承德大路股份有限公司 Chengde Dalu Co．，Ltd

承承承德德德大大大路路路股股股份份份有有有限限限公公公司司司 CHENGDE DALU CO ．，LTD.

ANNUAL REPORT 2009

April 2010 Chengde · PRC

Contents

Section I. Important Notice ------3 Section II. Company Profile------4 Section III. Summary of Accounting Highlights and Business Highlights------5 Section IV. Changes in Share Capital and Particulars about Shareholders------9 Section V. Particulars about Directors, Supervisors, Senior Executives and Employees------12 SectionVI. Administrative Structure ------18 SectionVII. Particulars about Shareholders’ General Meeting------22 Section VIII. Report of the Board of Directors------23 Section IX. Report of the Supervisory Committee------36 Section IX. Significant Events------38 Section XI. Financial Report------44 Section XII. Documents for Reference ------133

Section I. Important Notice and contents

Board of Directors, Supervisory Committee, all directors, supervisors and senior executives of Chengde Dalu Co., Ltd. (hereinafter referred to as the Company) hereby confirm that there are no any fictitious statements, misleading statements, or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents.

The 12 th Meeting of the 4 th Board of Director examined and approved 2009 Annual Report and its summary of the Company. All the directors, supervisors and senior executives attended the board meeting.

Beijing Yongtuo Certified Public Accountants Co., Ltd. audited the financial report of the Company and issued the unqualified auditor’s report with paragraph of emphasized matters for the Company. The Board of Director, Supervisory Committee and independent directors of the Company made definitions on the relevant matters; the investors are suggested to pay attention to read.

Mr. Chen Rong, Chairman of the Board of the Company, Mr. Wang Ansheng, Chief Financial Officer, and Liu Fengguo, Person in Charge of Accounting Organ hereby confirm that the Financial Report of 2009 Annual Report is authentic and complete.

Note: The report is prepared in bilingual versions using Chinese and English respectively, in the event of any discrepancy in understanding the two aforementioned versions, the Chinese version shall prevail.

2 Section II. Company Profile 1. Legal Name of the Company In Chinese: 承德大路股份有限公司 In English: CHENGDE DALU CO., LTD.

2. Legal Representative: Chen Rong

3. Secretary of Board of Directors: Chen Zhiguo Contact Address: Xiabancheng Town, Chengde County, Hebei Province E-mail: [email protected] Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3111475 Authorized Representative in Charge of Securities Affairs: Han Zhigang Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3111475 E-mail: [email protected]

4. Registered Address: Xiabancheng Town, Chengde County, Hebei Province Office Address: Xiabancheng Town, Chengde County, Hebei Provice Post Code: 067400 Company’s Internet Web Site: http://www.dxtex.com E-mail: [email protected]

5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (domestic) and Hong Kong Commercial Daily (overseas) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Contact Tel: (86) 314-3115049, 3115048

6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: ST DALU B Stock Code: 200160

7. Other Relevant Information of the Company Initial registered date: Nov. 3, 1999 Registered address: Industry and Commerce Administration Bureau of Hebei Province (316#, Tiyu South Street, Shijiazhuang, Hebei Province) Registered number for business license of the Company: 1300001001372 1/1 Registered number of taxation of the Company: 130821106576876 Organization Code Certificate: 106576876 The Certified Public Accountant engaged by the Company: Beijing Certified Public Accountants Co., Ltd. Office address: 11F-13F/Guo’an Building, No. Guandongdian North Street, Dongdaqiao Road, Chaoyang District, Beijing, P.R.C.

Section III. Summary of Accounting Highlights and Business Highlights

I. Summary of accounting highlight as of the year 2009 Items Amounts(RMB) Operating profit -148,559,930.22 Total profit 329,623,006.84 Net profit attributable to the shareholders of the listed 186,014,467.46 company Net profit attributable to the shareholders of the listed -221,422,306.04 company after deducting non-recurring gains and losses Net cash flow arising from operating activities -6,919,098.27

Notes: Items of deducting non-recurring gains and losses and the involved amounts are as following: Items of non-recurring gains and losses Amount Gains and losses from the disposal of non-current asset -78,908,837.79 Losses/gains from debt restructuring 829,105,872.23 Other non-operating income and expenditure except for the aforementioned items -304,350,725.61 Impact on income tax Influenced amount of minority shareholders’ gains/losses(after tax) -38,409,535.33 Total 407,436,773.50

II. Major accounting data and financial indexes over past three years ended the end of the report period (Unit: RMB)

1. Major accounting data Increase/decrease in this 2009 2008 year compared with that 2007 in last year (%) Total operating 0.00 11,132,286.00 -100.00% 59,972,518.33 income Total profit 329,623,006.84 372,761,404.05 -11.57% -1,971,295,949.65 Net profit attrib utable to 186,014,467.46 176,403,180.59 5.45% -1,392,672,660.84 shareholders of the listed company Net profit attributable to shareholders of the listed company -221,422,306.04 -534,641,187.11 58.59% -222,649,174.36 after deducting non-recurring gains and losses Net cash flow -6,919,098.27 -4,769,709.48 -45.06% -11,260,519.82 arising from

4 operating activities Increase/decrease at the end of this year compared At the end of 2009 At the end of 2008 At the end of 2007 with that at the end of last year (%) Total assets 183,328,923.59 598,681,950.83 -69.38% 1,134,689,885.81 Owners’ equity(Shareholder -51,338,938.68 -237,353,406.14 78.37% -413,756,586.73 s’ equity) Share capital 706,320,000.00 706,320,000.00 0.00% 706,320,000.00

2. Major financial ratio (Unit: RMB)

Increase/decrease in this year compared 2009 2008 2007 with that in last year (%) Basic earnings per share 0.26 0.25 4.00% -1.97 (RMB/Share) Diluted earnings per share 0.26 0.25 4.00% -1.97 (RMB/Share) Basic earnings per share after deducti ng -0.31 -0.76 59.21% -0.32 non-recurring gains and losses (RMB/Share) Weighted average return -128.87% -74.32% -54.55% -496.70% on equity (%) Weighted average return on equity after deducting 153.40% 225.25% -71.85% -79.41% non-recurring gains and losses (%) Net cash flow arising from operating activities -0.0098 -0.0068 -44.12% -0.016 per share (RMB/Share) Increase/decrease at the end of this year At the end of 2009 At the end of 2008 compared with that at At the end of 2007 the end of last year (%) Net asset per share attributable to shareholders of -0.07 -0.34 79.42% -0.59 listed company (RMB/share)

III. Detailed statement on Provision for the Devaluation of Asset

Unit: RMB Book balance in Decrease in this period Book balance in Items Increase in the year-begin report period Transfer-in Transfer-out period-end

I. Total of provision 344,856,543.48 12,054,389.38 292,625,636.43 64,285,296.43

5 for bad debts II. Provision for falling price of 5,996,046.09 5,996,046.09 - inventory III. Provision for devaluation 155,980,000.00 736,355,310.93 892,335,310.93 of long-term equity investment IV. Provision for devaluation 1,055,353,263.38 1,020,106,446.41 35,246,816.97 of fixed assets V. Provision for devaluation of 490,841,949.37 244,117,727.33 246,724,222.04 construction in progress VI. Provision for devaluation 19,670,971.87 19,670,971.87 - of intangible asset

Total 748,409,700.31 - 2,072,698,774.19 1,582,516,828.13 1,238,591,646.37 Notes: Increase of provision for devaluation of long-term equity investment in the report period was withdrawal of provision for devaluation of investments in full amount due to the subsidiaries Chengde Banhe Chemical Simulation Textile Co., Ltd. and Hebei Xiabancheng Knit Wears Co., Ltd. declared bankruptcy.

Losses from Devaluation of Asset

Unit: RMB Occurred amount in the report Occurred amount in last Items period report period I. Total of provision for bad debts 12,054,389.38 67,222,246.85 II. Provision for falling price of inventory -6,597,120.98 III. Provision for devaluation of long-term 736,355,310.93 100,000,000.00 equity investment IV. Provision for devaluation of fixed assets 139,607,678.19 VI. Provision for devaluation of intangible 19,670,971.87 asset Total 748,409,700.31 319,903,775.93 Note:

6 ① Losses from withdrawal of bad debts in the report period was RMB12,054,389.38. ② Because Chengde Banhe Chemical Simulation Textile Co., Ltd. and Hebei Xiabancheng Knit Wears Co., Ltd. went into bankruptcy, losses from withdrawal of devaluation of long-term equity investment in full amount were RMB 641,355,310.93. ③ Reevaluation was made on book value of long-term equity investment-- Chengde Dahua Paper Co., Ltd in the report period, increase in withdrawal of losses from the devaluation of long-term equity investment amounted to RMB 95,000,000.00 in accordance with actual status of Chengde Dahua Paper Co., Ltd.

7 Section IV. Changes in Share Capital and Particulars about Shareholders I. Changes in Share Capital (1) Statement of changes in share Before the Change Increase/Decrease in the Change (+, -) After the Change Capitaliz New Bonus ation of Proporti Amount Proportion shares Others Subtotal Amount shares public on issued reserve I. Unlisted shares 244,800,000 34.66% 244,800,000 34.66% 1. Sponsor’s 244,800,000 34.66% 244,800,000 34.66% shares Including: State-owned shares Domestic legal 23,147,309 3.28% 23,147,309 3.28% person’s shares Foreign legal person’s shares Others 221,651,691 31.38% 221,651,691 31.38% 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or other II. Listed shares 461,520,000 65.34% 461,520,000 65.34% 1. RMB ordinary shares 2. Domesti cally listed foreign 461,520,000 65.34% 461,520,000 65.34% shares 3. Overseas listed foreign shares 4. Other III. Total shares 706,320,000 100 % 706,320,000 100. %

(2) Particulars about issuance and listing of shares 1. Issuance and listing over the previous years ended the report period. The previous three year ended by the period-end, the Company did not issue shares and derived securities 2. During the report period, there were no changes in the number and structure of the Company’s shares and changes in structure of asset liabilities of the Company due to bonus share, capital public reserve transferring into share capital, rationed share, additional issuance, non-public offering, exercise of warrant, implementation of equity incentive plan, enterprise merger, convertible company’s bonds transferring shares, disinvestments, listing of inner employees’ shares or company’s employee’s shares, etc. 3. There were no inner employees’ shares in the Company.

II. About shareholders

8 (1) Amount of shareholders and particulars about shares holding Ended Dec. 31, 2009, the Company had totally 25,447 shareholders, including 5 of sponsors’ share and 25,442 of domestically listed foreign share. Total amount of shareholders 25,447 Particulars about shares held by the top ten shareholders Numbers of Number of Nature of Proportion of Total of shares Full name of Shareholders non-circulating share shareholder shares held held shares held pledged/frozen Chen Rong Natural person 29.49% 208,324,800 208,324,800 0 Circulating Li Tianyun 3.18% 22,440,000 Naught 0 B-share Circulating Zhou Haihong 3.17% 22,400,000 Naught 0 B-share Circulating Qian Zhenlin 3.11% 22,000,000 Naught 0 B-share Circulating Xu Jiang 3.11% 22,000,000 Naught 0 B-share Circulating Chen Yan 2.83% 20,000,000 Naught 0 B-share Domestic Chengde North Industrial legal person 2.62% 18,517,651 18,517,651 0 Corporation share Wang Zhengsong Natural person 1.89% 13,327,891 13,327,891 0 Circulating Wang Wensheng 1.03% 7,258,007 Naught 0 B-share SBCI FINANCE ASIN A/C Circulating 0.63% 4,448,829 Naught 0 SBC HONG KONG B-share Particulars about shares held by the top ten shareholders of circulation shares Number of circulation shares held at Shareholders’ name Type of shares the year-end Domestically listed foreign Li Tianyun 22,440,000 shares Domestically listed foreign Zhou Haihong 22,400,000 shares Domestically listed foreign Qian Zhenlin 22,000,000 shares Domestically listed foreign Xu Jiang 22,000,000 shares Domestically listed foreign Chen Yan 20,000,000 shares Domestically listed foreign Wang Wensheng 7,258,007 shares SBCI FINANCE ASIN A/C SBC HONG Domestically listed foreign 4,448,829 KONG shares Domestically listed foreign Peng Wei 2,978,525 shares Shanghai Wanguo Securities(Hong Kong)Co., Domestically listed foreign 2,945,164 Ltd. shares Domestically listed foreign NORGES BANK 2,516,195 shares Explanation on associated Among the top ten shareholders, except for that 5 natural persons of Li Tianyun, relationship among the Zhou Haihong, Qian Zhenlin, Xu Jiang and Che Yan holds the shares of the

9 aforesaid shareholders Company on behalf of Chengde Municipal Government and become Act in Concert; the Company is unknown whether there exists associated relationship or belongs to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company among the other shareholders. Note: In the report period, the Company receive notice from Bankruptcy and Clearing Team of China South Securities Co., Ltd. (Hereinafter refers to as South Securities), with the detailes as the followings: Bankruptcy and Clearing Team of South Securities singed relevant agreement with Chengde Municipal Government, with the voting approval of Creditors’ Chairman Committee of South Securities and judgement of Shenzhen Intermediate People’s Court, Bankruptcy and Clearing Team of South Securities transferred its holding 108,840,000 shares of the Company into Chengde Municipal Government with price of HKD 76,188,000. The purpose for shares acceptance of Chengde Municipal Government is to help and save Dixian Company and promote the reognization of Dixian Company. In accordance with the present national policy, as the local first level government, Chengde Municipal Government could not hold the shares directly; and dometic institution could not hold the shares either pursuant to present state policy on B shares; thus, Chengde Municipal Government especially entrusted 5 natural persons of Li Tianyun, Qian Zhenlin, Che Yan, Xu Jiang and Zhou Haihong, to hold the shares instead. After the transfer, South Securities did not hold the shares of the Company any longer. The shares holding instead were generally managed by Chengde Municipal Government and performed the information disclosure obligation as the single investor. According to the relevant provision of Securities Law, the shares could not be sold within 6 months after the accomplishment of ownership transfer, or else the income of selling shares would be owned by the Company. 6 months after the accomplishment of ownership transfer, Chengde Municipal Government would reduce to hold directly or transfer the shares of Dixian Company again in accordance with the actual condition of Dixian Company and on the premise of accomplishing to help and save Dixian Company.

(2) Particulars about controlling shareholder of the Company: The controlling shareholder of the Company is Chen Rong (the first largest shareholder of the Company), who is also actual controller of the Company. His information is as follows: Chen Rong: Male, aged 52 and Chinese nationality, who does not enjoy the residence power in the other country or area and got the Master Degree. He takes the posts of the member of the 9 th and 10 th Shanghai Committee’s Standing Committee of Political Consultative Conference; Vice-president of Shanghai Federation of Industry and Commerce; Vice-president of Shanghai Private Enterprises Association; and Vice-chairman of National Bowling Association. And he is also Chairman of Shanghai Zhonglu (Group) Co., Ltd. and Chairman of Zhonglu Co., Ltd. Mr. Chen Rong held the 208,324,800 sponsor’s shares of the Company accounted for 29.49% in total shares of the Company and became the first largest shareholder and actual controller of the Company. Now, he is the Chairman and concurrently General Manager of the Company.

(3) In the report period, controlling shareholder and actual controller of the Company had changed. In the report period, there were no changes in controlling shareholder and actual controller of the Company.

(4) Property right and controlling relationship between the actual controller and the Company is as follow:

Chen Rong 29.49%

CHENGDE DIXIAN TEXTILE CO., LTD.

(5) Particulars about legal person shareholders as of holding 10% shares (including 10%) The Company did not have legal person shareholders as of holding 10% shares (including 10%) . Section V. Particulars about the Directors, Supervisors and Senior Executives and Employees

I. Particulars about directors, supervisors and senior executives (1)Basic information Holding Holding Start dated of End date of Reason of Title Sex Age share at the share at the Name office term office term change year-begin year-end Chairman Chen Rong of the Male 51 2008-11-3 2011-11-3 208,324,800 208,324,800 - Board Chen Jie Director Male 56 2008-11-3 2011-11-3 0 0 -

Zhang Guichen Director Male 62 2008-11-3 2011-11-3 0 0 - Independen Liu Wei Male 40 2008-11-3 2011-11-3 0 0 - t Director Independen Li Min Male 53 2008-11-3 2011-11-3 0 0 - t Director Yuan Runbing Supervisor Male 32 2008-11-3 2011-11-3 0 0 - Fema Wu Yijing Supervisor 31 2008-11-3 2011-11-3 0 0 - le Xu Xue Supervisor Male 61 2008-11-3 2011-11-3 0 0 - Deputy Hu Wenxi General Male 55 2008-11-3 2011-11-3 0 0 - Manager Deputy Shi Bainian General Male 37 2008-11-3 2011-11-3 0 0 - Manager Ye Weijie CFO Male 43 2008-11-3 2011-11-3 0 0 - Secretary Chen Zhiguo of Board of Male 37 2008-11-3 2011-11-3 0 0 - Directors

(II) Particulars about main work experience of directors, supervisor and senior executives in previous five years 1. Particulars about present directors of the Company

11 Chen Rong: Male, aged 51, Master Degree. He takes the posts of the member of the 9 th and 10 th Shanghai Committee’s Standing Committee of Political Consultative Conference. Now, he is Chairman of Shanghai Zhonglu (Group) Co., Ltd., Chairman of Zhonglu Co., Ltd., Vice-president of Shanghai Federation of Industry and Commerce; Vice-president of Shanghai Private Enterprises Association; and Vice-president of National Bowling Association. Mr. Chen Rong held the 208,324,800 sponsor’s shares of the Company accounted for 29.49% in total shares of the Company and becomes the first largest shareholder and actual controller of the Company. Now, he is the Chairman and concurrently General Manager of the Company. Except for the aforementioned status, the positions held by Mr. Chenrong in other units as follows: Whether Begin date of of withdrew Name Name of other units Positions ficeterm remuneration, or not Shanghai Zhonglu (Group) Co., Chen Rong Chairman Dec. 3, 1998 Yes Ltd. Shanghai Zhonglu Bowling Chen Rong Chairman July 28, 1998 No Entertainment Co., Ltd. Shanghai Zhonglu Investment Co., Chen Rong Chairman Sep. 17, 1998 No Ltd. Shanghai Zhonglu Bowling Chen Rong Director Dec. 4, 1998 No Investment Co., Ltd. Shanghai Zhonglu Economics Chairman Chen Rong Oct. 14, 1998 No Development Co., Ltd. Chen Rong Shanghai Zhonglu Film Co., Ltd. Chairman Feb. 27, 2001 No Shanghai Lufa Seafood Dinings Chairman Chen Rong May 22, 2006 No Co., Ltd. Shanghai Greenman ECO Science Chen Rong Director July 18, 2006 No and Technology Co., Ltd. Shanghai Xiangxieli Chen Rong Director Nov. 2007 No Advertisement Co., Ltd. Shandong Fengyuan Coal Chen Rong Director Oct. 2009 No Industry&Electric Power Co., Ltd. Guangdong High-Altitude Wind Chen Rong Director Dec. 2009 No Power Technology Ltd. Chen Rong Qast Systems Solutions Inc. Director Nov. 2009 No

Chen Jie: Male: aged 56, graduated from senior high school. He has been engaged in equity investment for a long time, had profound acquaintances on capital market and other element market, experienced in investment and is the Vice-chairman of Shanghai Pingjie Investment Consultation Co., Ltd. Now, he is the Director of the Company.

Zhang Guichen: aged 62, member of Communist Party of China, graduated from junior college. He has ever been the Clerk of Chengde Commerce Bureau; he ever worked in Family Planning Committee of Chengde and Planning Bureau with holding the posts of Clerk, Deputy Office Director, Office Director and Director General; Deputy Director of Chengde People's Congress. He was retired in Oct. 2008. Now, he is the Director of the Company.

Li Min: Male, aged 53, member of Communist Party of China, Bachelor’s Degree, Senior Accountant, Certified Public Accountant. He ever was the Section Chief and Deputy President of Shanghai Toys Electroplate No.1 Factory; President and Deputy Secretary of Party Committee of Staff Accounting School of Shanghai No.2 Light Industry Bureau. Now, he is the Chairman, Director Accountant and Party Secretary of Shanghai Jinglong CPAs; Independent Director of 3 rd , 4 th and 5 th Board of Zhonglu Co., Ltd.; Independent Director of Stellar Megaunion Corporation. Now, he is the Independent Director of the Company.

Liu Wei: Male, aged 40, on-study Master of Laws, Lawyer, Executive Co-partner of Guohao Law Group Firms, Co-partner of Guohao Law Group (Shanghai) Firms. Now, he is the Member of 4 th Committee for Mergers, Acquisitions and Restructurings of Listed Companies in CSRC; Vice-director of Finance and Securities Committee of Shanghai Lawyers Association; he ever was elected as the Top Ten Excellent Lawyer in Shanghai with specializing in business of the company, stock and finance lawyer. In year 1993, he obtained the Qualification of Practicing Law Affairs Engaged in Securities Business presented by CSRC, and he actively supplied laws services for the large and medium enterprise and famous private enterprise since he was engaged in the securities law affairs for 16 years. He ever offered law services for issuance and listed in stock exchange, refinancing and debts restructurings for almost 200 listed companies and supplied perennial laws consultant services for several ten large enterprises. Now, he is the Independent Director of the Company.

2. Basic information of supervisors

Yuan Runbing: Male, aged 32. He ever worked in Unilever, Roland Berger Strategy Consultants, Deloitte Touche Tohmatsu Certified Public Accountants. He joined in PreIPO Capital Partners in 2008 and has taken the post of Vice-president of PreIPO Capital Partners. He participated in several project on management and consultation, deeply participated in several IPO audit project on listing in Stock Exchange and annual audit project; he specialized in private investment analysis and enterprise internal control analysis and enterprise strategy management. He obtained the Master Degree on Enterprise Management Department of Fudan University, Bachelor Degree on Applied Physics Department of Lanzhou University. Now, he is the Supervisor of the Company.

Wu Yijing: Female, aged 31, graduated from junior college, the Accountant of Shanghai Zhonglu (group) Co., Ltd. She ever worked in Shanghai Meizhao Culture Development Co., Ltd. Now, she is the Supervisor of the Company.

Xu Xue: Male, aged 61. He took the post of Plant Director of Dixian Company Zhuji Thread-making Plant from Jun. 1995 to Apr. 1997; Plant Director of Dixian Company Paper Cartons Plant from Apr. 1997 to Mar. 2001; Deputy Secretary of General Party Branch of the Dixian Company from Jul. 2003 till now. He ever was the Chairman of the 3rd Supervisory Committee. And now he is the Supervisor of the Company.

3. Basic information of other senior executives

Hu Wenxi: Male, aged 55, member of China Communist Party, graduated from junior

13 college, Senior Economist. He ever Group Leader and Director of Workshop of Chengde Water Pump Plant and Hardware Maintenance Plant; Factory Director and Secretary of Chengde Magang General Plant, Water-heating Pieces Plant and Light Industry Machinery Plant; Deputy Director General of Chengde Economics and Trade Bureau; Chief Engineer of Chengde Industry Promotion Bureau; he withdrew to the second line of duty in April 2008 and exempted the administrative post. Now, he is the Deputy General Manager of the Company.

Mr. Shi Bainian: Male, aged 37, Bachelor Degree (majored in economics management), was Director and General Manager of the Company. He successively took the post of Director of Tailoring Branch of Dixian Group, Director of Dyeing Manufacture and Director and General Manager of the Company. Now, he is the Deputy General Manager of the Company.

Ye Weijie: Male, age 43, Bachelor Degree, Accountant. He ever was the Accountant of Financial Department of Shanghai No.5 Printing and Dyeing Plant; Accountant of Financial Department of Shanghai Logitech Electronics Co., Ltd.; Financial Manager of Shanghai Bulanweike Bowling Center Co., Ltd.; Financial Manager of Shanghai Office of Australia TV Shopping Network Co., Ltd.; Deputy Manager of Financial Department, Majordomo of Financial Department of Marketing Center, and Director of Audit Office of Shanghai Forever Co., Ltd.; Majordomo of Financial Department of Shanghai Pujiang Cable Co., Ltd. Now, he is the CFO of the Company.

Mr. Chen Zhiguo: Male, aged 37, junior college degree, was the 2 nd and 3 rd secretary of the Board of the Company. He ever worked as the Associate Director, Sub-Section Chief of General Affairs of Spinning Mill, and Manager of Securities Department of the Company. Now, he is the 4 th secretary of the Board of the Company.

(III) All present directors, supervisors and senior executives drew the annual remuneration from the Company in 2009 as follows: In accordance with the approval of 2008 Annual Shareholders’ General Meeting, the allowance each year for independent director was RMB 61588.2(tax included); Deputy General Manager Hu Wenxi, Deputy General Manager Shi Bainian, Secretary of the Board Chen Zhiguo withdrew their remunerations as RMB 3000 each month temporarily; Emplloyee Supervisor Xu Xue withdrew his remuneration as RMB 2000 each month temporarily; other directors and supervisors did not withdraw remunerations from the Company temporarily.Chairman and General Manager Chen Rong did not withdraw remuneration from the Company. In year 2009, the Company actually paid remunerations to all the directors, supervisors and senior executives (including the former and current relevant persons) totaled to RMB 258,000. The Board of the Directors of the Company would finally confirm the annual remuneration of current directors, supervisors and senior executives according to the bankruptcy reorganization of the Company and restoration of productions of the Company, and handed into shareholders’ general meeting for approval.

14 Drew from other Total annual shareholder company or Title Name remuneration other related organ or not Chen Rong Chairman of the Board 0 Yes Chen Jie Director 0 Yes Zhang Guichen Director 0 No Liu Wei Independent Director 61588.2 No Li Min Independent Director 61588.2 No Yuan Runbing Supervisor 0 Yes Wu Yijing Supervisor 0 Yes Xu Xue Supervisor 24000.00 No Hu Wenxi Deputy General Manager 36999.96 No Shi Bainian Deputy General Manager 36999.96 No Ye Weijie CFO 0 No Chen Zhiguo Secretary of Board of Directors 36999.96 No

(IV) Election or leaving position of directors, supervisors and senior executives; and engagement and dismissal of senior executives in the report period In the report period, there were no election or leaving position of directors, supervisors and senior executives; and engagement and dismissal of senior executives.

(V)Presence at the board meeting by directors Whether Attending attending the the meeting Name of Due Presence in Entrusted meeting in in way of Absence the Positions Presence person presence person in communicat (times) directors (times) (times) (times) successive ion two times or (times) not Director of the 4 th Chen Rong 7 1 6 0 0 No Board Director of the 4 th Chen Jie 7 1 6 0 0 No Board Zhang Director of the 4 th 7 1 6 0 0 No Guichen Board Independent Director of Li Min 7 1 6 0 0 No the 4 th Board Independent Director of Liu Wei 7 1 6 0 0 No the 4 th Board

Explanations on not attending the meeting of the Board in person in successive two times There were no directors which did not attend the meeting of the Board in person in successive two times. Meetings of the Board held during 7 the year (times) Of which: site meetings (times) 1

15 Meetings held in way of 6 communication (times) Meetings held in way of both site and 0 communication (times)

II. Particulars about employees Since year-end of 2008, the Company entered into the procedure of bankruptcy reorganization, the administrator of the Company has released the labor contracts with original employees. The owed employee endowment insurance and compensation would be solved while the Company implemented the plan of bankruptcy reorganization. Because the Company did not resume production, the Company did not hire any new staff in 2009. The Company had no expense for retirees at present.

16 Section VI. Administrative Structure

I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies and other relevant laws and regulations, the Company continuously improved the legal person administration structure of the Company, established modern enterprise system and standardized the operation of the Company. There is no significant difference between the actual administration of the Company and the normative documents on administration of listed companies released by China Securities Regulatory Commission. The major representation is as follows: 1. Shareholders and the Shareholders’ General Meeting: The Company set up Rules of Procedure of Shareholders’ General Meeting and was able to convene and hold the Shareholders’ General Meeting strictly according to the requirement of normative opinions of the Shareholders’ General Meeting and the procedure of the meeting was legal. The Company ensures that all shareholders share the actual information of the Company equally and guarantee the legal rights of medium and small shareholders. 2. Relation of the controlling shareholder and the listed company: In order to truly safeguard the whole interest of the Company, the Company has set up Behavior Criterion of Controlling Shareholder. The Company is completely independent from the controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organization can operate independently. 3. Directors and the Board of Directors: The Company elected directors strictly according to the procedure stated in the Articles of Association and engaged independent directors according to relevant requirements. All directors can take the responsibilities in a diligent attitude on behalf of the maximum interests of the Company and the shareholders. The Board of Directors established Rules of procedure of the Board of Directors, implemented patiently the regulations of the laws, regulations and the Articles of Association of the Company, treated all shareholders fairly and concentrated on the interest of relevant beneficial parties. 4. Supervisors and the Supervisory Committee: The Supervisory Committee established Rules of procedure of the Supervisory Committee. The supervisors can take their duties and supervise over the Company’s finance and the compliance with laws and regulations of the implementation of the, directors, managers and other senior executives’ duties in an attitude responsible for all shareholders and thus protect the legal right and interest of the Company and the shareholders. 5. For relevant beneficial parties: The Company is able to fully respect and safeguard the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests. The Company pays special attention to social welfare, environmental protection and commonweal cause in the area, while protecting the Company’s sustainable development and realizing the maximum of the shareholders’ interests. 6. Information disclosure and transparency: The Company authorized the secretary of the Board of Directors to be responsible for information disclosure, reception of the shareholders’ interviewing and consultation. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to provisions of laws, regulations and the Articles of Association so as to ensure equal chances for all shareholders to obtain information. CSRC determined the year 2009 as the “Administrative and Rectifying Year for Listed

17 Companies”. Hebei Securities Regulatory Bureau of CSRC performed special inspection on the administration of the Company from Sep 15 th to Sep 16 th of 2009, and issued Notice for Chengde Dixian Textile Co., Ltd. to Rectify Before the Deadline (JZJF (2009) No. 144, hereafter referred to as Rectification Notice) on Sep 24 th , 2009.The Company attached great importance on the problem found in the inspection, proposed rectification measures and formed Rectification Report. Till the end of 2009, rectification for the problems raised in the inspection had been completed. After the rectification, the Company further formulated and perfected the Articles of Association, Procedures and Rules of Shareholders’ General Meeting, Procedures and Rules of Board of Directors, Procedures and Rules of Supervisory Committee, Working Rules of Independent Directors, Work Rules for Annual Report of Audit Committee, Encouragement and Restraint Mechanism Approach for Management Team, Implementation Specification for Strategy Committee of Board, Implementation Specification for Remuneration and Appraisal Committee of Board of Directors, Implementation Specification for Nomination Committee of Board of Director, Information Disclosure Management System , Related Transaction Management System and other regulations and systems.

II. Establishment, perfection and performance of the related working systems for independent directors The Company has established Working Rules of Independent Directors, in accordance with regulations and requirements of Working Rules of Independent Directors, since taking the post in the Company, independent Directors Mr. Li Min and Mr. Liu Wei seriously fulfilled their duties, participated in each meeting of Board of Directors and shareholders’ general meeting on time in the report period, and did not express different opinions on each proposal of the meeting of Board of Directors and other issues. They also actively inspected and researched the operations business developments and financial status, strictly supervised and guided the normal operation; actively took part in the decision-making of Board of Directors, expressed independent and object opinions on nominating directors and proposing to engage certified public accountants, and expressed scientific and reasonable opinions and suggestions with their specialized knowledge for several times on operation and development of the Company. They maintained interests of the Company and all shareholders and diligently perfect their responsibilities. In 2009, independent directors did not proposed any disagreement on relevant issues. In the report period, the Company totally held 7 Board meetings and the attending of independent directors is as follows: Times of Board Entrusted Name of independent meeting supposed Presence in Absence presence director to attend in this person (Time) (Time) (Time) year

Li Min 7 7 0 0

Liu Wei 7 7 0 0

III. Separation in businesses, personnel, assets, organization and finance of the Company and control shareholders 1. In respect of personnel: the labor, personnel and wage management of the Company is

18 completely independent and the manager, deputy manager and other senior executives received salaries in the Company. 2. In respect of assets: The Company as an independent legal person has full property right of legal person and has independent production system, accessorial production system and auxiliary equipment. Industrial property right, trademark, non-patent technology and other intangible assets all belong to the listed company. The Company has independent purchase and sales system. 3. In respect of finance: The Company has independent financial department, whole, independent and normatively operated business accounting system and financial administration system and independent bank account. 4. In respect of organization independence: The Company’s organizations are wholly independent and the offices of the Company are wholly separated from the controlling shareholder. 5. In respect of business: The Company is independent from the controlling shareholder in terms of businesses and has independent and whole business and operating ability.

IV. Particulars about the establishment and perfection of internal control (Details could be found in Self-estimation Report of Internal Control in 2009 on Juchao Website.) 1. Overall appraisal on the internal control status Based on the reality of its own, the Company had established a set of internal control system which was rather perfect, including Articles of Association, Procedures and Rules of Shareholders’ General Meeting, Procedures and Rules of Board of Directors, Procedures and Rules of Supervisory Committee, Work Specification for General Manager, Management System of Raised Proceeds, Conduct Code for Controlling Shareholders, Investor Relationship Management System, Financial Management System, Information Disclosure Management System, Internal Report System for Significant Information, Shares Held by the Directors, Supervisors and Senior Management Officers of Listed Companies and the Changes Thereof, Work Specification for Independent Directors, Implementation Specification for Audit Committee, Work Rules on Annual Report for Audit Committee, Encouragement and Restraint Mechanism Approach for Management Team, Implementation Specification for Strategy Committee of Board of Directors, Implementation Specification for Remuneration and Appraisal Committee of Board of Directors, Implementation Specification for Nomination Committee of Board of Directors and Related Transaction Management System and other regulations and systems. The internal control system basically covered all operational taches of the Company. The present internal control system of the company was basically completed, which could adapt demand of the Company’s management and development, and basically reached the whole goal of internal control. The present internal control could provide reasonable guarantee for compiling true and fair financial statement, and provide guarantee for healthy operation of each business, and implementation of relevant laws, regulations of the state and internal bylaws of unit. Each internal control of the Company was persistently, smoothly and strictly implemented in each tache of production and operation. The Company thought the internal control was effective. Accompanied with changes in operational and external environments, there was bound to be some systematical shortcomings or managerial loopholes during the corporate development, and effectiveness of the current internal control might change. The Company would comply with relevant requirements and further optimize internal control to make sure that it would always adapt to the developmental demands of the Company as well as the requirements of related national laws and rules.

19 2. Independent directors’ opinions The Company established perfect internal control system, which accorded with the requirement of relevant laws and regulations of the state and bylaws of department; the internal control had legality, rationality and validity, and had complete risk estimation system. The legal person governance, production and operation, information disclosure and significant events strictly accorded with regulations of each internal control system, the potential internal and external risk in each tache was effectively controlled, and each expected goal was basically realized. Therefore, the internal control was effective. The self-estimation report of internal control truly and objectively reflected the actual conditions of present establishment, implementation and supervisal of internal control. The Company needed to strengthen checking and supervising effect and efficiency of internal control implementation, and should establish relevant work system and responsibility accountability mechanism.

3. Supervisory committee’s opinions The self-estimation of internal control accorded with the requirement of Code of Corporate Governance for Listed Company issued by Shenzhen Stock Exchange and other relevant document; it truly and completely reflected the status of establishment, perfection and implementation and main present problems; reform plan was practical, which accorded with demand of internal control; the overall estimation on internal control was objective and exact.

V. Evaluation and encouragement mechanism of performance of senior executives Encouragement and Restraint Mechanism Approach for Management Team had already been established but not yet put into practice, as the Company was engaged in bankruptcy reorganization and had not resumed production up to now. As the Company gradually operated on a right track, the Board would implement and perfect the appraisal and encouragement mechanism for the senior executives step by step in accordance with the actual conditions.

VI. Establishment of Responsibility Accountability System for Major Errors in Annual Report Information Disclosure According to the requirements of documents such as Notice of Doing Well in 2009 Annual Report and Relevant Work of Listed Companies (CSRC Notice (2009) No.34) issued by CSRC, Notice of Doing Well in 2009 Annual Report Work of Listed Companies issued by Shenzhen Stock Exchange and Notice of Doing Well in Related Work of 2009 Annual Report of Listed Companies in the Prefecture (JZJF (2010) No. 4) issued by Hebei Securities Regulatory Bureau, the Company timely formulated the Responsibility Investigation System of Significant Errors in Information Disclosure of Annual Report, defined the cases of material errors in annual report information disclosure, forms and types of responsibility investigation, helping with the strengthening and better performance of information disclosure of annual report. During the report period, there were no such situations as correction for significant accounting erros, supplement for significant information omission or amendment for performance forecast.

20 Section VII. Particulars about Shareholders’ General Meeting

I. In the report period, the Company held one annual shareholders’ general meeting and two extraordinary shareholders’ general meetings: (I) Particulars about annual shareholders’ general meeting The Company held 2008 Annual Shareholders’ General Meeting on Jun. 25, 2009. Resolution notice was published on Securities Times, Hong Kong Wen Wei Po and Juchao Website (http:// www. Cninfo.com.cn) dated Jun. 26 th , 2009.

(II) Particulars about extraordinary shareholders’ general meetings 1. The Company held the 1 st Extraordinary Shareholders’ General Meeting of 2009 on Jan. 8th , 2009. Resolutions notice was published on published on Securities Times, Hong Kong Wen Wei Po and Juchao Website (http:// www. Cninfo.com.cn) dated Jan. 9 th , 2009.

2. The Company held the 2 nd Extraordinary Shareholders’ General Meeting of 2009 on Oct.12 th , 2009. Resolutions notice was published on published on Securities Times, Hong Kong Wen Wei Po and Juchao Website (http:// www. Cninfo.com.cn) dated Oct. 13 th , 2009.

21 Section VIII. Report of the Board of Directors

I. Discussion and analysis on the management level In the report period, the Company actively practiced bankruptcy reforming plan which progressed successfully and got practical progress; it accomplished works for cashing assets and discharging debts, which effectively relieved the Company from debt burden and financial risk. However, limited in time and condition, the Company didn’t still recover operation. As the Company finished bankruptcy reforming, its financial condition got improved. Input with assets of Chengde Rongyida Real Estate Development Co., Ltd. provided favorable condition for the Company to recover its main business ability. Besides, the two projects, Dalu Commercial Center (development for commercial shops along street) and Dalu Fazenda (commercial residence) which are developed by the wholly-owned subsidiary-Rongyida Company were under the initial phase preparation and approval and have not been started constructions. The Company would continue to seek for powerful strategic investors and cooperative partners to integrate its assets and business and inject capital to the Company, to help the Company resume its profit-making ability of main business and various businesses as soon as possible.

(I) Review on the operation of the Company in the report period 1. Overall operation of the Company in the report period During the report period, the Company hasn’t resumed production and any administration activities, thus realized zero operating income, 100% down compared over the same period of last year; operating profit of RMB -148,559,930.22, 73.98% up compared over the same period of last year; net profit of RMB 200,326,006.96, 29.3% up compared to the same period of last year. Net profit attributable to parent company was RMB 186,014,467.46, 5.4 % up compared over the same period of last year. During the report period, main business of the Company still received loss, but RMB 0.186 billion of net profit realized in 2009 which was mainly received from bankruptcy and reorganization of the Company and bankruptcy of subsidiaries Bancheng Company, Fashion Company and Chengde Banhe Company as well as larger amounts of gains and losses caused by reconciliation between Xingye Paper Company and its creditors, but the Company didn’t receive corresponding cash inflow from it.

2. Main business and operation status (1) Classified according to industry and product Unit: RMB’ 0000 Classified according to industries Increase/decre Increase/decre Increase/decrea Operating ase in ase in se in operating Classified according to Operating Operating profit ratio operating operating cost profit ratio industries or products income cost (%) income over over last year over last year last year (%) (%) (%) Sales of cotton yarn plain cloth and spinning & 0 0 0 -100% -100% -100% synthetic silks Sales of paper 0 0 0 -100% -100% -100% Classified according to products Sales of cotton yarn plain 0 0 0 -100% -100% -100% cloth and spinning &

22 synthetic silks Sales of paper 0 0 0 -100% -100% -100%

(2)Main business classified according to areas Unit: RMB’0000 Increase/decrease in operating Areas Operating income income over last year (%) Domestic 0 -100%

(3)Main customers: The total purchase amount from the top five suppliers amounted to RMB 0, accounting for 0% of the Company’s total purchase amount of the year. The total sales amount to the top five customers amounted to RMB 0, accounting for 0% of the Company’s total sales amount.

3. Analysis on constitution of assets of the Company in the report period Dec.31, 2009 Dec.31, 2008 Item Proportion Proportion in Amount Amount in total assets total assets Total assets 183,328,923.58 100% 598,681,950.83 100% Account receivable - - 6,314,628.93 1.05% Inventories 11,296,098.60 6.16% 377,830.47 0.06% Real estate investment - - - - Long-term equity 2,215,729.65 1.2% 97,215,729.65 16.24% investment Fixed assets 31,279,967.32 17.1% 124,093,126.16 20.73% Construction in 12,883,800.00 7.03% 12,883,800.00 2.15% progress Short-term loan 5,422,261.91 2.96% 257,110,082.88 42.95% Long-term loan - - - - Reason for material changes over the same period of last year: Reason for decrease in total assets: subsidiaries Xiabancheng Company, Fashion Company and Chengde Banhe Company declared bankrucptcies; Reason for decrease in account receivable: transferring-out of account receivable; Reason for increase in inventory: Rongyida Company obtained the land use right; Reasons for decrease in long-term equity investment: withdrawal of provision for devaluation of long-term equity investment; Reasons for decrease in fixed assets: Customs confiscated the equipments and auctioned the disposed assets; Reasons for decrease in short-term loans: cleared the debts in reorganization plan. Note: in the report period, the Company adopted historical cost method to measure main assets, and no item was measure by fair value.

Relevant analysis on financial data Increase/decrease Item 2009 2008 year-on-year Sales expense - 3,990.00 -100%

23 Administrative expense 16,934,898.09 36,314,298.59 -53.37%

Financial expense 2,049,933.86 200,115,413.80 -89.76%

Income tax 129,296,999.88 217,838,869.49 -40.65% Reason for material changes over the same period of last year: Reason for change in sales expense: no resumption in production in the report year and sales expense was not occurred; Reason for change in administrative expense: the depreciation expense decreased; Reason for change in financial expense: the Company went into bankruptcy; subsidiaries Xiabancheng Company, Fashion Company and Chengde Banhe Company declared bankrucptcies; Xingye Papermaking Company reached reconciliation with creditors; thus, the interests decreased; Reason for change in income tax: adjuted the deferred income tax.

4. Relevant analysis on constitution of cash flow Increase/decrease Item 2009 2008 proportion I. Cash flows arising from operating activities: Cash received from selling commodities and providing labor - 14,314,261.45 -100% services Other cash received concerning 4,853,996.64 1,546,269.50 213.92% operating activities Cash paid for purchasing commodities - 3,175,107.86 -100% and receiving labor service Cash paid to/for staff and 1,236,667.33 5,146,595.66 -75.98% workers Taxes paid 46,893.39 398,245.78 -88.23% Other cash paid concerning 10,489,534.19 11,910,291.13 -11.93% operating activities Net cash flows arising from -6,919,098.27 -4,769,709.48 -45.07% operating activities II. Cash flows arising from investing

activities: Net cash receiving from disposing fixed, intangible and other long-term 18,436,600.00 300,000.00 6045.54% assets

Cash paid for purchasing fixed, 3,400.00 -100% intangible and other long-term assets Cash paid for investment 1.00 - Net cash flows arising from 18,436,599.00 296,600.00 6115.98% investing activities III. Cash flows arising from financing

activities Cash received from loans 108,002,418.47 - - Cash paid for settling debts 119,908,920.82 1,395,649.94 8491.62% Cash paid for dividend and profit - distributing or interest paying

24 Net cash flows arising from -11,906,502.35 -1,395,649.94 -753.12% financing activities Reasons for significant changes compared with the same period of last year: (1) Reasons for cash flows arising from operating activities: paid for the liquidation expense and cleared the account-checking differences of bank account; (2) Reasons for cash flows arising from investing activities: the Company disposed fixed assets and intangible assets in this period; (3) Reasons for cash flows arising from financing activities: cleared the debts in accordance with the reorganization plan in the report period; (4) Reasons for significant difference between cash flows arising from operating activities and net profit in the report period: in 2009, the Company hasn’t resumed production, but RMB 0.186 billion of net profit realized in 2009 which was mainly received from bankruptcy and reorganization of the Company and bankruptcy of subsidiaries Bancheng Company, Fashion Company and Chengde Banhe Company as well as larger amounts of gains and losses caused by reconciliation between Xingye Paper Company and its creditors, but the Company didn’t receive corresponding cash inflow from it.

5. Discussion and analysis on utilization of equipment, order-obtaining, sales and stockpiling of products, changes of main technicians of the Company Being seriously restricted by capital, the Company stopped operation since October of 2007; workers and technicians all recessed. At the end of 2008, the Company walked into procedure of bankruptcy and reorganization. In 2009, the Company hasn’t resumed production and got any order, equipment were seriously corrosive.

6. Main holding subsidiaries and share-joining companies (1) Hebei Xiabancheng Knit Wears Co., Ltd. is the Company’s wholly owned subsidiary, which was a Sino-foreign joint venture set up by Knitting General Plant, the predecessor of the Company and foreign enterprises, registered on Jul.9, 1991 with a registered capital of USD 4 million. The operating scope is: production and sale of textile. Its main products are all kinds of knit wears. On Feb. 8 th , 2009, Xiabancheng Knit Company declared bankruptcy. (2) Chengde Dixian Fashion Co., Ltd. is a Sino-foreign joint venture, which was jointly invested by Japanese Y’s Corporation and the Company. It registered on May 23, 2000 with registered capital of USD 24 million. The Company holds 75% equity of this company and Y’s Corporation holds 25% respectively. The operating scope is: production and sale of yarn and synthetic silks. The main products are yarn and synthetic silks. On Feb. 8 th , 2009, Dixian Fashion Company declared bankruptcy. (3) Chengde Xingye Papermaking Co., Ltd. was a papermaking company jointly established by Hong Kong Zhanxi International Co., Ltd. and the Company, with a registered capital of USD 100 million. The Company holds 75% equity of this company and Zhanxi Group holds 25% respectively. The operating scope is: production and sale of series of high-grade copperplate plate paper and craft board. Influenced by the shortage of fund, the production of Xingye Papermaking was completely ceased. On Dec. 8 th , 2009, Xingye Papermaking was applied for bankruptcy and settlement. On May 8 th , 2009, reconciliation agreement was reached between Xingye Papermaking and creditors. (4) Chengde Banhe Chemical Simulation Textile Co., Ltd. was share-holding company of controlling subsidiary of the Company, which was a Sino-foreign operating enterprise registered and set up on Sep.29, 2002 with its registered capital of USD 60 million. Dixian Fashion Co., Ltd., Japan Shanxia Trade Co., Ltd. and Hebei Xiaban Town Knitting

25 Company respectively hold 40% and 35% and 25% equity of this company. The operating scope was: production and sale of different types of chemical simulation cloth with high quality, knitting cloth and different types of coloration finished cloth; the main products were high quality chemical simulation cloth, knitting cloth and different types of coloration finished cloth. On Feb. 8 th , 2009, Chengde Banhe declared bankruptcy. (5) Chengde Dahua Paper Co., Ltd (original Chengde Japan Papermaking Co., Ltd.) was a Sino-foreign joint venture invested and set up by the company and Japan Papermaking Co., Ltd. The total investment was amounting to YEN 11 billion and the registered capital was YEN 6.364 billion. The Company and Japan Papermaking respectively hold 45% and 55% equity of this company. The joint venture mainly produces and sells all types of high-quality paper. The production scale is producing 150 thousand tons of various papers per year. In 2005, the 45% equity of Chengde Japan Papermaking Co., Ltd held by the Company were transferred to controlling subsidiary of Chengde Xingye Papermaking Co., Ltd, 55% equity of Chengde Japan Papermaking Co., Ltd held by Japan Papermaking Co., Ltd were transferred to Japan New Century Trading Co., Ltd. After transferring the equity, Chengde Japan Papermaking Co., Ltd changed its name to Chengde Dahua Paper Co., Ltd. The investment on Chengde Dahua Paper Co., Ltd was jointly finished by Chengde Xingye Papermaking Co., Ltd and Japan New Century Trading Co., Ltd. Equipment of the Company has not been installed completely, the Company became an uncompleted project (6) Suning Banhe Chemical Simulation Textile Co., Ltd is a shareholding subsidiary of the Company, which is a joint venture and invested and set up by the Company and Japan Shanxia Trade Co., Ltd on Nov.7, 2004. Its registered capital was USD 29 million, the Company invests USD 5.8 million which accounts for 20% of the registered capital. Suning Banhe hasn’t carried out operation officially and stopped operation in 2009. (7) Chengde County Rongyida Real Estate Development Co., Ltd. was found on Feb 20 th , 2009. Its registered capital was RMB 10 million, business scope is: real estate development; textile, clothing manufacture, clothing import and export business; rental services. In Apr. 2009, Rongyida Company got assets from bankruptcy of the Company along with bankruptcy of subsidiaries through auction. On July 27, 2009, Mr. Wangfei and Ms Chenliping who are shareholders of Rongyida Company respectively signed equity transfer agreement with holding shareholder Mr. Chenrong, Mr. Wangfei and Ms Chenliping respectively transferred 90% and 10% of equity of Chengde Rongyida Property Development Co., Ltd. to Mr. Chenrong respectively with RMB 9 million and RMB 1 million. On the same day, Mr. Chenrong transferred the received 100% equity of Rongyida Company to the Company with RMB 1. Rongyida Company became a wholly-owned subsidiary of the Company after equity transfer. Presently total capital of Chengde Rongyida Property Development Co., Ltd. is RMB 100,411,352, total liability is RMB 94,900,908. The land currently owned by the Company is 1,180 mu, of which 540 mu can be transferred into commercial development land. In 2009, Dalu Commercial Center (development for commercial shops along street) and Dalu Fazenda (commercial residence) which are developed by Rongyida Company were under the initial phase preparation and approval and have not been started constructions.

7. The condition of entities controlled by the Company for special purpose The Company has no administrative entities for special purpose.

(II) Prospect for future development of the Company 1. The development tendency in the industry of the Company and the market competition pattern the Company faced The Company is in the industries of textile and papermaking. The textile is the traditional

26 pillar industry in China for a long time, and the foreign and domestic competition are intense. With the development of economy, the industrial structure of the textile improves, management benefit raises and integrated industry processing system is formed, and there are rich raw material resources and sufficient labor forces. Our country still enjoys advantage in textile industry competition and still has development space. The Company is mainly engaged in production of knitting costume. Due to the break in capital chain, the dress-making business of the Company has to stop. Once with capital to start, the Company has certain competitive power by its integrated industrial chain and low production cost. The industry of papermaking is the important industry which is closely linked with the development of national economy and social civilization. In developed countries, the growth step of paper and cardboard consumption keeps the same with that of GDP. Papermaking is an industry with intensity in technology, fund, resource and energy; efficiency of production scale is obvious, it is one industry of essential raw material with continuous and high effective production. At present, paper production of the Company has also ceased due to shortage of fund.

2. Development strategy and programming At the end of the report period, the Company entered procedure for bankruptcy and reform. According to the reform plan, once the Company discharged debts, its debt burden and financial pressure would be effectively relieved. While, in order to resume sustainable operation and profit-making ability, and guarantee that creditors could get complete discharge according to regulations of the reform plan, the Company still has to make asset reorganization, introduce industry investors, integrate industry resource, and equip with assets or business which have considerable development and profit-making prospects. According to the actual condition of itself, and in consideration of wills of potential industry investors, the Company made the following operation programming for future development: (1)Business of textile and printing & dyeing Taking use of the original facilities for textile and printing & dyeing, and comparatively cheap labor force in local place, the Company introduces potential industry investors and inputs necessary capital, equipment, technique and advanced management experience, to build textile printing & dyeing industry park featuring with R&D, production, process and sales together with investors. Business of the industry park is mainly focused on development of top-grade textile and printing & dyeing products, and it is predicted that over 1000 occupation posts would be provided for local place. (2)Business of costume manufacture According to the strategic development programming of Chengde government aiming to build Strong County for Costume across the nation, and with support from the government, the Company cooperates with the potential industry investors who are going to provide necessary capital, technique, equipment and brand authorization. Through integrating the original customer network and sales channels of the Company, and engaging the original skilled employees of the Company, the Company would gradually resume and develop production and process business of costume. (3)Business of pulp and paper-making With the original condition and assistance from the government, the Company cooperates with the potential industry investors, and introduces in technique of making clean pulp, technique of sewage disposal and relevant special equipments which possess of independent intellectual property. Promotion and demonstration base for clean pulp technique and sewage disposal technique is planned to establish; meanwhile, with production base for pulp and newsprint paper. At the same time, the Company would make

27 design development for matching equipments for the aforesaid techniques, and provides other paper-making enterprises with complete solution scheme for sustainable development between paper-making resources and environment. It aims to gradually become an integrated paper-making enterprise featuring with R&D of science and technology, production, operation and technique service.

3. Focus for 2010 works The Company will continue to consider to seek for powerful strategy investors and partners to integrate assets, injecting the Company with capital, assets or business which have considerable development and profit-making prospects, so as to help the Company to resume production and profit-making ability of main business, and normal operation of its various business as soon as possible.

4. Risks, and relevant solutions and measures to be taken (1) Macro-policy risk and countermeasures China now is just in procedure of rapid economic development. Unceasing release of new policy measures, and changes in laws and policy environment would bring certain uncertainties to the Company in implementing reform plan, operation, production and investment activities, also bring uncertainties to the development programming and strategy of the Company. Considering the policy risk, the Company will further research and analyze the changes of national policy and law regulation, fully and objectively appraise the influences of development strategy and operations of the Company brought by the changes of national policy and law regulations. On the basis of operation abiding to the law, assurance of the development goal of the Company and manufacturing operation abiding to the national laws and regulations, to adjust timely the development strategy and operations of the Company, hold the development chances brought by the changes of the national policy and laws and regulations; at the same time, to avoid the disadvantageous influences brought by the changes of the national policy and laws and regulations. (2) Market or business operation risks and countermeasures The Company has stopped operation for 2 years, so the original market has already been lost. At present, the Company has certain difficulty in resuming production and market, faced with griming test. With assistance from the government, the Company cooperates with potential industry investors who provide necessary capital, equipment, as well as technique. Through integrating original customer network and sales channels of the Company, and engaging the original skilled employees of the Company, the Company would gradually resume and develop the original industry. (3)Financial risk and countermeasure Affected by various factors, serious operation crisis and financial crisis had happened to the Company since 2005. It was prosecuted by various creditors, and all assets of the Company were sealed up or frozen, thus financial crisis was getting further serious, and the Company had lost ability to make profit. Once the Company staged in process of bankruptcy and restructure and discharges debts according to restructure plan, its debt burden and financial pressure would be effectively relieved (4)Technique risk and countermeasure Due to operation of the Company had stopped for 2 years, facilities were seriously rotten, and technique workers were all off for holiday. When resuming production, it is not avoidable for the Company to lose skilled workers. Except the preference reengagement for the original skilled workers of it, the Company also would engage technique talented personnel from the same industry, domestic or overseas, with high remuneration;

28 introduces and renews the original equipments; actively absorbs advanced technology of the same industry, domestic or overseas all available.

III. Investment of the Company 1. In the report period, there was no such situation that application of raised proceeds in the report period or application of proceeds started in previous periods while continuing to last in this report period. 2. In the report period, there was no investment with the non-raised proceeds of the Company.

IV. 1. Explanation of the Board on the non-standard Auditor’s Report issued by the CPAs The financial report of this period was audited by Beijing Yongta Certified Public Accountants Co., Ltd., and it issued auditor’s report with unqualified opinions of emphasis matters. MATTERS TO BE FOCUSED: We remind that the users of the financial statements should pay attention to the following events: (1) As stated in Note 1, the Company increases of its capital by issuing 150,000,000 B shares in July 2004, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not been verified by PRC certified public accountants and the procedures for the change of business registration are not carried out completely. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. After share bonus distribution, the registered capital of the Company changed to RMB 706,320,000. The shares mentioned above are not verified by PRC certified public accountants and the procedures of business changing registration are not carried out completely. (2) As stated in Note 1 (4), the controlling shareholder of the Company Chenrong transferred 100% share of Rongyida Real Estate Development Company to the Company for RMB 1 on 27 July 2009, but the procedures of changing business registration are not carried out completely. (3) As stated in Note 4 (1), (Hongkong) Century Win International Holding Co., Ltd invested in Chengde Xingye Papermaking Co., Ltd, the subsidiary of the Company with machinery equipment, the amount of investment was RMB 207,500,000.00, which was 25% share of Xinye Papermaking Co., Ltd. Confirmed by the Companies Registry of Hong Kong SAR Government, Century Win International Holding Co.,Ltd declared to dismiss on 20 May 2005. According to the ruling of Hebei senior People's Court (2009) Ji Xing Er Zhong Zi 44 of 23 April 2009, Chengde Xingye Papermaking Co.,Ltd was adjudicated a deceptive foreign- invested enterprise which was established by the original shareholder of the Company Wangsuxian in the name of Century Win International Holding Co., Ltd. (4) As stated in Note 5 (7), registered capital of Dahua Paper Industry Co., Ltd is JPY 6,364,000,000, of which USD 5,000,000 has been verified by PRC Certified Public Accountants. Investment of Xinye Papermaking Co., Ltd amounts RMB 206,215,729.65 (impairment provision RMB 204,000,000.00), of which RMB 187,653,000.00 hasn’t been verified by PRC Certified Public Accountants , which is invested by Xinye Papermaking Co., Ltd with equipment, land and plants. Chengde Industrial and Commercial Bureau withdrawed the licencse of Dahua Paper Industry Co., Ltd on 28 April 2009 due to not submitting the annual inspection material of 2007.

29 (5) As stated in Note 5 (4), The Company purchased land use right for a land of 619.81 Mu at the consideration of RMB 40,169,264.50 as land lease premium. The Company has got a land use right certificate for 324.781 mu, but hasn’t got the rest. We are not sure the land use certificate is available for the remaining land. (6) As stated in Note 5 (20), after making up the loss for the previous year, there is no income tax needed to pay for the profit before tax of the period, the event and deducting the loss of the disposed assets before tax has been applied to the Tax Authority, while it hasn’t been approved until 28 April, 2010. (7) According to the ruling of Chengde Intermediate People's Court (2008) Cheng Min Po Zi 10-1, (2008) Cheng Min Po Zi 11-1 and (2008) Cheng Min Po Zi 12-1 at 8 February 2009, Chengde Banhe Fiber Co., Ltd, Chengde Dixian Fashion Co., Ltd and Hebei Xiaban City Textile Co., Ltd were bankrupt respectively. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 9-5 at 27 April 2009, Chengde Intermediate People’s Court of Hebei Province confirmed that liabilities repayment included in the restructuring planning has been completed. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 13-3 on 10 May 2009, Chengde Intermediate People’s Court of Hebei Province confirmed the settlement agreement between Xinye Papermaking Co., Ltd and its creditors. The settlement proceedings had been terminated together. The Company still has uncertainty on its going concern operating ability while that hasn’t recovered to normal operating as to 31 December 2009. The statement of the above paragraphs has no effect on the expressed audit opinion. To the proceedings involved in unqualified opinions with paragraph of emphasized matters provided by accountants, the board of directors of the Company made the following explanations: The board of directors thought that, the proceedings involved in unqualified opinions with paragraph of emphasized matters provided by Beijing Yongtuo Certified Public Accountants existed which were problems left in history, and could not have substantial influences on production and operation of the Company. The board of directors attached importance to the emphasized issues and unqualified matters in the audit report, and is communicating with related department at present on negotiating the solutions. We believed that with the accomplishment of bankruptcy reorganization of the Company, the Company would gradually went into the right path, and the above matters involved would be resolved soon.

2. Explanation of independent directors on the non-standard Auditor’s Report issued by the CPAs In 2009, as for the financial statement of the Company, Beijing Yongtuo Certified Public Accountants Co., Ltd. audited the statement and issued unqualified audit report with emphasized matters. Independent directors of the Company thought that Speical Explanation of the Board on the Matters Involved in Nonstandard Unqualified Auditor’s Report accorded with the actual condition and they agreed with this explanation. While meanwhile, they demanded the board of directors, administrative level and financial department of the Company to pay great attention to the problems involved in the emphasized issues and unqualified opinion of the audit report, and to solve the problems as soon as possible, thus to protect practical interest of vast middles and minor shareholders.

3. Explanation of the Board on correction of financial information of the Company In the report period, accounting policy and accounting estimate of the Company haven’t changed, and the Company didn’t revise the previous financial information.

V. Routine work of the Board of Directors (I) In the report period, the meetings and resolutions of the Board of Directors: 1. The 5 th Meeting of the 4 th Board of Directors of the Company was held on Jan 22 nd of 2009 by communications, this meeting discussed and approved proposal on building Audit Committee of Board of Directors; proposal on Work Details on Annual Report of Audit Committee; proposal on Work Details of Independent Directors. The relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Jan 23 rd of 2009. 2. The 6 th Meeting of the 4 th Board of Directors of the Company was held in 1/F meeting room of No. 832 Shanghai Huamu Road on Apr. 28 th of 2009, this meeting discussed and approved proposal on Annual Work Report of Board of Directors of 2008; proposal on Annual Financial Report of the Company in 2008; proposal on Pre- plan for Annual Profit Distribution of 2008; proposal on Annual Report and Summary of the Company in 2008; proposal on Board of Directors’ Explanation on Relevant Particulars of Non-standardized Audit Report Issued by Accountants; proposal on Apply Special Settlement on Caution of Retreating Risk from Stock Delisting; proposal on Rename of the Company; proposal on Revising Articles of Association; proposal on Report on Self-estimation of Internal Control in 2008; proposal on Engagement of Audit Institution of the Company in 2009; proposal on Remunerations of Directors(Supervisory) and Senior Executives; of the First Quaterly Report and Summary in 2009; proposal on Holding 2008Annual Shareholders General Meeting; the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Apr 30 th of 2009. 3. The 7 th Meeting of the 4 th Board of Directors of the Company was held on July 30 th of 2009 by communications, this meeting discussed and approved proposal on Proposal on the Company Took Over 100 Percent Equity of Chengde Rongyida Property Development Co., Ltd. with RMB 1; Proposal on Project Construction of Wholly-owned Subsidiary Chengde Rongyida Property Development Co., Ltd. The relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated July 31 st of 2009. 4. The 8 th Meeting of the 4 th Board of Directors of the Company was held on Aug 28 th of 2009 by communication, this meeting discussed and approved Proposal on Semi-annual Report and Summary of 2009. The relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Aug 30 th of 2009. 5. The 9 th Meeting of the 4 th Board of Directors of the Company was held on Sep 22 nd of 2009 by communications, this meeting discussed and approved Proposal on Enlarging Operation Scope and Revising Articles of Association; Proposal on Holding the Second Extraordinary Shareholders’ General Meeting of 2009. The relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Sep 23 rd of 2009. 6. The 10 th Meeting of the 4 th Board of Directors of the Company was held on Oct 21 st of 2009 by communications, this meeting discussed and approved Rules of Procedure of Shareholders’ General Meeting after revision; Rules of Procedure of Board of Directors after revision; Rules of Procedure of Board of Supervisors after revision; Related Transactions Management System; Information Disclosure Management System after revision; Rectification Report. The relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Oct 22 nd of 2009. 7. The 11 th Meeting of the 4 th Board of Directors of the Company was held on Nov 25 th of 2009 by communications, this meeting discussed and approved Proposal on Establishment of Remuneration and Examination Committee; Proposal on Establishment of Strategy Committee; Proposal on Establishment of Nomination Committee; Implementation

31 Regulation of Establishment of Remuneration Committee; Implementation Regulation of Strategy Committee; Implementation Regulation of Nomination Committee; Incentive and Restriction Mechanism of Management Team. The relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Nov 25 th of 2009.

(II)Implementation of resolutions reached in Shareholders’ General Meeting by the Board In the report period, the Company did neither distribute profit, nor have executable equity incentive plan. In the report period, the Company didn’t implement allotment and issuance of new shares.

(III) Implementation of audit committee of the board of directors Audit committee was constituted by 3 directors, including 2 independent directors. Audit committee strictly followed Implementation Regulations of Audit Committee and Annual Report Work Regulations of Audit Committee, audit committee seriously and actively started relevant work of auditing annual report, exerted the function of supervising and auditing, and audit committee made summary of auditing work in 2009 as follows: 1. Confirming overall audit plan and check financial report Audit committee and financial department negotiated with Beijing Yongtuo Certified Public Accountants, and confirmed audit work arrangement of 2009. At the same time, audit committee checked financial statement of 2009 compiled by the Company and thought that: the Company could made financial calculation according to the regulations of New Accounting Standard, without any significant untruthfulness in report information; the financial statement of 2009 compiled by the Company basically reflected conditions of assets liability and operation achievement till Dec. 31, 2009, and agreed to start financial audit work in 2009 with the financial statement as basis. 2. Keeping normal communication with CPAs and paying attention to the progress of auditing During the auditing period, audit committee always kept communication with financial department and CPAs, and paid attention to the progress of auditing. The CPAs provided initial audit opinions, audit committee checked financial accounting statement, and formed written opinions that: the financial report of 2009 compiled by the Company basically reflected conditions of assets liability and operation achievement till Dec. 31, 2009, and agreed to compile Financial Report of 2009 with the financial statement as basis and submit the board of directors to approve. At the same time, audit committee again put forward the requirement that the CPAs complete the final draft of audit report in the last ten days of April according to overall audit plan to ensure the Company to disclose Annual Report 2009 as schedule. 3. Audit committee held meeting to discuss relevant matters on annual report After completing annual auditing, audit committee held meeting to discuss the following resolutions: Financial Report of 2009, Self-estimation Report of Internal Control of the Company 2009, Proposal on suggesting Reengaging Certified Public Accountants to the Board of Directors and Summary Report on Annual Audit Work in 2009 of Certified Public Accountants. Till then, the audit work of 2009 was totally completed. Audit committee would submit the board of directors to approve the above proposals. 4. Summary Report on Annual Audit Work in 2009 of Certified Public Accountants Beijing Yongtuo Certified Public Accountants started the audit work on Feb 24 th , 2010. During the audit work in one month, the audit group completed all audit procedure, obtained sufficient appropriate audit evidence, and submitted initial audit opinion to audit committee. In the process of auditing, Beijing Yongtuo Certified Public Accountants strictly followed the basic principle of profession morality, possessed high professional

32 level, adhere to independent, and kept profession caution; greatly completed the audit work of financial report of 2009, checked capital occupancy of holding shareholders and other related parties in 2009, and provided special explanation. Beijing Yongtuo Certified Public Accountants provided unqualified auditor’s report with paragraph of emphasized issues for the 2009 annual financial report of the Company. 5. Proposal on suggesting Reengaging Certified Public Accountants to the Board of Directors Beijing Yongtuo Certified Public Accountants completed the audit work of annual report as schedule. In the audit work, Beijing Yongtuo Certified Public Accountants seriously implemented each duty, strictly followed the basic principle of profession morality, possessed high professional level, adhere to independent, kept profession caution, and greatly completed the audit work of financial report. Audit committee suggested reengaging Beijing Yongtuo Certified Public Accountants as audit institution of the Company for 2010.

(IV) Performance of remuneration and examination committee On Nov 25 th , 2009, the 11 th Meeting of the 4 th Board of Directors discussed and approved establishing Remuneration and Exmination Committee, the Remuneration and Exmination Committee was consisted of 3 directors, 2 of whom were independent directors. On Mar 25 th , 2010, the 1 st meeting of Remuneration and Exmination Committee believed that: in 2009, the Company hadn’t resumed production, the remunerations of the director, supervisory and senior executives temporarily would be conducted according to 2008 Annual Shareholders’ General Meeting which was in accordance with real condition of the Company, re-approval would be conducted after the Company resumed production. The Company established Incentive and Restriction Mechanism Ways of Management Team, but because the Company took bankruptcy reorganization and hadn’t resumed production, Incentive and Restriction Mechanism Ways of Management Team was still not be implemented, the Remuneration and Exmination Committee wouldn’t comment on it for the moment.

VI. Profit distribution preplan or preplan on converting capital public reserve into share capital in current year Audited by Beijing Yongtuo Certified Public Accountants Co., Ltd., the net profit realized by the Company in 2009 attributable to shareholders of listed company amounted to RMB 186,014,467.46. After offsetting losses in previous years, the undistributed profit of the Company amounted to RMB -1,230,421,633.22 till Dec 31 st of 2009. The board of directors decided not to distribute profit in 2009, nor convert public reserve into share capital. The proposal still needs to be handed in to 2009 Shareholders’ General Meeting for discussion. Reason for why cash profit distribution preplan was not presented though profit was made in the report period, and usage of the undistributed profit: Influenced by various factors, the Company together with its subsidiaries all stopped production since October of 2007, and have not resumed production in the report period, besides, no production and operation business has been carried out. For that, the main business of the Company still received loss in 2009, but RMB 0.186 billion of net profit realized in 2009 which was mainly received from bankruptcy and reorganization of the Company and bankruptcy of subsidiaries Bancheng Company, Fashion Company and Chengde Banhe Company as well as larger amounts of gains and losses caused by reconciliation between Xingye Paper Company and its creditors, but the Company didn’t receive corresponding cash inflow from it. The profit of 2009 was all spent in offsetting

33 loss in previous years. Independent directors thought: the situation that the board of directors decided not to distribute profit in 2009, nor convert public reserve into share capital was in accordance to actual condition of the Company, and also met relevant regulations of Company Law and Article of Association.

2. Bonus Division of the Company in recent three years Ratio of net profit Net profit attributable to Year for attributable to Amount of cash bonus shareholders of listed bonus shareholders of listed (tax included) company in consolidated distribution company in statement of bonus year consolidated statement - 2008 0 176,403,180.59

- 2007 0 -1,392,672,660.84

- 2006 0 -343,506,925.21

The proportion of accumulative cash bonus during recent three years in latest - annual average net profit (%)

VII. Establishment and perfection particulars of management system respectively of inside information insiders and outside information users According to the requirements of documents such as Notice of Doing Well in 2009 Annual Report and Relevant Work of Listed Companies (CSRC Notice (2009) No.34) issued by CSRC, Notice of Doing Well in 2009 Annual Report Work of Listed Companies issued by Shenzhen Stock Exchange and Notice of Doing Well in Related Work of 2009 Annual Report of Listed Companies in the Prefecture (JZJF (2010) No. 4) issued by Hebei Securities Regulatory Bureau, the Company timely made Management System of Inside Information Insiders, which made specific regulation of inside information, insiders along with scope, inside information management and outside information management as well as responsibility investigation of those conducts against system.

VIII. Special explanation and independent opinion issued by independent directors on capital occupancy and external guarantee of related parties of the Company Following the spirits of ZJF No.56 (2003) document on Standardizing Capital Current and External Guarantee between Listed Company and Related Party and ZJF No.120 (2005) document on Standardizing External Guarantee of Listed Company, as independent directors of the Company, we made careful inspection on the external guarantee executed according to the aforementioned regulation and presented the following explanation on relevant problems, with an attitude of earnest and responsibility: Till the end of the report period, the Company has never provided guarantee for shareholder, actual controller and its related party, any non legal person unit and individual; controlling shareholder and other related party neither forced the Company to provide guarantee for others; the Company didn’t provide guarantee violating any regulations.

IX. Other proceedings The domestic media for information disclosure appointed by the Company is Securities

34 Times; and Hong Kong Commercial Daily will replace Hong Kong Wen Wei Po for overseas media since Apr 22 nd , 2010.

35 Section IX. Report of Supervisory Committee

I. Particulars about meetings of Supervisory Committee during the report period and the resolutions During the report period, Supervisory Committee of the Company held two meetings, and particulars are as follows: 1. The 2 nd Meeting of the 4 th Supervisory Committee was held at conference room on the first floor of No. 832 Huamu Road in Shanghai and examined and approved following resolutions: (1) 2008 Work Report of Supervisory Committee (2) 2008 Financial Audit Report (3) 2008 Annual Report and the Summary (4) The Board’s Explanation on Relevant Matters of Nonstandard Auditor’s Report Issued by Accountants (5) The First Quarterly Report of the Company in 2009 Resolutions of the meeting were published on Hong Kong Wen Wei Po and Securities Times dated Apr. 30 th , 2009.

2. The 3 rd meeting of the 4 th Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Aug. 26, 2009. The meeting examined and approved the Semi-Annual Report 2009 and Summary. The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated Aug. 27, 2009.

II. Independent opinions of the Supervisory Committee on relevant matters in 2009 1. Independent opinions on legal operations of th Compamy from the Supervisory Committee According to relevant State laws and regulations, the Supervisory Committee of the Company supervised the holding procedures and resolutions of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board, implementation of duties of the senior executives and the management system of the Company, and believed that, in 2009, the Board of the Company could normatively operate strictly according to Company Law, Securities Law, Listing Rules, Articles of Association of the Company, as well as other relevant regulations and systems in a patient and responsible way and its operation decisions were scientific and reasonable. The Board had further perfected internal management system and internal control to set up a good internal mechanism. The directors and managers of the Company had no behaviors against laws, regulations or Articles of Association of the Company, nor behaviors that had done harm to the interest of the Company in implementing their duties.

2. Inspection of the financial status of the Company The Supervisory Committee of the Company patiently and meticulously inspected the financial system and financial status of the Company, and believed that the Financial Report 2009 of the Company could truly reflect the financial status and operation achievement of the Company.

3. Independent opinions of the Supervisory Committee on the actual investment of the latest raised fund. In the report period, the Company did not raise fund. With the approval of ZJF 〔2004 〕

36 No.101 promulgated by CSRC, the Company has completed directional increasing 0.15 billion B shares in 2004. The total raised amount was HKD 0.498 billion. The raised fund have been used up according to the commitment of Prospectus, there were no changes on the projects of the raised fund.

4. Independent opinions of the Supervisory Committee on purchase and sales of assets During the report period, the Company took over 100% equity of Chengde Rongyida Property Development Co., Ltd at a price of RMB 1, which made Rongyida a fully-owned subsidiary of the Company. Assets injection into Chengde Rongyida Property Development Co., Ltd brought advantages to the Company’s restoration of the capacity of mainstay business and embodied big shareholder—Mr. Chen Rong’ s strong supports for the Company. The Supervisory Committee was greatly appreciative of the big shareholder’s behavior and cherished a wish that the Company could shake off difficulties as soon as possible under the joint efforts of all parties.

5. Independent opinions of the supervisory committee on related transactions of the Company In the report period, the related transaction occurred according to the market transaction term and relevant regulations; there were no harm to the Company, equity of the shareholder, losses of assets of the Company, and no insider dealings.

6. Independent opinions of the supervisory committee on nonstandard Auditor’s Report issued by the Certified Public Accountants In 2009, Beijing Yongtuo Certified Public Accountants Co., Ltd. audited the financial report of the Company and issued unqualified auditor’s report with paragraph of emphasized issues for the Company. Explanations of the Board of Director of the Company on particulars about the nonstandard Auditor’s Report issued by the Accountants were in accordance with the real status of the Company, and the Supervisory Committee agreed and did not have matters with special explanations.

37 Section X. Important Events

I. In the report period, significant lawsuits of the Company 1. On Feb. 25, 2009, Shijiazhuang Intermediate People’s Court made a sentence that the Company had the crime of smuggling general cargo, which would be fined RMB 68,734,451.21, and the general cargo involved in the case would be confiscated into state treasury. In the legal time limit, Wang Shuxian appealed. On Apr. 23, 2009, Hebei high People’s Court made a Written Verdict of Crime (2009) JXEZZ No.44, which judged that: rejected the appeal and kept the original sentence. And the judgment was the final verdict. The Company thought that the aforementioned results had no material influence on reorganization of the Company.

II. Bankruptcy and related reforming issues in the report period 1. Bankruptcy and related reforming issues of the Company: on Nov. 1, 2008, the creditor – Chengde Xingchen Construction Engineering Co., Ltd. submitted application of bankruptcy and related reforming to Chengde Intermediate People’s Court (hereinafter refer to as Chengde Intermediate Court). On Nov. 10, 2008, Chengde Intermediate Court made Civil Arbitrate Verdict (2008) CMPZ No. 9, which permitted the Company to reform and appointed settlement group as manager. During reforming period, on Dec. 13, 2008, the Company the Company submitted Reform Plan (Draft) of Chengde Dixian Textile Co., Ltd. (hereinafter refer to as Reform Plan (Draft)) to Chengde Intermediate Court. On Dec. 15, 2008, the 1 st creditors meeting voted to Reform Plan (Draft) by the method of group vote, and the expiry date of submitting votes was Dec. 19, 2008. Till Dec. 19, 2008, employees’ credit group and tax credit group had voted to approve Reform Plan (Draft); priority credit group and common credit group had voted not to approve Reform Plan (Draft). On Dec. 29, 2008, the Company submitted application for approving Reform Plan (Draft) to Chengde Intermediate Court. On Dec. 30, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 9-2 from Chengde Intermediate Court, which said that: in the group voting of Reform Plan (Draft), employees’ credit group and tax credit group approved Reform Plan (Draft); the liquidation plan of priority credit group (credit that enjoy guarantee right of specific assets) accorded with the regulations of Item II (I) in Article 87 of Law of the People's Republic of China on Enterprise Bankruptcy; the liquidation proportion that common credit right received according to regulations of Reform Plan (Draft) was not less than the liquidation proportion received according to bankruptcy liquidation procedure; Reform Plan (Draft) equally treated members in the same group, and the regulated liquidation order did not disobey the regulations of Article 113 in Law of the People's Republic of China on Enterprise Bankruptcy; the operation plan also had feasibility. The Reform Plan (Draft) accorded with the approval qualification regulated by Law of the People's Republic of China on Enterprise Bankruptcy. Hereby, according to regulations of Item II and III in Article 87 of Law of the People's Republic of China on Enterprise Bankruptcy, Chengde Intermediate People’s Court judged as follows: (1) approved Reform Plan (Draft) of Chengde Dixian Textile Co., Ltd.; (2) terminated reform procedure of Chengde Dixian Textile Co., Ltd. The time limit of implementing reform plan was 24 months, and was calculated from the day when reform plan was permitted by Chengde Intermediate People’s Court. Since got approval for its reform plan, the Company actively made implementation, and cleared all debt till Apr 24 th of 2009 according to the reform plan. On Apr 27 th of 2009, the Company received Civil Verdict (CMPZ (2008) No.9-5) issued by Hebei Chengde Intermediate People's Court, which confirmed that the debt clearness part in the reform

38 plan had already been executed completely, and the court judged that: 1. since Apr 24 th of 2009, administrant of Chengde Dixian Textile Co., Ltd. terminated its obligation as supervisor; 2. since Apr 24 th of 2009, creditors who have not declared creditors’ right over Chengde Dixian Textile Co., Ltd. during the reforming period could ask exertion right according to the clearness condition as being the same type of creditors’ right regulated by the reform plan.

2. Bankruptcy liquidation of Xiabancheng Company: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 12 made by Hebei Chengde Intermediate People’s Court that accepted application of Anxin Hongda Plastic Factory making bankruptcy liquidation of Hebei Xiabancheng Knitted Dress Co., Ltd. - wholly owned subsidiary of the Company. On Feb.18, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 12-1 made by Hebei Chengde Intermediate People’s Court, which declared that Hebei Xiabancheng Knitted Dress Co., Ltd. was bankrupted. Xianbancheng Company was currently under bankruptcy liquidation.

3. Bankruptcy liquidation of Fashion Company: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 11 made by Hebei Chende Intermediate People’s Court that accepted application of Chengde Xinda Energy-saving Electronical Equipment Co., Ltd. making bankruptcy liquidation of Chengde Dixian Fashion Co., Ltd. whose 75% equity was held by the Company. On Feb.18, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 11-1 made by Hebei Chengde Intermediate People’s Court, which declared that Chengde Dixian Fashion Co., Ltd. was bankrupted. The Fashion Company was now under bankruptcy liquidation.

4. Bankruptcy liquidation of Banhe Company: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 10 made by Hebei Chende Intermediate People’s Court that accepted application of Sun Weishan making bankruptcy liquidation of Chengde Banhe Chemical Fibber Simulation Textile Co., Ltd. – holding subsidiary of the Company. On Feb.18, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 10-1 made by Hebei Chende Intermediate People’s Court, which declared that Chengde Banhe Chemical Fiber Simulation Textile Co., Ltd. – holding subsidiary of the Company was bankrupted. Banhe Company was at present under bankruptcy liquidation.

5. Xingye Papermaking Co., Ltd. applied for bankruptcy: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 13 made by Hebei Chende Intermediate People’s Court that accepted application of Chengde Yonghe Concrete Co., Ltd. making bankruptcy liquidation of Xingye Papermaking Co., Ltd. whose 75% equity was held by the Company. At present, Xingye Papermaking Co., Ltd. was in process of liquidation. Xingye Papermaking Co., Ltd. reached reconciliation agreement with creditor on May 8 th , 2009.

III.The Company had no equity of other listed companies, share participating commercial bank, Security Company, insurance company, trust companies, futures companies and other financial enterprises.

IV. Purchases or sales of assets, takeovers or mergers During the report period, the Company disposed and sold the realizable assets in line with the Bankruptcy Reform Draft Plan and liquidated all debts. On July 27, 2009, Mr. Wangfei and Ms Chenliping who are shareholders of Rongyida

39 Company respectively signed equity transfer agreement with holding shareholder Mr. Chenrong, Mr. Wangfei and Ms Chenliping respectively transferred 90% and 10% of equity of Chengde Rongyida Property Development Co., Ltd. to Mr. Chenrong respectively with RMB 9 million and RMB 1 million. On the same day, Mr. Chenrong transferred the received 100% equity of Rongyida Company to the Company with RMB 1. Rongyida Company became a wholly-owned subsidiary of the Company after equity transfer. ongyida Company had acquired all of the bankruptcy reform assets of the Company and auctioned bankruptcy assets of the subsidiary by auction in April of 2009 prior to the equity transfer issue. Capital injection from Rongyida Company created favorable conditions for the Company’s recovery in production and capacity of continual operation In 2009, Dalu Commercial Center (development for commercial shops along street) and Dalu Fazenda (commercial residence) which are developed by Rongyida Company were under the initial phase preparation and approval and have not been started constructions. V. Particulars about the implementation of equity incentive plan in this report period The Company constituted equity incentive mechanism during the report period and would implement it when the conditions were mature. During the report period, no implementation of equity incentive plan occurred.

VI. Significant related transaction On Jul. 27 th of 2009, Chen Rong, controlling shareholder of the Company transferred 100% equity of Chengde Rongyida Property Development Co., Ltd. to the Company at a price of RMB 1, which made Rongyida Company become a wholly-owned subsidiary of the Company after the transfer. During the report period, there were no other significant related transaction issues.

VII. Significant contract and performance of the contract 1. In the report period, the Company had no significant trusteeship, contract and lease of other companies’ assets and vice visa. 2. Significant Guarantee During the report period, the Company provides no guarantee for subsidiaries, shareholders, actual controllers or its related parties. Neither did the Company provide guarantee for object with assets-liability ratio exceeding 70% in direct or indirect manner. 3. During the report period, the Company did not entrust cash- assets management issues or financing scheme to others. 4. The Company had no significant contract undisclosed.

VIII. In the report period of lasting to this report period, neither the Company nor shareholders with personal equity exceeding 5% made any commitment which exerted important influence upon the operation results and financial position of the Company.

IX. During the report period, directors, supervisors and senior executives conducted no stock purchase or stock sales which violated regulations.

X. Engagement and Removal of CPAs Firm During the report time, the Company reengaged Beijing Yongtuo Certified Public Accountants Co., Ltd. as the audit organ for 2009, as it was passed by the 6 th Meeting of the 4 th Board of Directors and approved by 2008 Annual Shareholders’ General Meeting. Yongtuo CPAs Limited had provided audit service for the Company for two successive years, and the audit charge of 2009 amounted RMB 0.5 million.

40 XI. Related issues of received investigation, administrative punishment or criticism through public notice from China Securities Regulatory Commission or condemn by the stock exchange in public the Board of Directors, the Supervisory Committee, directors, supervisors and other senior executives of the Company in the report period. In the report period, Shijiazhuang Intermediate People’s Court judged that the Company had the crime of smuggling general cargo, which would be fined RMB 68,734,451.21, and the general cargo involved in the case would be confiscated into state treasury; some former directors and senior executives would be investigated into criminal responsibility. The present directors, supervisors, senior executives, shareholders, actual controllers and purchaser of the Company had never be investigated by authorized department, received compulsory measure from judicial department, be sent to judicial department or be investigated into criminal responsibility; also never received investigation, administrative punishment or criticism through public notice from China Securities Regulatory Commission, nor had they been condemned by the stock exchange in public either.

XII. In the report period, reception of research and interview In accordance with the principles of just, fair and publicity, to further regulate the behaviors of information disclosure for the listed companies and ensure justice for information disclosure, the Company received the research and media interviews in standardized way according to the regulations of Guideline on Fair Information Disclosure for Listed Companies promulgated by Shenzhen Stock Exchange. In the report period, the Company received visits and telephone communication from its investors for many times; the Company received them and replies strictly in accordance with relevant regulations; there occurred no such situations as selectively and privately reveal or leak non-public significant information to specific parties; and all these assure the fairness of information disclosure of the Company. Reception Way of Reception Discussion topics and information Reception date place reception object provided

Security Department Reorganization progress of the Company th Telephone Jan. 19 , 2009 Investors of the communication and no material was supplied Company Security Verdict status of the lawsuits involving Department nd Telephone Mar 2 , 2009 Investors the Company and no material was of the communication supplied Company Security Auction situation of part assets of the Department th Telephone Mar 10 , 2009 Investors Company and subsidiary’s assets, and of the communication no material was supplied Company Security th Telephone May 11 , 2009 Department Investors Existing assets, offered annual report communication of the

41 Company

Security Department Present status and no material was th Telephone May 20 , 2009 Investors of the communication supplied Company Security Department Progress of the lawsuit, and no material th Telephone Jun. 20 , 2009 Investors of the communication was supplied Company Security Department Present status, and no material was nd Telephone Jul. 2 ,2009 Investors of the communication supplied Company Security Department Present status, and no material was th Telephone Jul. 25 , 2009 Investors of the communication supplied Company Security Performance of the first half year, Department th Telephone Aug. 17 , 2009 Investors provided Prediction of the Semi-annual of the communication Performance Company Security

st Department Telephone Development of the Company’s real Sep. 21 , 2009 interview and Investors of the estate, and no material was supplied communication Company Security Department Restoration of production, and no material nd Telephone Oct. 22 , 2009 Investors of the communication was supplied Company Security Department Status of the Company in the third rd Telephone Nov. 3 , 2009 Investors of the communication quarter, provided 3rd Quaterly Report Company Security Project construction status of the th Telephone Dec. 15 , 2009 Department Investors wholly-owned subsidiary, and no material communication of the was supplied

42 Company

Security Department Present status of the Compan, and no th Telephone Dec. 27 , 2009 Investors of the communication material was supplied Company

XIII. Occupation of non-recurring proceeds by shareholders and their related parties During the report period, none occupation of the Company’s fund by shareholders and the related parties took place.

XIIII. Other Significant Events 1. Upon the approval document No.[2004]101 issued by the China Securities Regulatory Commission in July 2004, the Company increases of its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of B shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. According to the resolution of general meeting of shareholders on Jun. 8, 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. Influenced by the aforementioned factors, the procedures for the change of business registration were not carried out completely.

2. In the report period, because the subsidiaries - Dixian Fashion Co., Ltd., Xiabancheng Knitwear Co., Ltd. and Banhe Chemical Simulation Textile Co., Ltd. was bankrupted, the aforesaid three companies was not in the range of consolidation statement in this period. During the report period, Chen Rong, controlling shareholder of the Company transferred 100% of Chengde Rongyida Property Development Co., Ltd to the Company at a price of RMB 1. Rongyida Company became a wholly-owned subsidiary of the Company after equity transfer, and it was taken into the range of consolidation statement in this period.

3. In the report period, approved by Shenzhen Stock exchange, the delisting risk warning of the Company’s stock was retreated on Jul. 7, 2009, and the stock would be implemented other special treatment.

4. During the report period, after the approval of 2008 Shareholders’ General Meeting and Verification of Hebei Administration Bureau of Industry and Commerce, the Company’s name changed from “ Chengde Dixian Textile Co., Ltd.” to “ Chengde Dalu Co., Ltd. Short form of the Company’s stock changed from “ST Dixian” to “ST Dalu” from Nov. 26 th of 2009 while the stock code was still 200160 with the approval of Shenzhen Stock Exchange.

43 Section XI. Financial report

Chengde Dalu Company Limited Audited financial statements for the year ended 31 December 2009 Contents

1 Auditor’s report

2 Appendices

1) Consolidated balance sheet

2) Balance sheet

3) Consolidated income statement

4) Income statement

5) Consolidated changes in shareholders’ equity

6) Changes in shareholders’ equity

7) Consolidated statement of cash flows

8) Statement of cash flows

9) Notes to financial statements

Beijing Yongtuo CPAs

44 AUDITOR’S REPORT [English Translation for Reference Only]

(2010)GU SHEN ZI NO.11014

To the Shareholders of Chengde Dalu Company Limited:

We have audited the accompanying financial statements of Chengde Dalu Company Limited (the Company), which comprise the company and consolidated balance sheets and as at 31 December 2009, the company and consolidated income statements, the company and consolidated statements of changes in shareholders’ equity, the company and consolidated cash flow statements for the year then ended, and notes to the financial statements.

1. MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation of these financial statements in accordance with the Chinese Accounting Standards for Business Enterprises (2006). The responsibility includes: (a) designing, implementing and maintaining internal control relevant to the preparation of the financial statements that are free from material misstatement, whether due to fraud or error; (b) selecting and applying appropriate accounting policies; and (c) making accounting estimates that are reasonable in the circumstances.

2. ADUTITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Chinese Certified Public Accountants Auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

45 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider the internal control relevant to the preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

3. OPINION In our opinion, the financial statements have been prepared in accordance with the Accounting Standards for Business Enterprises and China Accounting System for Business Enterprises, and present fairly, in all material respects, the company’s and consolidated financial position as of 31 December 2009, and the company’s and consolidated results of operations and cash flows for the year then ended.

4. MATTERS TO BE FOCUSED We remind that the users of the financial statements should pay attention to the following events: (1) As stated in Note 1, the Company increases of its capital by issuing 150,000,000 B shares in July 2004, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not been verified by PRC certified public accountants and the procedures for the change of business registration are not carried out completely. According to the resolution of general meeting of shareholders on 8 June 2006, the

46 Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. After share bonus distribution, the registered capital of the Company changed to RMB 706,320,000. The shares mentioned above are not verified by

PRC certified public accountants and the procedures of business changing registration are not carried out completely.

(2) As stated in Note 1 (4), the controlling shareholder of the Company Chenrong transferred 100% share of Rongyida Real Estate Development Company to the Company for RMB 1 on 27 July 2009, but the procedures of changing business registration are not carried out completely.

(3) As stated in Note 4 (1), (Hongkong) Century Win International Holding Co., Ltd invested in Chengde Xingye Papermaking Co., Ltd, the subsidiary of the Company with machinery equipment, the amount of investment was RMB 207,500,000.00, which was 25% share of Xinye Papermaking Co., Ltd. Confirmed by the Companies Registry of Hong Kong SAR Government, Century Win International Holding Co.,Ltd declared to dismiss on 20 May 2005. According to the ruling of Hebei senior People's Court (2009) Ji Xing Er Zhong Zi 44 of 23 April 2009, Chengde Xingye Papermaking Co.,Ltd was adjudicated a deceptive foreign- invested enterprise which was established by the original shareholder of the Company Wangsuxian in the name of Century Win International Holding Co., Ltd. (4) As stated in Note 5 (7), registered capital of Dahua Paper Industry Co., Ltd is JPY 6,364,000,000, of which USD 5,000,000 has been verified by PRC Certified Public Accountants. Investment of Xinye Papermaking Co., Ltd amounts RMB 206,215,729.65 (impairment provision RMB 204,000,000.00), of which RMB 187,653,000.00 hasn’t been verified by PRC Certified Public Accountants , which is invested by Xinye Papermaking Co., Ltd with equipment, land and plants. Chengde Industrial and Commercial Bureau withdrawed the licencse of Dahua Paper Industry Co., Ltd on 28 April 2009 due to not submitting the annual inspection material of 2007. (5) As stated in Note 5 (4), The Company purchased land use right for a land of 619.81 Mu at the consideration of RMB 40,169,264.50 as land lease premium. The

47 Company has got a land use right certificate for 324.781 mu, but hasn’t got the rest. We are not sure the land use certificate is available for the remaining land. (6) As stated in Note 5 (20), after making up the loss for the previous year, there is no income tax needed to pay for the profit before tax of the period, the event and deducting the loss of the disposed assets before tax has been applied to the Tax Authority, while it hasn’t been approved until 28 April, 2010. (7) According to the ruling of Chengde Intermediate People's Court (2008) Cheng

Min Po Zi 10-1, (2008) Cheng Min Po Zi 11-1 and (2008) Cheng Min Po Zi 12-1 at 8 February 2009, Chengde Banhe Fiber Co., Ltd, Chengde Dixian Fashion Co., Ltd and

Hebei Xiaban City Textile Co., Ltd were bankrupt respectively. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 9-5 at 27 April 2009, Chengde Intermediate People’s Court of Hebei Province confirmed that liabilities repayment included in the restructuring planning has been completed. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 13-3 on 10 May 2009, Chengde Intermediate People’s Court of Hebei Province confirmed the settlement agreement between Xinye Papermaking Co., Ltd and its creditors. The settlement proceedings had been terminated together. The Company still has uncertainty on its going concern operating ability while that hasn’t recovered to normal operating as to 31 December 2009.

The statement of the above paragraphs has no effect on the expressed audit opinion.

(There are no texts on this page.)

Beijing Yongtuo CPAs Chinese Certified Public Accountants:xiaohui zhang

Beijing · China Chinese Certified Public Accountants:hailan guo

28 April 2010

49 CHENGDE DALU COMPANY LIMITED

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

ASSETS Notes 5 31 December 2009 31 December 2008 Current assets Cash and cash equivalent 1 58,256.11 447257.73 Tradable financial assets Notes receivable Accounts receivable 2 - 6,314,628.93 Prepaid accounts 3 - 68,630,272.88 Interest receivable Dividend receivable Other receivables 4 20,146,954.46 64,109,210.96 Inventories 5 11,296,098.60 377,830.47 Non-current asset due within one year Other current assets 6 1,093,527.39 Total current assets 32,594,836.56 139,879,200.97 Non-current assets Finance assets available for sales Held-to-maturity investment Long-term account receivable Long-term equity investment 8 2,215,729.65 97,215,729.65 Investment property Fixed assets 9 31,279,967.32 124,093,126.16 Construction in progress 10 12,883,800.00 12,883,800.00 Engineering material Disposal of fixed asset Consumable biological asset Oil and gas asset Intangible assets 11 25,445,282.21 91,294,980.17 Expense on Research and Development Goodwill Long-term prepaid expenses 12 2,009,612.55 Deferred tax asset 13 2,008,501.45 131,305,501.33 Other non-current asset 15 76,900,806.40 Total non-current asset 150,734,087.03 458,802,749.86

TOTAL ASSETS 183,328,923.59 598,681,950.83

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

50 CHENGDE DALU COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

LIABILITIES AND SHAREHOLDERS' EQUITY Notes 5 31 December 2009 31 December 2008 Current liabilities Short-term loans 16 5,422,261.91 257,110,082.88 Transaction financial liabilities Notes payable Accounts payable 17 231,075.82 40,929,519.04 Advances from customers 18 721,601.25 Employee compensation 19 6,217,486.60 27,658,657.03 Taxes payable 20 5,259,144.31 64,981,574.02 Interest payable 21 270,261,883.18 Dividendes payable Other accounts payable 22 192,510,256.74 57,034,528.39 Long-term liabilities due within 1 year Other current liabilities Total current liabilities 209,640,225.38 718,697,845.79 Noncurrent liabilities Long-term loan Bonds payable Long-term account payable 23 95,450,000.00 Special accounts payable 24 10,598,000.03 19,651,018.03 Estimated liabilities 25 2,118,395.79 Deferred income tax liabilities Other non-current liabilities Total non-current liabilities 10,598,000.03 117,219,413.82 Total liabilities 220,238,225.41 835,917,259.61 Owner’s equity Paid-in capital (or share capital) 26 706,320,000.00 706,320,000.00 Capital reserve 27 395,971,144.37 395,971,144.37 Less: Inventory shares Surplus reserve 28 76,791,550.17 76,791,550.17 Retained earnings 29 -1,230,421,633.22 -1,416,436,100.68 Balance difference of foreign currency translation Shareholders' equity attributed to the Company -51,338,938.68 -237,353,406.14 Minority owner's equity 14,429,636.86 118,097.36 Total owner’s equity -36,909,301.82 -237,235,308.78 TOTAL LIABILITIES AND OWNER'S EQUITY 183,328,923.59 598,681,950.83

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

51 CHENGDE DALU COMPANY LIMITED

BALANCE SHEET OF THE PARENT COMPANY

AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

ASSETS Notes 13 31 December 2009 31 December 2008 Current assets Cash and cash equivalent 16,900.44 365,685.40 Tradable financial assets Notes receivable Accounts receivable 1 12,231,947.36 Prepaid accounts 92,842,017.50 Interest receivable Dividend receivable Other receivables 2 44,498,801.46 450,923,188.75 Inventories Non-current asset due within one year Other current assets Total current assets 44,515,701.90 556,362,839.01 Non-current assets Finance assets available for sales Held-to-maturity investment Long-term account receivable Long-term equity investment 3 630,800,001.00 1,211,812,433.52 Investment property Fixed assets 16,175,897.23 Construction in progress Engineering material Disposal of fixed asset Consumable biological asset Oil and gas asset Intangible assets 7,990,608.73 Expense on Research and Development Goodwill Long-term prepaid expenses 2,009,612.55 Deferred income tax asset 2,008,501.45 131,305,501.33 Other non-current asset Total non-current asset 632,808,502.45 1,369,294,053.36

TOTAL ASSETS 677,324,204.35 1,925,656,892.37

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

52 CHENGDE DALU COMPANY LIMITED

BALANCE SHEET OF THE PARENT COMPANY

AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

LIABILITIES AND OWNER'S EQUITY Notes 13 31 December 2009 31 December 2008 Current liabilities Short-term loans 422,261.91 650,705.60 Transaction financial liabilities Notes payable Accounts payable 218,802.27 34,436,425.01 Advances from customers 8,607.09 Employee compensation 120,000.00 17,897,697.28 Taxes payable -34,717.11 15,372,537.49 Interest payable 165,267,072.66 Dividendes payable Other accounts payable 141,820,505.74 469,229,434.21 Long-term liabilities due within 1 year Other current liabilities Total current liabilities 142,546,852.81 702,862,479.34 Noncurrent liabilities Long-term loan Bonds payable Long-term account payable Special accounts payable 98,000.03 151,018.03 Estimated liabilities 2,118,395.79 Deferred income tax liabilities Other non-current liabilities Total non-current liabilities 98,000.03 2,269,413.82 Total liabilities 142,644,852.84 705,131,893.16 Owner’s equity Paid-in capital (or share capital) 706,320,000.00 706,320,000.00 Capital reserve 394,571,587.96 394,571,587.96 Less: Inventory shares Surplus reserve 76,791,550.17 76,791,550.17 Retained earnings -643,003,786.62 42,841,861.08 Total owner’s equity 534,679,351.51 1,220,524,999.21 TOTAL LIABILITIES AND OWNER'S EQUITY 677,324,204.35 1,925,656,892.37

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

53 CHENGDE DALU COMPANY LIMITED CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

Items Notes 2009 2008 ⅠⅠⅠ. Operating income in total 11,132,286.00 Operating income 30 11,132,286.00 Interest income Premium earned Handling fee and commission income ⅡⅡⅡ. Operating cost in total 767,394,532.26 582,135,177.20 Including ：Operating cost 30 25,797,698.88 Interest expense Handling fee and commission expense Premium returned Net Claim and Payment Net reserves of insurance contract accrued Policyholder Dividend Expense Reinsurance costs Tax and additional expense Selling and distribution expenses 3,990.00 General and administrative expenses 31 16,934,898.09 36,314,298.59 Finance expense - net 32 2,049,933.86 200,115,413.80 Impairement loss(gain) 33 748,409,700.31 319,903,775.93 Add: Changing income of fair value(loss is listed with'"-") Investment income(loss is listed with'"-") 34 618,834,602.04 Including: Disposal loss of non-current asset Foreign exchange income(loss is listed with'"-") ⅢⅢⅢ. Operating profit(loss is listed with'"-") -148,559,930.22 -571,002,891.20 Add: Non-operating income 35 843,634,746.73 1,107,750,661.79 Less: Non-operating expenses 36 365,451,809.67 163,986,366.54 Including: Disposal loss of non-current asset ⅣⅣⅣ. Profit before tax(loss is listed with'"-") 329,623,006.84 372,761,404.05 Less: Income tax 37 129,296,999.88 217,838,869.49 ⅤⅤⅤ. Net profit for the year(loss is listed with'"-") 200,326,006.96 154,922,534.56 Net profit attributed to the owmers of parent company 186,014,467.46 176,403,180.59 Minority shareholders 14,311,539.50 -21,480,646.03 ⅥⅥⅥ. Earnings per share （1）Basic earnings per share 0.26 0.25 （2）Diluted earnings per share 0.26 0.25 ⅦⅦⅦ. Other profit ⅧⅧⅧ. Profit in all 200,326,006.96 154,922,534.56 The total comprehensive profit attributable to parent company 186,014,467.46 176,403,180.59 The total comprehensive profit attributable to minority interest 14,311,539.50 -21,480,646.03

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

54 CHENGDE DALU COMPANY LIMITED INCOME STATEMENT OF THE PARENT COMPANY AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

Items Note 13 2009 2008 ⅠⅠⅠ. Operating income in total 4,494,064.24 Operating income 4 4,494,064.24 Interest income Premium earned Handling fee and commission income ⅡⅡⅡ. Operating cost in total 597,457,062.07 219,875,979.52 Including ：Operating cost 4 18,735,669.63 Interest expense Handling fee and commission expense Premium returned Net Claim and Payment Net reserves of insurance contract accrued Policyholder Dividend Expense Reinsurance costs Tax and additional expense Selling and distribution expenses - 3,990.00 General and administrative expenses 4,374,966.52 17,816,881.06 Finance expense - net 15,272.65 120,711,178.05 Impairement loss(gain) 593,066,822.90 62,608,260.78 Add: Changing income of fair value(loss is listed with'"-") Investment income(loss is listed with'"-") Including: Disposal loss of non-current asset Foreign exchange income(loss is listed with'"-") ⅢⅢⅢ. Operating profit(loss is listed with'"-") -597,457,062.07 -215,381,915.28 Add: Non-operating income 554,010,910.72 1,107,296,785.72 Less: Non-operating expenses 513,102,496.47 163,936,366.54 Including: Disposal loss of non-current asset ⅣⅣⅣ. Profit before tax(loss is listed with'"-") -556,548,647.82 727,978,503.90 Less: Income tax 129,296,999.88 -72,051,552.85 ⅤⅤⅤ. Net profit for the year(loss is listed with'"-") -685,845,647.70 800,030,056.75 ⅥⅥⅥ. Earnings per share （1）Basic earnings per share -0.97 1.13 （2）Diluted earnings per share -0.97 1.13 ⅦⅦⅦ. Other profit ⅧⅧⅧ. Profit in all -685,845,647.70 800,030,056.75

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

55 CHENDE DALU COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As of the year 2009 (All amounts in RMB Yuan unless otherwise stated) Year of 2009 Owner's equity attributed to parent company Item Minority Total owners'equity Paid-in capital Capital reserve Less ：treasury stock Surplus reserve Retained earnings others shareholders' equity

ⅠⅠⅠ.Balance as at 31 Dec.2009 706,320,000.00 395,971,144.37 76,791,550.17 -1,416,436,100.68 118,097.36 -237,235,308.78 Add: Change in accounting policies Correction of previous accounting period Others ⅡⅡⅡ. Balance as at 31 Dec.2009 706,320,000.00 395,971,144.37 76,791,550.17 -1,416,436,100.68 118,097.36 -237,235,308.78 ⅢⅢⅢ. Increase/ Decrease in 2009 ("-" means loss) 186,014,467.46 14,311,539.50 200,326,006.96 ( ⅠⅠⅠ) Net profit 186,014,467.46 14,311,539.50 200,326,006.96 ( ⅡⅡⅡ) Other comprehensive income Subtotal of ( Ⅰ) and ( Ⅱ) 186,014,467.46 14,311,539.50 200,326,006.96 ( ⅢⅢⅢ) Input and reduced capital of owners 1．Capital input by owners 2．Amount of share-based payment recorded in owner's equity 3． Others ( ⅣⅣⅣ) Profit distribution 1．Withdrawal of surplus reserves 2. Appropriating general risk 3．Distribution to owners (shareholders) 4． Others ( ⅤⅤⅤ) Internal carry-over of owner's equity 1．Capital reserves conversed to capital (share capital) 2．Surplus reserves conversed to capital (share capital) 3．Remedying loss with surplus reserves 4．Others ( ⅥⅥⅥ) Specific-purpose reserve 1．Amount withdrawn for the period 2．Amount used for the period ⅣⅣⅣ. Balance as at 31 Dec.2009 706,320,000.00 395,971,144.37 76,791,550.17 -1,230,421,633.22 14,429,636.86 -36,909,301.82

Head of the Company: Chief Financial Officer: Head of Accounting Department:

（（（The accompanying notes form an integral part of these financial statements ）））

CHENDE DALU COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As of the year 2008 (All amounts in RMB Yuan unless otherwise stated) Year of 2008 owners'equity attributed to the parent company Item Minority Total owners'equity Paid-in capital Capital reserve Less ：treasury stock Surplus reserve Retained earnings others shareholders' equity

ⅠⅠⅠ. Balance as at 31 Dec.2009 706,320,000.00 395,971,144.37 76,791,550.17 -1,592,839,281.27 21,598,743.39 -392,157,843.34 Add: Change in accounting policies Correction of previous accounting period Others ⅡⅡⅡ. Balance as at 31 Dec.2009 706,320,000.00 395,971,144.37 76,791,550.17 -1,592,839,281.27 21,598,743.39 -392,157,843.34 ⅢⅢⅢ. Increase/ Decrease in 2009 ("-" means loss) 176,403,180.59 -21,480,646.03 154,922,534.56 ( ⅠⅠⅠ) Net profit 176,403,180.59 -21,480,646.03 154,922,534.56 ( ⅡⅡⅡ) Other comprehensive income Subtotal of ( Ⅰ) and ( Ⅱ) 176,403,180.59 -21,480,646.03 154,922,534.56 ( ⅢⅢⅢ) Input and reduced capital of owners 1．Capital input by owners 2．Amount of share-based payment recorded in owner's equity 3． Others ( ⅣⅣⅣ) Profit distribution 1．Withdrawal of surplus reserves 2. Appropriating general risk 3．Distribution to owners (shareholders) 4． Others ( ⅤⅤⅤ) Internal carry-over of owner's equity 1．Capital reserves conversed to capital (share capital) 2．Surplus reserves conversed to capital (share capital) 3．Remedying loss with surplus reserves 4．Others ( ⅥⅥⅥ) Specific-purpose reserve 1．Amount withdrawn for the period 2．Amount used for the period ⅣⅣⅣ. Balance as at 31 Dec.2009 706,320,000.00 395,971,144.37 76,791,550.17 -1,416,436,100.68 118,097.36 -237,235,308.78

Head of the Company: Chief Financial Officer: Head of Accounting Department:

（（（The accompanying notes form an integral part of these financial statements ）））

57 CHENDE DALU COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As of the year 2009 (All amounts in RMB Yuan unless otherwise stated) Year of 2009 item Paid-in capital Capital reserve Less ：treasury stock Surplus reserveRetained earnings Total owners'equity

ⅠⅠⅠ. Balance as at 31 Dec.2009 706,320,000.00 394,571,587.96 76,791,550.17 42,841,861.08 1,220,524,999.21 Add: Change in accounting policies Correction of previous accounting period Others ⅡⅡⅡ. Balance as at 31 Dec.2009 706,320,000.00 394,571,587.96 - 76,791,550.17 42,841,861.08 1,220,524,999.21 ⅢⅢⅢ. Increase/ Decrease in 2009 ("-" means loss) -685,845,647.70 -685,845,647.70 ( ⅠⅠⅠ) Net profit -685,845,647.70 -685,845,647.70 ( ⅡⅡⅡ) Other comprehensive income Subtotal of ( Ⅰ) and ( Ⅱ) -685,845,647.70 -685,845,647.70 ( ⅢⅢⅢ) Input and reduced capital of owners 1．Capital input by owners 2．Amount of share-based payment recorded in owner's equity 3． Others ( ⅣⅣⅣ) Profit distribution 1．Withdrawal of surplus reserves 2. Appropriating general risk 3．Distribution to owners (shareholders) 4． Others ( ⅤⅤⅤ) Internal carry-over of owner's equity 1．Capital reserves conversed to capital (share capital) 2．Surplus reserves conversed to capital (share capital) 3．Remedying loss with surplus reserves 4．Others ( ⅥⅥⅥ) Specific-purpose reserve 1．Amount withdrawn for the period 2．Amount used for the period ⅣⅣⅣ. Balance as at 31 Dec.2009 706,320,000.00 394,571,587.96 76,791,550.17 -643,003,786.62 534,679,351.51

Head of the Company: Chief Financial Officer: Head of Accounting Department:

（（（The accompanying notes form an integral part of these financial statements ）））

58 CHENDE DALU COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As of the year 2008 (All amounts in RMB Yuan unless otherwise stated) Year of 2008 item Paid-in capital Capital reserve Less ：treasury stock Surplus reserve Retained earnings Total owners'equity

ⅠⅠⅠ.Balance as at 31 Dec.2009 706,320,000.00 394,571,587.96 76,791,550.17 -757,188,195.67 420,494,942.46 Add: Change in accounting policies Correction of previous accounting period Others ⅡⅡⅡ.Balance as at 31 Dec.2009 706,320,000.00 394,571,587.96 76,791,550.17 -757,188,195.67 420,494,942.46 ⅢⅢⅢ.Increase/ Decrease in 2009 ("-" means loss) 800,030,056.75 800,030,056.75 ( ⅠⅠⅠ) Net profit 800,030,056.75 800,030,056.75 ( ⅡⅡⅡ) Other comprehensive income Subtotal of ( Ⅰ) and ( Ⅱ) 800,030,056.75 800,030,056.75 ( ⅢⅢⅢ) Input and reduced capital of owners 1．Capital input by owners 2．Amount of share-based payment recorded in owner's equity 3． Others ( ⅣⅣⅣ) Profit distribution 1．Withdrawal of surplus reserves 2. Appropriating general risk 3．Distribution to owners (shareholders) 4． Others ( ⅤⅤⅤ) Internal carry-over of owner's equity 1．Capital reserves conversed to capital (share capital) 2．Surplus reserves conversed to capital (share capital) 3．Remedying loss with surplus reserves 4．Others ( ⅥⅥⅥ) Specific-purpose reserve 1．Amount withdrawn for the period 2．Amount used for the period ⅣⅣⅣ.Balance as at 31 Dec.2009 706,320,000.00 394,571,587.96 76,791,550.17 42,841,861.08 1,220,524,999.21

Head of the Company: Chief Financial Officer: Head of Accounting Department:

（（（The accompanying notes form an integral part of these financial statements ）））

59 CHENGDE DALU COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

Items Notes 2009 2008 ⅠⅠⅠ. Cash flows from operating activities Cash received from sale of goods or rendering services 14,314,261.45 Cash received from disposal of tradable financial asset Cash received from interest & handling charge and commission Refunds of taxes Other cash receipts relating to operating activities 40 4,853,996.64 1,546,269.50 Sub-total of cash inflows 4,853,996.64 15,860,530.95 Cash paid for goods and services 3,175,107.86 Cash paid for interest, handling fee and commissions Cash paid to and on behalf of employees 1,236,667.33 5,146,595.66 Payments of all types of taxes 46,893.39 398,245.78 Other cash payments relating to operating activities 40 10,489,534.19 11,910,291.13 Sub-total of cash outflows 11,773,094.91 20,630,240.43 Net cash flows from operating activities -6,919,098.27 -4,769,709.48 ⅡⅡⅡ．Ⅱ．．．Cash flows from investing activities Cash received from return of investments Cash received from investment income Net cash received from disposal of fixed,intangible and other 18,436,600.00 300,000.00 long-term assets Net cash received from disposal of subsidiaries and other units Cash received relating to other investing activities Sub-total of cash inflows 18,436,600.00 300,000.00 Cash paid to acquire fixed,intangible and other long-term assets 3,400.00 Cash paid for investment 1.00 Cash received from subsidiaries and other business units Cash paid relating to other investing activities Sub-total of cash outflows 1.00 3,400.00 Net cash flow from investing activities 18,436,599.00 296,600.00 ⅢⅢⅢ．Ⅲ．．．Cash flows from financing activities Cash received from absorbing investment Including: Cash received from absorbing minority shareholders’ investment by subsidiaries Cash received from borrowings 108,002,418.47 Cash received from issuing bonds Cash received relating to other financing activities Sub-total of cash inflows 108,002,418.47 - Cash repayments of loan 119,908,920.82 1,395,649.94 Cash payments for distribution of dividends and interest expenses Including:Dividend and profit of minority shareholder paid by subsidiaries Other cash payments relating to financing activities Sub-total of cash outflows 119,908,920.82 1,395,649.94 Net cash flow from financing activities -11,906,502.35 -1,395,649.94 ⅣⅣⅣ. Effect of foreign exchange rate changes on cash ⅤⅤⅤ. Net increase in cash and cash equivalents -389,001.62 -5,868,759.42 Add: Balance of cash and cash equivalents at the beginning of year 447,257.73 6,316,017.15 58,256.11 447,257.73 ⅥⅥⅥ. Closing balance of cash and cash equivalents at the end of year

Head Chief Head of of the Company: Financial Officer: Accounting Department: （（（The accompanying notes form an integral part of these financial statements ）））

60 CHENGDE DALU COMPANY LIMITED CASH FLOW STATEMENT OF THE PARENT COMPANY AS AT 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated)

Items Notes 2009 2008 ⅠⅠⅠ. Cash flows from operating activities Cash received from sale of goods or rendering services 6,019,507.00 Cash received form disposal of tradable financial asset Cash received from interest & handling charge and commission Refunds of taxes Other cash receipts relating to operating activities 40 4,781,608.42 8,734,026.50 Sub-total of cash inflows 4,781,608.42 14,753,533.50 Cash paid for goods and services 3,175,107.86 Cash paid for interest,handling fee and commissions Cash paid to and on behalf of employees 974,058.33 4,777,673.66 Payments of all types of taxes 46,893.39 19,971.81 Other cash payments relating to operating activities 40 10,639,538.31 8,566,056.14 Sub-total of cash outflows 11,660,490.03 16,538,809.47 Net cash flows from operating activities -6,878,881.61 -1,785,275.97 ⅡⅡⅡ．Ⅱ．．．Cash flows from investing activities Cash received from return of investments Cash received from investment income Net cash received from disposal of fixed,intangible and other 6,601,433.01 300,000.00 long-term assets Net cash received from disposal of subsidiaries and other units Cash received relating to other investing activities Sub-total of cash inflows 6,601,433.01 300,000.00 Cash paid to acquire fixed,intangible and other long-term assets 3,400.00 Cash paid for investment 1.00 Cash received from subsidiaries and other business units Cash paid relating to other investing activities Sub-total of cash outflows 1.00 3,400.00 Net cash flow from investing activities 6,601,432.01 296,600.00 ⅢⅢⅢ．Ⅲ．．．Cash flows from financing activities Cash received from absorbing investment Including: Cash received from absorbing minority shareholders’ investment by subsidiaries Cash received from borrowings 119,087,585.46 Cash received from issuing bonds Cash received relating to other financing activities Sub-total of cash inflows 119,087,585.46 Cash repayments of loan 119,158,920.82 1,395,649.94 Cash payments for distribution of dividends and interest expenses Including:Dividend and profit of minority shareholder paid by subsidiaries Other cash payments relating to financing activities Sub-total of cash outflows 119,158,920.82 1,395,649.94 Net cash flow from financing activities -71,335.36 -1,395,649.94 ⅣⅣⅣ. Effect of foreign exchange rate changes on cash ⅤⅤⅤ. Net increase in cash and cash equivalents -348,784.96 -2,884,325.91 Add: Balance of cash and cash equivalents at the beginning of year 365,685.40 3,250,011.31 ⅥⅥⅥ. Closing balance of cash and cash equivalents at the end of year 16,900.44 365,685.40

Head Chief Head of of the Company: Financial Officer: Accounting Department:

（（（The accompanying notes form an integral part of these financial statements ）））

CHENGDE DALU COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009

CHENGDE DALU COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS

62 FOR THE YEAR ENDED 31 DECEMBER 2009 (All amounts in RMB Yuan unless otherwise stated) [English Translation for Reference Only]

1. GENERAL

(1) History of the company The former of Chengde Dalu Company Limited (hereinafter referred to as “the Company”) is

Chengde Dixian Textile Company Limited, which was established in the People’s Republic of China as a joint stock Company approved by People’s Government of Hebei Province (JI GU BAN

(1999) No. 36) dated on 3 November 1999. The Legal Representative’s Operating License issued by Hebei Industrial and Commercial Administrative Bureau is No. 130000400001225.

There are five promoters of the Company, which are Mr. Shuxian Wang, North Industry Co., Ltd., Longfeng Cosmetic Co., Ltd., Red Star Plastic Product Co., Ltd. and Mr. Zhengsong Wang respectively. The initial registered capital of the Company is RMB 100,000,000 representing 100,000,000 shares with a par value of RMB 1 each . Mr. Shuxian Wang holds 85,100,000 shares. Upon the approval document No.[2000] 121 issued by the China Securities Regulatory Commission on 29 August 2000, the Company issued 100,000,000 foreign capital shares (B share) with a par value of RMB 1 each. In addition, the Company increased issuance of 15,000,000 foreign capital shares (B share) with a par value of 1 each between 29 September and 29 October 2000. The Company’s B shares have been listed in Shenzhen Stock Exchange. The registered capital of the Company after the issue of B shares was increased to RMB 215,000,000. According to the resolution of general meeting of shareholders on 12 March 2002, the Company distributed share bonus 43,000,000 shares to all shareholders at the rate of two shares given per ten shares and transferred capital reserves into capital as 107,500,000 shares to all shareholders at the rate of five shares given per ten shares. The registered capital of the Company was increased to RMB 365,500,000 after share bonus distribution and transferring. According to the resolution of general meeting of shareholders on 22 July 2003, the Company distributed share bonus 73,100,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 438,600,000 after share bonus

63 distribution.

Upon the approval document No.[2004] 101 issued by the China Securities Regulatory Commission in July 2004, the Company increased its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares hasn’t been approved by the China

Administration of Foreign Exchange department, and also hadn’t been verified by PRC certified public accountants as well as the procedures for the change of business registration in Industrial and

Commercial Bureau were not carried and completely. Upon the approval of the Ministry of Commerce on 11 March 2004, the Company changed into foreign investment joint stock company. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. The issuance mentioned above hasn’t been verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. At the year of 2008, the Intermediate People's Court of Shenzhen determined that promoter share of 112,324,800 shares held by Shuxian Wang should be compensate for Chen Rong in the price of RMB 45,491,544. And at the same year, Intermediate People's Court of Dalian determined that promoter share of 96,000,000 shares held by Shuxian Wang should be compensate for Rong Chen in the price of RMB 38,880,000. On 13 November 2009, the company was changed into the name of Chengde Dalu company

Limited upon agreement of the board. (2) Scope of operation Except for the increased subsidiary Chengde Rongyida Real Estate Development Co., Ltd (hereinafter referred to as “Rongyida Company”). The company run business producing, processing and selling all kinds of fiber and brass paper as well as the other subsidiaries. The principal activity of Rongyida Company is the development of residential properties. (3) Restructuring On 1 November 2008, Chengde Xingcheng Building Project Co., Ltd submitted its

64 restructuring plan to Chengde Intermediate People's Court of Hebei province, and the court accepted the application on 10 November 2008. On 30 December 2008, Chengde Intermediate People's Court of Hebei province approved the company’s Restructuring Program (Draft) and end the restructuring procedures in the ruling of Civil Judge Letter Cheng Min Po Zi 9-2. According to the Restructuring Program (Draft), the Company disposed some assets and paid the restructuring expenses and the debts. On 27 April 2009 Chengde Intermediate People’s Court of Hebei Province confirmed that liabilities repayment included in the restructuring planning had been finished in the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 9-5. (4) Changes of subsidiaries

a. One subsidiary increased The controlling shareholder of the Company Chenrong transferred 100% share of Rongyida Real Estate Development Company to the Company for RMB 1 on 27 July 2009. After all the stock transferred, The Chengde Rongyida Real Estate development Co., Ltd became the wholly owned subsidiary of the Company. Rongyida is a joint-venture company with registered capital of RMB 10,000,000 which was built by Wangfei and Chenliping. And the two shareholders signed the Equity Transfer Agreement with Chenrong to transfer their equity for RMB 9,000,000 and RMB 1,000,000 respectively. On the same day, Chenrong sold it to the Company for RMB 1. The procedures of changing business registration are not carried out completely. b. Three subsidiaries bankrupted On 8 February 2009, Chengde Intermediate People’s Court confirmed the bankruptcy of Chengde Dixian Fashion Co., Ltd, Hebei Xiaban City Textile Co., Ltd and Chengde Banhe Fibre Textile Co., Ltd.

2. THE MAIN ACCOUNTING POLICIES, ESTIMATES AND CORRECTION OF ERRORS (1) Preparation basis of the financial statement The consolidated financial statements of the company as well as the subsidiaries have been prepared in accordance with the following accounting policies and estimates based on the assumption of going concern. The consolidated financial statements of the company as well as the subsidiaries are prepared.

65 (2) Statement of compliance with Accounting Standards for Business Enterprises

The accounting policies adopted by the Company are in accordance with Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance and its concert items as well as the guidelines, explanations and other rules ,which will be referred to as Accounting Standards, and present truly and completely, the Company’s and Consolidated financial position, operating results an cash flows. Apart from that, the statement also keep in accordance with the 15th ruling of Security

Supervising Committee for disclosure of financial statement and the note. (3) Accounting period

The accounting period of the Company is from January 1 to December 31. (4) Functional currency Except for Gold Axe Investment Group Limited, the functional currency of the Company is the RMB (Yuan), the statutory currency of the People’s Republic of China. The functional currency of the Gold Axe Investment Group Limited is US dollars. (5) Accounting treatment for corporate merger under the same control and corporate merger under different control. If enterprises that participate in merger are under the final control by the same party or unchanged several parties before and after merger and such control is not temporary, it is the corporate merger under the same control. The assets and liabilities obtained by the merging party under merger are measured according to the book value on the merged party on the merger date. The difference between the book value of the net assets obtained and the book value of consolidated consideration paid (or the total face value of the issued shares) is modified in the premium price of stock equity (or premium price of capital) in the capital reserves; if the premium price of stock equity (or premium price of capital) in the capital reserves is not sufficient to write off, the earning retained is modified. The merger date is the date when the merging party actually acquires the control rights to the merged party. If the parties that participate in merger are not under the final control by the same party or the same several parties, it is the corporate merger under different control. The merger costs paid by the Company are the sum of the assets paid for the control rights to the merged party, liabilities occur or are undertaken, the fair value of the issued equity securities on the purchase date and direct

66 expenses occurring in corporate merger. The difference between the fair value and book value of the paid assets is calculated into the current profits and losses. The purchase date is the date when the Company actually obtains the control rights to the purchased party. The Company distributes the merger costs on the purchase date to confirm the fair value of recognizable assets, liabilities and contingent liabilities of the purchased party. When the merger costs are larger than the fair value of recognizable net assets of the purchased party obtained from merger, the difference is confirmed as goodwill. When the merger costs are less than the fair value of recognizable net assets of the purchased party obtained from merger, the difference is calculated into the current profits and losses.

(6) Basis of financial statements consolidation a. The scope of consolidation The consolidated scope of the consolidated financial statements includes the Company and the subsidiaries under control of the Company. Control refers to which is entitled to decide the financial and management policies of a Company and by which interest can be obtained from the operating activities of the Company. The operating results and financial situation of the subsidiaries under control are contained in the consolidated financial statements from control starting date to control closing date. b. Accounting method of consolidated financial statements For any subsidiary acquired by the Company through corporate merger under the same control, when the consolidated financial statements for the current period are being prepared, it is deemed that the merged subsidiaries are entered into the merger scope of the Company when the final control party of the Company starts to perform control to it, and the number at the beginning of the period in the consolidated financial statements and previous comparable statement are modified correspondingly. While the Company is preparing the consolidated financial statements, the assets and liabilities of the merged subsidiary and their book values are combined into the consolidated balance sheet of the Company and the operating results of the merged subsidiary are combined into the consolidated profit statement of the Company since the final control party of the Company starts to perform control. For any subsidiary acquired by the Company through corporate merger not under the same control, when the consolidated financial statements for the current period are being prepared, the

67 financial statements of the subsidiary are modified on the basis of recognizable assets, fair values of liabilities as confirmed on the purchase date, and the assets, liabilities and operating results of the purchased subsidiary are combined into the financial statements of the Company as of the purchase date. c. The accounting policies of the subsidiaries

The accounting policies of the subsidies is in accordance with the company. (7) Cash and cash equivalents

The cash equivalents refers to short-term (matured within three months from the purchased date) and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. (8) Translation for foreign currency transactions and financial statement The foreign currency transaction should be converted into market exchange rates on the day in which the transaction took place when initially recorded. Foreign currency items should be converted into at market exchange rates on balance sheet date. The differences raised from the translation between market exchange rates on balance sheet date and the initial confirmation value or the previous balance sheet date should be calculated into the current profits and losses. The foreign non-currency items which recorded in historical cost adopted the market exchange rates on the day in which the transaction took place. For balance sheet, all items related to assets and liabilities should be converted into at the market exchange rates on balance sheet date. All owner's equity except for retained earnings should be converted into at market exchange rates on the day in which the transactions took place. For the income statement, items related to revenues and expenses should converted into at market exchange rates on the day in which the transactions took place. The translation difference should be presented in the owner’s equity in the balance sheet. For the Companies that operate in the foreign badness inflation economy situation, all items of balance sheet should be restated as normal price index, all items of income statement should be restated as movements of normal price first and then translated into at the market exchange rates on the date that most close to the balance sheet date. Restate of the financial statements should cease when the foreign operation out of inflation situation, and the statements should be converted as the price on the date of which the restate stopped.

68 For the cash flow statement, foreign currency cash flow items and cash flow items of foreign subsidiaries should converted into at market exchange rates on the day in which they took place. (9) Financial instrument

a. Classification of financial assets and liabilities Financial assets comprise transaction financial assets, financial assets measured with fair value and their changes calculated into the current profits and losses, held-to-maturity investment, loans and receivables, available-for-sale financial assets etc. Financial liabilities comprise tradable financial liabilities, financial liabilities measured with fair value and their changes calculated into the current profits and losses.

b. The principle and the methods of measurement for financial tools ① Confirmation a financial asset or financial liability when the Company involved in a contract. When the rights of the contract for charging cash flow of a financial asset terminate or nearly all risks and remunerations thereon ownership are transferred, the Company terminates confirming the financial asset. Confirmation of all or partial of the financial liability should be terminated when all or partial current obligations of the financial liability terminated. ② After initial confirmation, financial assets and financial liabilities are measured with fair value. For financial assets or financial liabilities measured with fair value and their changes calculated into the current profits and losses, the relevant transaction expenses are directly calculated into the current profits and losses; For other kinds of financial assets and financial liabilities, the relevant transaction expenses are calculated into initial confirmation amount. ③ After initial confirmation, financial assets of the Company are measured with fair value subsequently and does not deduct the transaction expenses possibly occurring when such financial assets will be disposed in the future. However, the following items excluded: Held-to-maturity investment and receivable accounts are measured with amortized costs according to actual interest rate method; The equity tool investment that has no quotation in active market and which fair value cannot be reliably measured are measured according to costs after initial confirmation; When financial assets are not able to be measured with fair value due to the held intention or ability of the Company changed or the fair value cannot be measured reliably, the Company converts the fair value to cost measurement. The cost should be the fair value of the financial assets

69 on the day which they are re-classified.

④ The Company adopts amortized costs for subsequent measurement of liabilities according to actual interest rate method except the following:

After initial confirmation, the financial liabilities measured with fair value and their changes calculated into the current profits and losses are measured with fair value, and do not deduct the transaction expenses possibly occurring when such financial liabilities will be disposed in the future;

When financial liabilities are not able to be measured with fair value due to the held intention or ability of the Company changed or the fair value cannot be measured reliably, the Company converts the fair value to cost measurement. The cost should be the fair value of the financial liabilities on the day which they are re-classified; Derivative financial liabilities related with the equity tool investment that has no quotation in active market and which fair value cannot be reliably measured are measured according to costs after initial confirmation; Financial guarantee contract of financial liabilities which do not belong to kinds of the financial liabilities that measured with fair value and their changes calculated into current profits and losses, or loan undertaking not measured with fair value and their changes calculated into current profits and losses and moreover loaned with a rate that lower than the market rate, should be subsequent measured with the larger amount of the following two: a) Amount according to the rule of contingent events; b) Balance amount that arises from the initial confirmation amounts deducting the accumulated amortized amounts that in accordance with rules of confirmation for revenues. ⑤ Except that related with hedging, profit or loss occurring from fair value change of financial assets or liabilities should be treated as flowing ruled: Gain or loss arising from fair value change for the financial assets or liabilities which measured with fair value and changes of fair value calculated into current profits and losses should be calculated into current profits and losses; Gain or loss resulting from fair value change of available for sale financial assets should be calculated into capital reserve after deducting total differences from impairment loss and foreign currency financial assets exchange. The amount should be transferred out to current profits and

70 losses when the financial assets terminated to confirm.

⑥ Except that related with hedging, gain or loss arising when the financial assets or liabilities which measured with amortization cost terminated to confirm or impairment or amortization should calculated into current profits and losses. ⑦ Amortization from fair value exchange of hedging tools and items hedged, which at the same accounting period, should be calculated into current profits and losses. c. Confirmation of fair value

The Company uses the quotation in active market to confirm the fair values of financial assets or financial liabilities in active market. The quotation of the financial assets held by the Company or the financial liabilities that the Company intends to undertake is the current offer; the quotation of the financial assets that the Company intends to purchase or the financial liabilities that the Company has undertaken is the current price. If any financial tool has no active market, its fair value is confirmed with value estimation technology. The value estimation methods include reference to the closing cost of market transaction made recently by parties who are willing to transact, or reference to current market quotation of other financial tools that are essentially same. The Company takes the value estimation value of regular evaluation and tests its validity. d. Provisions for devalue of financial assets At end of the period, the Company checks book value of financial assets excluding financial assets which measured with fair value and changes of which calculated into current profits and losses. Impairment provision should be made if impersonality evidence obtained to verify the impairment of the assets. Single significant amount assets should be test impairment singly. And single amount assets that do not significant should be test in the financial assets group which have the similar credit risk characterizers. Main methods to calculate impairment provision for financial assets are as flowing: ① Financial assets that can be measured with fair value reliably should be made impairment provision in light of amounts from book value minus fair value and calculated into current profits and losses. For financial assets that can not be measured with fair value reliably, provision should be made in the light of amounts from book value minus current value of projected future cash flow (excluding credit loss has not happened yet) and calculated into current profits and losses. For

71 impairment of available for sale financial assets, accumulated losses that calculated into owners’ equity due to decrease of fair value when happening, should be transferred out to current profits and losses.

② For held-to-maturity investment, impairment provision should be calculated in the amount from book value minus current value of projected future cash flow( excluding credit loss has not happened yet) and entered into current profits and losses. e. Conversion of Financial assets:

Recognition of financial assets conversion: Recognition of the financial assets should be terminated when the Company converts out nearly all related risks and rewards in light with the flowing situations: ① Selling the financial assets without recourse; ② For financial assets that partially conversed, book value of the unitary financial assets should be allocated between the terminated recognition parts and the rest in light with fair value of their own respectively. Differences between book value of the termination recognition parts and relevant receivables together with accumulated amounts from fair value change should be calculated into current profits and losses. (10) Accounts receivables a. The recognizing base and accrue method of provisions for Individual accounts with large amount

The recognizing method for provisions of individual It will be defined as individual accounts with large accounts with large amount ： amount if over RMB 1,000,000 single.

The accrue method of provisions for individual If evidence shows its repayment and its present value of accounts with large amount ： expected future cash flow is lower than the carry

amount, provisions for bad debt should be recognized.

b. The recognizing base and accruing method of provisions for individual accounts without large amount but with major risk after integrated into credit risk combination

72 Withdrawal of provision on the basis of risk level was as follows: Accounts

receivables which are not individually significant, but assessed at high risk level

through credit risk combination, single amount of which are not significant and The recognizing base of impairment tests show no impairment, withdrawal of provision for bad debts was credit risk combination determined at the period-end, specific rates of which are based on the history loss

ratio of same or similar period division, considering similar current credit risk

combination.

The accrued method based on credit risk combination: To recognize the provision for bad debt by aging analysis to those Individual accounts without large amount but with major risk after integrated into credit risk combination which was tested no repayment single.

c. Aging analysis

Aging Percentage of accounts receivable Percentage of other receivables

provision for bad accounts provision for bad accounts

Within 1 year 1%-5% 1%-5%

Between 1 and 2 years 20% 20%

Between 2 and 3 years 50% 50%

Over 3 years 100% 100%

(11) Inventory a. Classification of inventory Inventories mainly include raw material, auxiliary materials, repair parts, low cost consumables, packing material, goods in stock, goods in process, finished goods.

b. The measurement of sending inventories Weighted average accounting method is used when issued c. The base of net realizable value and the accruing method of provision for inventory Provision for inventories should be accrued and adjusted according to the lower of cost and net realizable value after checking thoroughly at the end of the year. The net realizable value of the finished goods, merchandise and hold for sell materials which will be sold directly is the estimated selling price in the ordinary course of business less the estimated selling expenses and the taxes necessary to make the sale. The net realizable value of the processing material is the estimated selling price in the ordinary

73 course of business less the estimated costs before finished and the estimated selling expenses and the taxes necessary to make the sale. To the inventories holding for selling contract and service contract, its net realizable value should be measured according the contract price. If the holding quantity is over the contract needed, the surplus should be measured based on selling price instead of contract .

The provision for impairment equals to the difference between cost and NRV for individual item. But to those huge quantity and low price items, provision can be accrued for types of stock. If it is hard to discriminate with other inventories, provisions can be accrued for whole to those with the same purpose and series.

If the influence resulted in provision for impairment disappeared, the write-down amount should be reversed and profit recognized accordingly. d. The inventory system Perpetual inventory system is applied to inventories. e. The amortization method of low cost consumables and packing materials. Low cost consumables and Packing materials are recorded using immediately write-off method when issued. Long-term equity investment Long- term equity investments of the Company are referred to the equity tools of which the Company do have control on or control with other joint entities and have significant influence or do not do control and joint control or have significant influence and have not offer in active market , fair value cannot be reliably measured. a. The initial cost of the long-term equity investment formed in the merger of an enterprise shall be ascertained in accordance with the following provisions: ① For the merger of enterprises under the same control, regarding the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the book value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. ② For the merger of enterprises under the different control, if the consideration of the merging

74 enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the book value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. If the consideration of the merging enterprise is that it issues equity securities, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The total face value of the stocks issued shall be regarded as the capital stock, while the difference between the initial cost of the long-term equity investment and total face value of the shares issued shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. Besides the long-term equity investments formed by the merger of enterprises, the initial cost of a long-term equity investment obtained by other means shall be ascertained in accordance with the provisions as follows: 1) The initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid. The initial cost consists of the expenses directly relevant to the obtainment of the long-term equity investment, taxes and other necessary expenses; 2) The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued; 3) The initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement; 4) The initial cost of a long-term investment obtained by the exchange of non-monetary assets shall be ascertained in accordance with the Accounting Standards for Enterprises No. 7 – Exchange of Non-monetary Assets; 5) The initial cost of a long-term equity investment obtained by recombination of liabilities shall be ascertained in accordance with Accounting Standards for Enterprises No. 12 – Debt Restructuring. b. Subsequent measurement and recognition of the profit

75 A long-term equity investment of the Company that does not do joint control or does not have significant influences on the invested entity, and has no offer in the active market and its fair value cannot be reliably measured. The Company shall accounted by the cost method, and shall make an adjustment by the equity method when it works out consolidated financial statements. The price of a long-term equity investment measured by the cost method shall be included at its initial investment cost. If there are additional investments or disinvestments, the cost of the long-term equity investment shall be adjusted. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. A long-term equity investment of the Company that does joint control or significant influences over the invested entity shall be measured by the equity method. If the initial cost of a long-term equity investment that measured by equity method is more than the Company’s attributable share of the fair value of the invested entity's identifiable net assets for the investment, the initial cost of the long-term equity investment may not be adjusted. If the initial cost of a long-term equity investment is less than the investing enterprise' attributable share of the fair value of the invested entity's identifiable net assets for the investment, the difference shall be included in the current profits and losses and the cost of the long-term equity investment shall be adjusted simultaneously. After the Company obtains a long-term equity investment, it shall, in accordance with the attributable share of the net profits or losses of the invested entity, recognize the investment profits or losses and adjust the book value of the long-term equity investment. The investing enterprise shall, in the light of the profits or cash dividends declared to distribute by the invested entity, calculate the proportion it shall obtain, and shall reduce the book value of the long-term equity investment correspondingly. c. Base of joint control or significant influences over the invested entity To own the power of joint control over the invested entity according to contract only exists when the material financial and operating decision-making needs to be agreed by both parties. Only the right of participating in the financial and operating decision-making doesn’t mean the significant influences to the invested entity. d. The impairment testing method and accrue method of provision The impairment of a long-term equity investment which is measured by cost method for which

76 there is no offer in the active market and of which the fair value cannot be reliably measured, its impairment shall be disposed in accordance the difference between the book value and the current value of the expected future cash flow which similar to financial assets rates of market return. The impairment of any other long-term equity investment measured with cost method should be calculated into current profits and losses.

Once impairment of long-term equity investment invalidated, it cannot be transferred back. (13) Fixed assets and accumulated depreciation:

Fixed assets include buildings and plant, machinery and equipment, motor vehicles and other equipments used in production or rendering of services, which par value is over 1,000.00 and with useful life for more than one year. For those non-manufacturing or non-operating equipments which par value is over 2, 000.00 and with useful life for more than two years is also defined as fixed assets. Fixed assets purchased or constructed by the Company are recorded at actual cost as carrying amount. For the fixed assets obtained from the Company restructuring, the carrying amounts should be recognized based on an assessment of national assets management departments. Fixed assets are depreciated using the straight-line method to write off the cost of the assets to their estimated residual values over their estimated useful lives. The estimated residual value of fixed assets is recognized base on different categories of fixed assets, distributed basically from 5% to 10% of its original costs. The annual depreciation rate of fixed assets and estimated useful lives are as follows:

Estimated Estimated Category Annual depreciation rate residual value useful lives

Buildings and plant-cost 5% 25 years 3.80%

Papermaking equipment 10% 20 years 4.50%

Other machinery equipment 5% 7—15 years 6.33%-13.57%

Motor vehicles 5% 5—10 years 9.5%—19%

Office equipments 5% 5—10 years 9.5%—19%

Fixed assets are presented at the lower side between carrying amount and net realizable value (NRV).If at any time the recoverable amount has declined below the carrying amount due to continuous decline of market price, negative change in technology, physical damage and

77 obsolescence, then impairment has occurred. The provision for impairment of individual fixed assets equals to the differences between the recoverable amount and the carrying amount of that fixed assets. Impairment losses can not be reversed in subsequent periods.

(14) Construction in progress Construction in progress is recorded as actual cost. Borrowing costs on specific borrowings for financing the construction are capitalized as part of the cost of the fixed assets until the assets are ready for their intended use. Construction in progress is transferred to fixed assets and depreciation commences when the asset are ready for their intended use. At each period end, for those construction in process is suspended (whatever due to the negative change in technology or worse economic performance) and there is estimation that the construction will not be re-activated in the next three years, a provision for impairment should be made for individual construction project. The provision for impairment equals to the differences between the recoverable amount and the carrying amount. Impairment losses can not be reversed in subsequent periods. (15) Borrowing expenses The borrowing expenses, which are incurred by the Company and can be directly listed into purchase, construction or production of the assets in accordance with capitalized conditions, are capitalized and calculated into the costs of relevant assets. Except the above borrowing expenses, other borrowing expenses are confirmed as financial expenses at the current period of their occurrence. In the period of capitalization, the Company confirms the amount of interest capitalization in each accounting period according to the following method (including amortization of discounting price or premium price.) For special loans borrowed for purchase, construction or production of the assets in accordance with capitalized conditions, the Company confirms them with the amount of the interest expenses of special loans calculated according to actual interest rate of the current period, minus the interest incomes from the not used loan capital that is deposited into bank, or minus the investment earnings acquired from temporary investment. For the common borrowing occupied for purchasing, constructing or producing the assets in accordance with capitalized conditions, the Company calculates and confirms the interest amount of common borrowings that shall be capitalized, according to the weighted average of capital

78 expenditures of the part that the accumulative asset expenditures exceed the special borrowings, multiplied capitalization rate of the occupied common borrowings. Capitalization rate is confirmed according to the weighted average actual interest rate of common borrowings.

When the Company is confirming the actual interest rate of borrowings, the Company discounts the future cash flow of borrowings in the anticipated existence term or any applicable shorter term, as the interest rate used for the current carrying amount of the borrowing. Capitalization term refers to the term from capitalization of borrowing expenses to closing of capitalization, exclusive of the term that the borrowing expenses suspend capitalization. When capital expenditures and borrowing expenses have occurred, and the purchase, construction or production activities necessary for making assets reach the scheduled usable or available-for-sale status have commenced, capitalization of the borrowing expenses starts. When assets purchased, constructed or produced in accordance with capitalized conditions reach the scheduled usable or available-for-sale status, capitalization of borrowing expenses stops. If the assets in accordance with capitalized conditions generate non-normal interruption in the course of purchase, construction or production, and the interruption time exceeds three months, the Company temporarily stops capitalization of borrowing expenses. (16) Intangible assets Intangible assets represent land use right, which is recorded at acquired cost and amortized using the straight-line basis over the estimated useful lives. At the end of the year, the intangible assets should be computed based on the lower side between carrying amount and recoverable amount. If the carrying amount is higher than the net realizable value, a provision for impairment of intangible assets is to be computed. Impairment losses can not be reversed in subsequent periods. (17) Long-term prepaid expenses Long-term prepaid expenses include the improvement of business lease fixed assets and other long-term prepayments that should be amortized for more than 1 year and are presented at cost net of accumulated amortization. Expenses occurred during the opening period, which should be recorded as expenses at the month when it begins business operating. (18) Predicted liability If the implementation of current liability which resulted from quality assurance, guarantees and pending lawsuit is likely to lead the outflow of economic profit, the accrued liability should be

79 accounted when the amount of obligation is capable to measure, but the future operating loss unrecognized. The initial predicted liability should be measured according to the estimation fulfilling the current obligation, factors should also be considered, such as risk, uncertainty, monetary value of time. If the influence of monetary value of time is significant, the estimation should base upon the future cash outflow after discounting. The carry amount of predicted liability increased resulted from discounting should be recognized as interest expense.

On the date of balance sheet, the carry amount of predicted liability should be reviewed and properly adjusted to present the accurate predicted liability.

(19) Revenue recognition Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods are transferred to the buyer; the transfer of control and ownership of the goods sold which normally takes place upon delivery of goods; And the amount of revenue and cost relating to the goods can be measured reliably. Revenue from providing service is recognized when the income, relating cost and extent of performance can be reliably measured and a presumption of cash inflow exists and cost relating to the service can be measured reliably. Revenue from transferring using right of assets is recognized when the relevant economic benefits are likely to flow into the Company and the amount of revenues can be measured in reliable way. (20) Deferred income tax Deferred tax assets and deferred tax liabilities are confirmed respectively according to the deductible temporary difference and taxable temporary difference. Temporary difference refers to the difference between the book value of assets or liabilities and their taxation basis, including the deductible losses and taxation set-off that can be carried forward in the subsequent years. The confirmation of deferred income tax assets is limited to the amount of taxable incomes that is likely obtained for deducting the deductible temporary difference. If it is not a transaction of corporate merger, accounting profits or taxable amount of incomes is not affected when the transaction occurs (or can deduct the losses), the temporary difference generating in this transaction will not generate deferred income taxes. The temporary difference

80 caused by the initial confirmation of goodwill will not generate relevant deferred income taxes.

On the balance sheet date, the Company measures the book value of the deferred income tax assets and liabilities according to the anticipated realization or settlement manner of deferred income tax assets and liabilities, the provisions of taxation laws issued, and the tax rate applicable to the anticipated period of recovering the assets or discharging the liabilities.

(21) The changes of the accounting policies and accounting estimates There is no changes in accounting policies and accounting estimates during the accounting period. (22) Other principle accounting policies and estimates, the preparation of financial statement

a. Impairment of assets: The term "impairment of assets" refers to that the recoverable amount of assets is lower than its carrying value. An enterprise shall, on the day of balance sheet, make a judgment on whether there is any sign of possible assets impairment. No matter whether there is any sign of possible assets impairment, the business reputation formed by the merger of enterprises and intangible assets with uncertain service lives shall be subject to impairment test every year. The impairment basis and methods of long term equity investment, fixed assets, construction in progress and intangible assets etc. are listed as flowing: ① There may be an impairment of assets when one of the following signs occurs: a）The current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use; b) The economic, technological or legal environment in which the enterprise operates, or the market where the assets is situated will have any significant change in the current period or in the near future, which will cause adverse impact on the enterprise; c) The market interest rate or any other market investment return rate has risen in the current period, and thus the discount rate of the enterprise for calculating the expected future cash flow of the assets will be affected, which will result in great decline of the recoverable amount of the assets; d) Any evidence shows that the assets have become obsolete or have been damaged substantially; e) The assets have been or will be left unused, or terminated for use, or disposed ahead of schedule;

81 f) Any evidence in the internal report of the enterprise shows that the economic performance of the assets have been or will be lower than the expected performance, for example, the net cash flow created by assets or the operating profit (or loss) realized is lower (higher) than the excepted amount, etc.; g) Other evidence indicates that the impairment of assets has probably occurred.

② Where any evidence shows that there is possible assets impairment, the recoverable amount of the assets shall be estimated. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the assets minus the disposal expenses and the current value of the expected future cash flow of the assets. When either of the net amount of the fair value of an asset minus the disposal expenses or the current value of the expected future cash flow of the asset exceeds the carrying value of the asset, it shows that no asset impairment has occurred, and it does not need to estimate another amount of the asset. The net amount of the fair value of an asset minus the disposal expenses shall be determined in light of the amount of the basis of the price as stipulated in the sales agreement in the fair transaction minus the disposal expenses directly attributable to the asset. Where there is no sales agreement but there is an active market of assets, the net amount of the fair value of an asset minus the disposal expenses shall be determined in light of the amount of the market price of the asset minus the disposal expenses. Generally the market price of the asset shall be determined according to the price bidden by the buyer of the asset. Where there is no sales agreement and no active market of assets, the net amount of estimated fair value of an asset minus the disposal expenses shall be estimated in light of the best information available. The said net amount may be estimated by reference to the latest transaction prices or results of similar assets among the counterparts. Where the net amount of the fair value of an asset minus the disposal expenses cannot be estimated reliably according to the provisions as described above, the enterprise shall regard the current value of the expected future cash flow of the asset as the recoverable amount of the asset. The current value of the expected future cash flow of an asset shall be determined by the discounted cash with an appropriate discount rate, on the basis of the expected future cash flow generated during the continuous use or final disposal of an asset. To predict the current value of the future cash flow, the enterprise shall take into comprehensive consideration the expected future cash flow, service life, discount rate, and other factors.

82 ③ Where the measurement result of the recoverable amount indicates that an asset's recoverable amount is lower than its carrying value, the carrying value of the asset shall be recorded down to the recoverable amount, and the reduced amount shall be recognized as the loss of asset impairment and be recorded as the profit or loss for the current period. Simultaneously, a provision for the asset impairment shall be made accordingly. After the loss of asset impairment has been recognized, the depreciation or amortization expenses of the impaired asset shall be adjusted accordingly in the future periods so as to amortize the post-adjustment carrying value of the asset systematically (deducting the expected net salvage value). Once any loss of asset impairment is recognized, it shall not be switched back in the future accounting periods.

④ Where there is any evidence indicating a possible impairment of assets, the enterprise shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. The recognition of an asset group shall base on whether the main cash inflow generated by the asset group is independent of those generated by other assets or other group assets. Simultaneously, when recognizing an asset group, the enterprise shall take into consideration how its managers manage the production and business activities (for example, according to the production lines, business varieties or according to the regions or areas), and the ways of decision-making for the continuous use or disposal of the assets, etc. b. Employee compensation The employees’ salaries and wages are various remunerations paid by the Company for employees’ services and other relevant expenditures. Except dismissal welfare, the Company confirms the payable employees’ salaries and wages as liability in the period that the employees provide their services, and correspondingly increase asset costs or current expenses. According to relevant regulations of China, the employees of the Company have participated in social basic endowment insurance implemented by the local labor and social security department. The Company pays endowment insurance to the local social basic endowment insurance institution according to payment amount and ratio of social basic endowment insurance locally regulated. The social basic endowment insurance above paid is calculated into the current profits and losses according to accrual basis. When employees have retired, local labor and social security department is liable to pay social basic retirement pension to the retired employees. The Company has no other payment

83 obligations. Besides retirement welfare, the Company pays house accumulation fund and basic hospitalization insurance, unemployment insurance, employment injury insurance and birth insurance for in-service employees according to relevant laws, regulations and policies. The

Company pays house accumulation fund and the above social insurances according to certain proportion of employee’s salary on monthly basis, and calculates into capital costs or the current profits and losses according to accrual basis. c. Basis of financial statements consolidation

① The scope of consolidation The consolidated scope of the consolidated financial statements includes the Company and the subsidiaries under control of the Company. Control refers to which is entitled to decide the financial and management policies of a Company and by which interest can be obtained from the operation activities of the Company. The operation results and financial status of the subsidiaries under control are contained in the consolidated financial statements from control starting date to control closing date. ② Accounting method of consolidated financial statements For any subsidiary acquired by the Company through corporate merger under the same control, when the consolidated financial statements for the current period are being prepared, it is deemed that the merged subsidiaries are entered into the merger scope of the Company when the final control party of the Company starts to perform control to it, and the number at the beginning of the period in the consolidated financial statements and previous comparison statement are made corresponding modification. While the Company is preparing the consolidated financial statements, the assets and liabilities of the merged subsidiary and their book values are combined into the consolidated balance sheet of the Company and the operation results of the merged subsidiary are combined into the consolidated profit statement of the Company since the final control party of the Company starts to perform control. For any subsidiary acquired by the Company through corporate merger not under the same control, when the consolidated financial statements for the current period are being prepared, the financial statements of the subsidiary are modified on the basis of recognizable assets, fair values of liabilities as confirmed on the purchase date, and the assets, liabilities and operation results of the purchased subsidiary are combined into the financial statements of the Company as of the purchase

84 date.

③ The accounting policy of each holding subsidiary is in accordance with the Company.

3. TAX The types of taxes and its rates applicable to the Company are listed as follows: Items of taxation Tax base Tax rate Value added tax Taxable amount of income minus deducted input tax 17% or 13% Business Tax Taxable amount of turnover 5% Enterprise income tax Taxable amount of income 25%

4. CONSOLIDATED FINANCIAL STATEMENTS (1) Subsidiaries a. Holding subsidiaries ： ①subsidiaries by investment or newly built

Consolidated Rate of Rate Types of Nature of Scope of financial Minority Name of holding Place of Registered Invested Shares of subsidiary business operation statement equity registration capital amount hold Voting (yes/no) (%) right (%)

Hebei Xiaban 100% 100% City Textile Co., Clothes USD Production and USD Wholly Chengde No Ltd. ( Xiaban producing 4,000,000 sale of clothes 4,000,000 City Textile) Production and 100% 100% Chengde Dixian Clothes USD sale of clothes USD Fashion Co., Ltd. Wholly Chengde No producing 24,000,000 and synthetic 24,000,000 (Dixian Fashion) fibers Xingye Production and 75% 75% Papermaking Co., Paper USD sale of various USD RMB Wholly Chengde Yes Ltd. (Xingye producing 100,000,000 kind of brass 75,000,000 38527625.95 Papermaking) paper Chengde Banhe 65% 65% Production and Fiber Textile Co., Clothes USD USD Wholly Chengde sale of clothes Ltd. producing 60,000,000 39,000,000 No and synthetic (Banhe Fiber fibers Textile)

Wholly Investment Gold Axe British Export USD1 100% 100% Owned holding Yes Investment Group Virgin Authorized and liaison capital Limited Islands $5,000,issued capital $1 Huaxin Waste Part Waster RMB RMB Chengde Collection and 90% 90% Paper owned paper 1,000,000 900,000 Yes RMB 6.74 sales of waster Collection Co., Collection paper Ltd. Notes: The 25% shareholding of Xiaban City Textile belongs to the Gold Axe Investment Group Limited, which is a subsidiary of the Company. Xiaban City Textile was bankrupt on 8 February 2009.

85 According to the Share Transfer Agreement signed on 25 June 2005 between Gold Axe Investment and the Japan Yufa Company, the Japan Yufa Company agreed to transfer the 25% shareholding to Gold Axe in return for the set off against the account receivables of RMB 50,643,321 from Japan Yufa Company. The amount of RMB 50,643,321 was the account payables should be paid to the Gold Axe for goods payment. An agreement was signed between the Company and Gold Axe on 25 June 2005 for the above mentioned account receivables at the carrying amount of RMB 50,643,321 transfer to Gold Axe. The equity transfer was approved by the board of Fashion Co., Ltd but it hadn’t been approved by the related department of government as well as the Industrial and Commercial Bureau. The Fashin Company was bankrupt on 8 February 2009. Century Win International Holding Ltd. (Century Win International), a Company incorporated in Hong Kong, entered into an equity joint venture agreement with the Company to set up Xingye Papermaking in 2001 and obtained the business license on 12 March 2001. According to the equity joint venture agreement, the Company and Century Win International had paid in capital of approximate RMB 622,500,000 and RMB 207,500,000 respectively, and the registered capital would be contributed in full by both sides within three years from the business license date of Xingye Papermaking (the ‘Investment Period’). Up to the 31 December 2007, the Company and Century Win International had fully paid the capital of RMB 622,500,000 and RMB 207,500,000 respectively. Some of the production lines were in operation since 2002. According to the verdict letter of Hebei senior People's Court (2009) Ji Xing Er Zhong Zi 44 on 23 August 2008, Chengde Xingye Paper Industry Co., Ltd was adjudicated a deceptive foreign invested company which was established by the original shareholder of the company Wangzuxian in the name of Century Win International Holding Ltd. Due to serious liquidity problem,The business operation of Xingye Papermaking was suspended from the year of 2006. On 8 December 2008, Chengde Intermediate People's Court (2008) Cheng Min Po Zi 13 confirmed the acceptance of liquidation application of Chengde Yonghe Concrete Co., Ltd for Xingye Papermaking Co., Ltd. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 13-3 on 10 May 2009, Chengde Intermediate People’s Court of Hebei Province confirmed the settlement agreement between Xingye Paper Paper and its creditors on 8 May 2009, The ruling was the final order. Banhe Fiber Textile is a subsidiary of the Company incorporated as Sino-foreign enterprise on 29 September 2002 and the registered capital was $15,000,000. Dixian Fashion and Yamashita Shoji Co., Ltd. invested 35% and 65% shareholding respectively. Upon approval coded Ji Wai Jin Mao Zi Zi [2003]No.37 issued by the Hebei Province Ministry of Commerce on 24 March 2003, the Banhe Fiber Textile increased the registered capital from $15,000,000 to $60,000,000 on 7 July 2003. Xiaban City Textile then joined as a new shareholder. The distribution of shareholding then became Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 20%, 55% and

86 25% respectively. Upon the approval coded Ji Wai Jin Mao Zi [2004]No.22 issued by the Hebei Province Ministry of Commerce on 31 March 2004,Yamashita Shoji Co., Ltd. was transferred 20% shareholding to Dixian Fashion. After the change, the distribution of shareholding became as Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 40%, 35% and 25% respectively. Up to 31 December 2007, the paid up share capital of Banhe Fiber Textile was RMB 394,820,975.29. Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB 114,890,975.29 respectively. However, the share capital verification procedure was not completed. Banhe Fiber Textile was declared bankrupt on 8 February 2009. Huaxin Waste Paper is a subsidiary of the Company invested by Xingye Papermaking and XinYe Commerce & Trade Co., Ltd. and obtained the business license on 17 January 2003. Xingye Papermaking holds 90% equity of Huaxin Waste Paper. No business operations were transacted of Huaxin Waste Paper during the year of 2006. According to the information from Industrial and Commerce Bureau, the minority shareholder is changed from XinYe Commerce & Trade Co., Ltd. to Dixian Fashion. Chengde Industrial and Commercial Bureau withdrawed the licenses of Huaxin Waste Paper Co., Ltd on 28 April 2009 due to not submitting the annual inspection material of 2007. ②There is no subsidiary acquired under the same control. ③Subsidiary from merger under different control

Name of Types Place nature of Registered Scope invested Rate Rate Whether Minority subsidiaries of of business Of capital of of Consolidated equity subsidiaries registration operation share vote statement (%) (%)

rongyida Estate Real Estate Limited Estate RMB development,clothe chengde RMB 1 100% 100% Yes development liabilities development 10,000,000 producing and Co., Ltd lease service

b. There is no operating entity for special purpose or controlled party been entrusted and leased c. Presentation for consolidation changes ① Three companies were excluded from consolidation including Chengde Dixian fashion Co., Ltd ,Hebei Xiaban City Textile Co., Ltd and Chengde Banhe Fibre Co., Ltd which was declared bankrupt by Chengde Intermediate People's Court of Hebei province. ② One subsidiary Chengde Rongyida Real Estate Development Co., Ltd was added in consolidation which was transferred from controlling shareholder of the Company for RMB 1 on 27 July 2009. The Company owns 100% equity of Chengde Rongyida Real Estate Development Co.,Ltd. d. New subsidiaries included in the consolidated statement and entities which should be

87 excluded from consolidation.

① New subsidiaries included in the consolidation

Name Ending amount of net asset Net loss and profit

Rongyida Real Estate Development Co., Ltd 1,608,566.07 -3,937,436.90

② Entities which should be excluded from consolidation

Net profit from the beginning to Name Net asset on date of disposal the date of disposal

Hebei Xiaban City Textile Co., Ltd. 215,396,178.03 -387,315.66

Chengde Dixian fashion Co., Ltd -191,208,863.92 -1,766,947.53

Chengde Banhe Fiber Textile Co., Ltd. -46,299,575.73 -1,666,605.22

e. There is no consolidation under the same control during the current period. f. The consolidation under different control

Consolidated party Amount of goodwill Calculate method of goodwill

Chengde Rongyida Real Estate Development Co., Ltd 0.00

Note: It cost the Company RMB 1 to purchase Chengde Rongyida Real Estate Development Co.,Ltd. No goodwill aroused from consolidation. 5. NOTES TO SIGNIFICANT MATTERS OF FINANCIAL STATEMENTS (1). Cash and cash equivalents

Closing balance Opening balance

Item Foreign Exchange Foreign Exchange Amount (RMB) Amount (RMB) currency rate currency rate

Cash ： - - 0.00 - - 12,639.38

RMB - - 0.00 - - 12,639.38

Cash in bank ： - - 58,256.11 - - 434,618.35

RMB - - 58,256.11 - - 434,618.35

Total - - 58,256.11 - - 447,257.73

Note: As a reason of the restructuring, there is no monetary revenue except by disposals of asset. Ordinary expenses and debt settlement were financed by cash from disposal of asset or borrowing

88 by bankrupt supervisor.

(2). Accounts receivable a. Accounts receivable disclosed based on category Closing balance Opening balance Bad debt Book balance Book balance Bad debt provision Item provision Amou Rate in Amoun Rate in Rate in Rate in Amount Amount nt total t total total total 1. Individual accounts with - - - - 131,055,106.54 92.05% 126,545,785.40 93.01% large amount 2. Individual accounts without large amount but with major risk after - - - - 5,550,166.48 3.90% 5,550,166.48 4.08% integrated into credit risk combination 3. Others with small amount - - - - 5,767,250.56 4.05% 3,961,942.77 2.91% Total - - - - 142,372,523.58 100% 136,057,894.65 100%

Note: ① The category of individual accounts with large amount is defined as the single amount of receivable over RMB 1,000,000. ② The accounts receivable of parent company with book balance RMB 136,452,770.37 and its provision RMB 125,492,771.81 was auctioned. Rongyida Co., Ltd purchased it for RMB 51,420.17 on 8 April 2009 (referred to auction ruling Ji Sheng Pai Zi 20090408 No.1). All loss for the auction is RMB 10,908,578.39. ③ Except for auction right of credit, the Company wrote off the account receivable for RMB 13,502,087.90 which were over 3 years aging and expected no recovery.( provision for RMB 10,565,122.84 had been accrued before that), the whole auction made loss for RMB 2,936,965.06. b. There is no provision accrued for individual accounts with large amount or without large amount but impairment tested singly. c. There is no accounts receivable which has been accrued fully or high rate provision before the beginning of the year and reversed this year. d. There is no accounts receivable reversed by restructuring or by other ways. e. Accounts receivable written-off Related Nature of accounts The amount Name of the companies Reason for Written-off party receivable Written-off (yes/no) ShanghaiTianbiao Trade accounts 2,085,936.00 Uncollectible for over 3 years no Langfang Office Trade accounts 1,504,236.40 Uncollectible for over 3 years no

89 Qingdao Tengfa Package Trade accounts 1,109,966.37 Uncollectible for over 3 years no Material Jingjin Office(since 1 Trade accounts 1,020,959.19 Uncollectible for over 3 years no February) Dixian Second Paper Box Trade accounts 898,962.40 Uncollectible for over 3 years no (32th) Shandong Qingzhou Trade accounts 591,966.96 Uncollectible for over 3 years no Qinglong Paper Langfang Office (since 1 Trade accounts 563,536.32 Uncollectible for over 3 years no February) Shandong Jimo Yuanjian Trade accounts 519,578.66 Uncollectible for over 3 years no Plastic Zhejiang Yulei Package Trade accounts 436,511.80 Uncollectible for over 3 years no Group Tianjing Jinshijiao Paper Trade accounts 393,424.88 Uncollectible for over 3 years no Shenzhen Lingfeng Fabric Trade accounts 381,767.91 Uncollectible for over 3 years no Luwenjian Trade accounts 300,821.25 Uncollectible for over 3 years no Chengde Yongsheng Material Trade accounts 276,279.81 Uncollectible for over 3 years no Jimo Office(since February) Trade accounts 272,592.40 Uncollectible for over 3 years no Wangyuliang Trade accounts 213,708.00 Uncollectible for over 3 years no Xinlijiahua International Trade accounts 204,315.15 Uncollectible for over 3 years no Trade Yinchuan Gaoxin Zone Trade accounts 195,795.20 Uncollectible for over 3 years no Jindong Paper Industrial Beijing Huayixingsheng Trade accounts 133,548.50 Uncollectible for over 3 years no Package Prodecing America Yajie Trade Trade accounts 122,416.63 Uncollectible for over 3 years no Wujin Tongda Paper Box Trade accounts 116,280.00 Uncollectible for over 3 years no Package Beijing Bolin(Chengde) Lulin Trade accounts 115,162.13 Uncollectible for over 3 years no Beijing Branch Changli Fuqiang Package Trade accounts 109,113.65 Uncollectible for over 3 years no Hebei Wuqiang Jinlun Paper Trade accounts 101,564.36 Uncollectible for over 3 years no Box Henan Ancai Trade accounts 101,464.36 Uncollectible for over 3 years no Shanghai Shuangyao Trade accounts 96,519.10 Uncollectible for over 3 years no Wuhan Hengchang Paper Trade accounts 94,603.60 Uncollectible for over 3 years no (Wuhua) Shouguang Shangkou Paper Trade accounts 88,290.40 Uncollectible for over 3 years no Wholesale Tianjing Hengsheng Pringting Trade accounts 75,577.50 Uncollectible for over 3 years no Tianjing Hangu Western Trade accounts 66,008.42 Uncollectible for over 3 years no Village Box Processing Huaxing Paper box Trade accounts 64,747.00 Uncollectible for over 3 years no

90 Tianjing Yongying Pringting Trade accounts 61,606.18 Uncollectible for over 3 years no Package Wangbingjun Trade accounts 56,398.00 Uncollectible for over 3 years no Weichang Jiuyuan Trade accounts 54,000.00 Uncollectible for over 3 years no architecting Advisory Shijiazhuang Yuanxiang Trade accounts 53,297.00 Uncollectible for over 3 years no Fabric Printing Trade Zhangjiagang Hongtu Paper Trade accounts 50,529.48 Uncollectible for over 3 years no Box Chengde construction Trade accounts 50,000.00 Uncollectible for over 3 years no prospecting Jiangsu Danyang Huaxin Trade accounts 49,845.15 Uncollectible for over 3 years no Chemical packing Dandong Fuda Chemical Trade accounts 49,583.65 Uncollectible for over 3 years no material Jinghu Xinhua Paper Box Trade accounts 46,090.00 Uncollectible for over 3 years no Shenyang Taixian Paper Trade accounts 46,038.95 Uncollectible for over 3 years no Shijiazhuang Yongbi Trade accounts 43,236.90 Uncollectible for over 3 years no Dongxiang Paper Box Tianjing Jianyue Trade Trade accounts 39,450.55 Uncollectible for over 3 years no Lujing Trade accounts 36,834.05 Uncollectible for over 3 years no Shaoxing Chengming Paper Trade accounts 33,927.43 Uncollectible for over 3 years no Chengde Qianyu Caiyin Trade accounts 30,949.80 Uncollectible for over 3 years no Packing Chengde Lulin Packing Trade accounts 30,210.94 Uncollectible for over 3 years no Beijing Paper Box Trade accounts 30,000.00 Uncollectible for over 3 years no Beijing Hengxing Changyuan Trade accounts 28,755.84 Uncollectible for over 3 years no Trade Chengde Jinghua Packing Trade accounts 26,788.00 Uncollectible for over 3 years no Pringting Qinghuangdao Gold Beach Trade accounts 26,254.02 Uncollectible for over 3 years no Changlihongyuan Caiyin Beijing Fangyuan Paper Trade accounts 25,081.20 Uncollectible for over 3 years no Lianwenjun Trade accounts 24,135.00 Uncollectible for over 3 years no Shandong Xingchuang Paper Trade accounts 23,054.27 Uncollectible for over 3 years no Baoding Jihongxing Clothe Trade accounts 20,759.00 Uncollectible for over 3 years no Pinggu Yuzishang Second Trade accounts 20,000.20 Uncollectible for over 3 years no Paper Box Other small amount items Trade accounts 289,607.94 Uncollectible for over 3 years no Total 13,502,087.90

Note: Other small amount items is defined as less than RMB 20,000.00, 159 items included. Items above were expected no recovery for over 3 years aging and unable to reach the contact

91 with the debtors.

f. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights.

g. Accounts receivable derecognized Item Amount Derecognized Loss for Derecognizing

Yufa company 79,114,550.26 - Korea Gaozhisha 11,391,123.66 - Chengde import and export company 4,814,258.69 3,833,337.61 Lanyan Group 8,000,000.00 - New century 7,044,666.04 - Japan Tianbiao 5,757,806.51 - Chengde Banhe clothes 5,713,083.85 2,843,140.11 Antianxiushan 3,724,953.90 - Shaoxing Office 2,715,275.09 2,162,028.84 Fumian Company 1,652,254.33 - Chengde Banhe textile 1,389,680.84 1,106,528.79 Yecun Trading 1,167,696.69 - CAL 934,026.16 - Jieweiying 696,995.62 - Longbing 416,950.18 - Hangzhou Bafu fibre Co., Ltd 398,159.12 198,145.55 Changzhou Office 364,267.61 181,279.30 Beizi 297,926.90 - HK Rude 631,772.00 503,046.37 Lvchanghai 62,871.00 - Jiuyuan clothes 48,240.00 38,410.94 Tianjing taida 48,145.20 - Suning meihua Fabric Co., Ltd 46,858.72 37,311.10 Japanese school 10,750.00 5,349.78 Yitengzhong 10,458.00 - Total 136,452,770.37 10,908,578.39

Note: The above accounts receivable was derecognized for auction. h. There is no securitization transaction for accounts receivable (3). Prepaid accounts Prepaid accounts listed on aging basis Closing balance Closing balance Aging Amount Rate in total Amount Rate in total Within 1 year - -

92 1 to 2 years - - 1,030,133.15 1.5% 2 to 3 years - - 3,716,189.37 5.42% Over 3 years - - 63,883,950.36 93.08 Total - - 68,630,272.88 100%

Note: ① The prepaid accounts of parent company with book balance RMB 86,429,553.06 (accounts of subsidiary declared bankrupt Banhe Fibre 25,000,000.00 included) was auctioned. Rongyida Co., Ltd purchased it for RMB 405,494.77 on 8 April 2008.(referred to auction confirmation ruling Ji

Sheng Pai Zi 20090408 No.1. All loss for the auction is RMB86,024,058.29. ② Except for auction right of credit, the Company wrote off the account receivable for RMB 7,279,722.72 which were over 3 years aging and expected no recovery, the whole auction mad loss for RMB 7,279,722.72.

(4). Other receivables a. Other receivables disclosed on types

Closing balance Beginning balance Item Book balance Bad debt provision Book balance Bad debt provision Rate in Rate in Rate in Rate in Amount Amount Amount Amount total total total total 1.Individual accounts 84,366,165.76 99.92% 64,281,533.51 99.99% 264,785,242.70 97.02% 206,254,716.37 98.78% with large amount

2.Individual accounts without large amount but with major risk - - - - 978,940.30 0.36% 978,940.30 0.47% after integrated into credit risk combination 3. Others with small 66,085.13 0.08% 3,762.92 0.01% 7,143,676.78 2.62% 1,564,992.15 0.75% amount Total Item 84,432,250.89 100% 64,285,296.43 100% 272,907,859.78 100% 208,798,648.82 100%

Note: ① The types of individual accounts with large amount is defined as the single amount of receivable over RMB 1,000,000. ② The other receivables of parent company with book balance RMB 252,765,623.58 and its provision for 119,626,278.88 was auctioned. Rongyida Co., Ltd purchased it for RMB624,639.45 on 8 April 2008.(referred to auction ruling Ji Sheng Pai Zi 20090408 No.1. All loss for the auction is RMB 132,514,705.25.

93 ③ Except for auction right of credit, the Company wrote off the other receivables for RMB

116,993,863.08 ( provision for 32,696,217.07 had been accrued before that )which were over 3 years aging and expected no recovery, the whole auction mad loss for RMB 84,297,646.01.

b. Provision accrued for individual accounts with large amount or without large amount but impairment tested singly. Content Book balance Bad debt accrued Rate accrued Reason for accruing

Xiaban city finance bureau 40,169,264.50 20,084,632.25 50% 2-3 years aging Dahua paper 44,196,901.26 44,196,901.26 100% over 3 years aging Total 84,366,165.76 64,281,533.51 - -

Note: In the closing balance of other receivables, the receivables belong to Xiaban Finance Bureau is RMB 40,169,264.50, which is paid for 619.81 mu land transferrent. The company has got a land use right certificate for 324.781 mu but hasn’t got the rest. For the land use certificate can not be matched with the payment, the land use right will be amortized till land use right registration has finished. c. There is no other receivables which has been accrued fully or high rate provision before the beginning of the year and reversed this year. d. Other receivables written-off Name of the Nature of other Amount Related Reason for writing-off company receivables Written-off party(Yes/No) Shenzhen Lingfeng Payments or receipts 40,000,000.00 Uncollectible for over 3 years No Xiaban City Payments or receipts 29,910,159.32 Uncollectible for debtor’s bankruptcy Yes Unable to recover for debtor’s Banhe Fibre Payments or receipts 23,086,078.03 Yes bankruptcy House accounts Payments or receipts 12,206,028.10 Uncollectible for over 3 years No Fashion company Payments or receipts 5,976,371.12 Uncollectible for debtor’s bankruptcy Yes Deposit in bank Payments or receipts 1,782,324.22 Uncollectible for over 3 years No Court Payments or receipts 1,339,177.55 Uncollectible for over 3 years No Tahe Paper factory Loan 750,000.00 Uncollectible for over 3 years No Other monetary Payments or receipts 593,569.16 Uncollectible for over 3 years No items Shenzhen Dahua Payments or receipts 500,000.00 Uncollectible for over 3 years No Tiancheng Chengde principle Payments or receipts 200,000.00 Uncollectible for over 3 years No construction office Liuhe and Lend to Employee 131,800.00 Uncollectible for over 3 years No Zhaoshengkai

94 Staff warming fee Payments or receipts 117,203.00 Uncollectible for over 3 years No Financial Bureau Payments or receipts 59,302.27 Uncollectible for over 3 years No Chengde Xuangua Payments or receipts 50,000.00 Uncollectible for over 3 years No Shijiazhuang Xuri Payments or receipts 48,000.00 Uncollectible for over 3 years No Airline Advisory Yuhaiquan Payments or receipts 45,000.00 Uncollectible for over 3 years No Hebei senior court Payments or receipts 30,500.00 Uncollectible for over 3 years No Shenzhen Security Payments or receipts 29,914.40 Uncollectible for over 3 years No centre Shenzhen Xingyahui Payments or receipts 25,000.00 Uncollectible for over 3 years No Advertisement Hanwenjian Payments or receipts 20,000.00 Uncollectible for over 3 years No Others with small Payments or receipts 93,435.91 Uncollectible for over 3 years No amount Total 116,993,863.08

Note: Other small amount items is defined as less than RMB 20,000.00, 45 items included. Items above were expected no recovery for over 3 years aging and unable to reach the contact with the debtors. e. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. f. The big amounts of other receivables are the payments or receipts of associates, land accounts for intangible asset temporarily as well as bankruptcy supervisor account. g. Information for 5 biggest amounts of other receivables: Rate to the total Name Relationship Amount Age of others(%) Dahua Paper Associate 44,196,901.26 over 3 years 52.34% Xiaban City financial bureau Supervisor 40,169,264.50 2-3 years 47.57% Electricity supplying -- 32,037.98 Within 1 year 0.04% Shibainian Staff 14,500.00 Within 1 year 0.02% Suning Banhe Fibre Associate 13,312.00 Within 1 year 0.02% Total -- 84,426,015.74 -- 99.99%

h. Other receivables of related parties Name Relationship Amount Rate to the total of others(%) Suning Banhe Fibre Associate 13,312.00 0.02% Dahua Paper Associate 44,196,901.26 52.35% Total -- 44,210,213.26 52.37%

i. Other accounts derecognized

95 Item Amount derecognized Loss for derecognizing Fashion Company 113,306,096.51 112,774,507.16

Japanese Paper Making 58,360,818.27 - Shenzhen Lingfeng 6,774,283.24 - New Century 30,792,000.00 - Banhe Fibre 13,024,898.03 - Dachen Paper Industry 9,280,976.93 7,389,947.28 Financial Bureau 9,184,470.01 4,570,689.98 Suning Banhe Fibre 4,588,899.78 3,653,896.32 Suning financial Payment Centre 2,000,000.00 995,308.38 Lanwenzhi 1,459,318.92 1,161,977.88 Hebei Suning Financial Bureau 1,000,000.00 497,654.19 Dixian Light Rail 635,099.53 - Shibainian 497,535.81 396,161.25 Chenmeizhu 319,058.44 254,049.23 Huoxueyan 182,404.32 172,471.12 Mengxueyan 174,069.00 - Shibainian(rotate fund) 159,735.00 127,188.47 Lidongming 111,877.40 105,784.89 Wanghuilai 101,379.85 95,859.00 Jiandongzhi 100,000.00 - Gaoshuming 95,968.55 - Songshiqing 76,357.54 60,799.44 Liufuming 68,108.71 64,399.71 Yibing 64,527.00 - Songshiqiang 58,289.60 46,412.90 Wangyouxiang 50,000.00 - Electricity Bond 50,000.00 - Zhangqing 48,000.00 45,386.06 Chenzhiguo 32,866.24 26,169.64 Weiguochuan 20,000.00 - Other small amount items 148,584.90 76,042.35 Total 252,765,623.58 132,514,705.25

Note: Other small amount items is defined as less than RMB 20,000.00, 47 items included. Items above were derecognized for auction. j. There is no securitization transaction for other receivables （5）Inventories

96 a. Types of the inventories Closing balance Opening balance Item Book Provision for Provision for Carry amount Book balance Carry amount balance inventories inventories Goods in stock - - - 3,754,396.56 3,734,383.71 20,012.85 Raw material - - - 1,844,501.69 1,841,215.17 3,286.52 Goods in process - - - 774,978.31 420,447.21 354,531.10 Products to be developed 11,296,098.60 11,296,098.60 Total 11,296,098.60 11,296,098.60 6,373,876.56 5,996,046.09 377,830.47

Note: ①The decrease is the written-off amount of inventory.

② The closing balance of Products to be developed is the auctioned land use right which Rongyida

Company purchased from bankrupt subsidiaries Xiaban City Fibre with warrant Number Cheng Xian Guo

Yong (2002) Zi No.32, No 33, No 34 and Fashion company with No.173 and 174. The land use right acquired were entered into the account book at the price of auction, but the procedures of ownership changing registration hasn’t been carried out yet. b. Provision for inventories Current decrease Item Opening balance Current increase Closing balance Reversed Wrote off

Goods in stock 3,734,383.71 - - 3,734,383.71 - Raw material 1,841,215.17 - - 1,841,215.17 - Goods in process 420,447.21 - - 420,447.21 - Total 5,996,046.09 - - 5,996,046.09 -

（6）Other current asset Item Closing balance Opening balance Debt purchased 1,093,527.39

Total 1,093,527.39

Note: Other current asset is the auction right of credit purchased by Rongyida Co., Ltd. which was recognized at the initial cost, including its price RMB 1,197,300.00 and auction expenses RMB 11,973.00(referred to auction ruling Ji Sheng Pai Zi 20090408 No.1. The ending amount is the balance after offsetting the accounts of its subsidiary Gold Axe for RMB 115,745.61. （7）Investment to the associates and joint ventures

97 Name of Type of Registered Leagal Type of Registered Rate Rate Closing Closing Closing Operating Net profit the business place representat business capital of of balance balance of balance of revernue during the companies ive share vote of asset liability net asset last period current period invested (%) (%)

1.Joint venture 2.Associate Limited Hebei Wangzhen Producing $29000000 20% 20% 23,456,2 69,755,786. 46,299,57 - - Suning liability Suning gsong company 10.61 34 5.73 Banhe Fibre

Limited Chengde Wangshux Producing $1000000 - - Chengde liability ian company Beirifang

Limited Chengde Wangshux Producing 6364000000 JPY 45% 45% 266,969, 624,579.62 266,345,3 - - Chengde liability ian company 909.27 29.65 Dahua Paper

Limited Chengde Wanghuila Producing $8000000 - - Dixian liability i company Light Rail

Suning Banhe Fibre Textile Co., Ltd. was invested by Yamashita Shoji Co., Ltd. on 7 November 2004 approved by the People’s Government of Hebei province in certificate [2004] 0047. The registered capital was $29,000,000, of which the Company invested $5,800,000 accounting for 20 ％ equity, RMB 7,251,417.00 in monetary which worth $895,236.67. Japan New Century paid the transportation fee and installation charges JPY 521,007,225.00 （ amount to $4904763.33 ）for Suning Banhe Fibre Textile Co., Ltd intead of the Company, which was regarded as the paid-in capital the Company invested to Suning Banhe Fibre Textile Co., Ltd. Yamashita Shoji Co., Ltd. invested $23,200,000.00 with equipment accounting for 80% equity. Suning Banhe Fibre Textile Co., Ltd. leased equipments from Chengde Banhe Fibre Textile Co., Ltd. to operate from the year of 2006. Chengde Beirifang Co., Ltd. is a joint venture company invested by Japan Beirifang Co., Ltd., Y’S Corporation Co., Ltd. and the Company obtained the business license on 13 December 2002.

The Company holds 50% equity of Chengde Beirifang Co., Ltd. But as to 31 December 2005 the Company paid no capital actually. And business operations were stopped. Chengde Industrial and Commercial Bureau withdrawed the licenses on 27 March 2009 due to not submitting the annual inspection material of 2007. Dahua Paper Industry Co., Ltd. was founded as a joint venture Company invested by Nippon Paper Industries Co. Ltd and the Company, its original name is Chengde Paper Co., Ltd. which was approved in the ruling Cheng Shi Commercial Foreign Zi [2004] 8. The registered capital was $5,000,000, of which the Company invested $2,250,000 accounting for 45 ％ equity. Upon approval coded Ji Shang Wai Zi Zi [2004] No.41 issued by the Hebei Province Ministry of

98 Commerce, Dahua Paper Industry Co., Ltd. has increased the total investment from $5,000,000 to

JPY 11,000,000,000 and the registered capital increased from $5,000,000 to JPY 6,364,000,000. The investment of the Company has increased from $2,250,000 to JPY 2,864,000,000, accounting

for 45 ％ equity. On 24 June 2005, Nippon Paper Industries Co., Ltd and Japan New Century Co. Ltd agreed the share-transfer contract, which indicated that Nippon Paper Industries Co., Ltd

transferred 55 ％ equity of Dahua Paper Industry Co., Ltd. to Japan New Century Co., Ltd. The above alteration has approved by the Hebei Province Ministry of Commerce. Dahua Paper Industry

Co., Ltd. obtained new business license due to rename. On 29 June 2005, the Company agreed the share-transfer contract and transferred 45% equity of Dahua Paper Industry Co., Ltd. to Xinye

Papermaking Co., Ltd. As to 31 December 2007, Dahua Paper Industry Co., Ltd. has obtained investment of RMB 266,280,320.00. However, the above capital is unverified and the procedure on changes of shareholder haven’t been finished. Chengde Industrial and Commercial Bureau withdrawed the licenses of Dahua Paper Industry Co., Ltd due to not submitting the annual inspection material of 2007. Dixian Light Rail Co., Ltd. (hereafter referred to as Light Rail company) was invested by Japan New Century Co., Ltd. and the Company on 8 April 2003 approved in the ruling of Ji Cheng Shi Zi [2003] 0004 and received the license . The registered capital was USD 8,000,000 and the total investment was USD 17,800,000. The Company invested USD 6,000,000, accounting for 75 ％ of total equity. As to 31 December 2007, the Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Dixian Light Rail Co., Ltd. has not come into operation. Chengde Industrial and Commercial Bureau withdrawed the licenses of Dixian Light Rail Co., Ltd on 27 March 2008.

（8）Long-term equity investment Compa Accountin Initial Openin Increase and Closing rate of rate of Explanation Impairmen The The cash ny g method investment g decrease balance share(%) vote(%) of difference t provision impairmen bonus for investe cost balance between rate t provision the period d of share and accrued for rate of vote the period

1.Investment in affiliated Company listed as follows:

Suning Banhe Cost 46,980, 46,980,00 46,980,000 46,980,000 Fibre method 46,980,000.00 000.00 0.00 20% 20% .00 - .00 Dahua Paper Industr y Co., Equity 206,215,729.6 206,215 206,215,7 204,000,00 95,000,000 Ltd. method 5 ,729.65 29.65 45% 45% 0.00 .00

Total 253,195,729.6 253,195 253,195,729 - 253,195,72 250,980,00 95,000,000

99 5 ,729.65 .65 9.65 0.00 .00

2.Investment in subsidiaries as follows: Fashion Compa Cost 200,051,551.1 200,051 200,051,5 200,051,55 200,051,55 ny method 1 ,551.11 - 51.11 100% 0% Bankrupt 1.11 1.11 - Xiaban City Cost 441,303,759.8 441,303 441,303,7 441,303,75 441,303,75 Fabric method 2 ,759.82 - 59.82 100% 0% Bankrupt 9.82 9.82 -

641,355,310.9 641,355 641,355,310 641,355,31 641,355,31 Sub-Total 3 ,310.93 .93 - 0.93 0.93

894,551,040.5 894,551 894,551,040 892,335,31 736,355,31 Total 8 ,040.58 .58 - 0.93 0.93

（9）Fixed asset

a. Information of fixed asset Item Opening balance Increase Decrease Closing balance

1.Initial cost of fixed asset ： 1,660,872,937.35 - 1,573,271,086.50 87,601,850.85

Buildings and plants 256,653,223.06 - 180,024,075.65 76,629,147.41

Machinery equipment 1,391,877,261.16 - 1,391,877,261.16 -

Motor vehicle 11,010,889.94 - 208,800.00 10,802,089.94

Other equipment 1,331,563.19 - 1,160,949.69 170,613.50

2.Accumulated depreciation ： 481,426,547.81 5,794,654.25 466,260,881.54 20,960,320.52

Buildings and plants 73,992,122.99 3,825,950.19 65,140,284.55 12,677,788.63

Machinery equipment 398,685,619.02 1,571,851.31 400,257,470.33 -

Motor vehicle 7,932,635.27 396,312.84 102,283.68 8,226,664.43

Other equipment 816,170.53 539.91 760,842.98 55,867.46

3.Book value of fixed asset: 1,179,446,389.54 -5,794,654.25 1,107,010,204.96 66,641,530.33

Buildings and plants 182,661,100.07 -3,825,950.19 114,883,791.10 63,951,358.78

Machinery equipment 993,191,642.14 -1,571,851.31 991,619,790.83 -

Motor vehicle 3,078,254.67 -396,312.84 106,516.32 2,575,425.51

Other equipment 515,392.66 -539.91 400,106.71 114,746.04

4.Impairment provision 1,055,353,263.38 114,746.04 1,020,106,446.41 35,361,563.01

Buildings and plants 113,471,701.28 - 80,342,237.69 33,129,463.59

Machinery equipment 939,719,162.04 - 939,719,162.04 -

Motor vehicle 2,162,400.06 - 45,046.68 2,117,353.38

Other equipment - 114,746.04 - 114,746.04

5.Carry amount of fixed asset 124,093,126.16 -5,909,400.29 86,903,758.55 31,279,967.32

Buildings and plants 69,189,398.79 -3,825,950.19 34,541,553.41 30,821,895.19

100

Machinery equipment 53,472,480.10 -1,571,851.31 51,900,628.79 -

Motor vehicle 915,854.61 -396,312.84 61,469.64 458,072.13

Other equipment 515,392.66 -115,285.95 400,106.71 - Note:

① The depreciation accrued is RMB 5,794,654.25 for the period. ② The increase of provision for other equipment is the declassed amount of Buildings and plants. There is no substantive increase for provision of fixed asset. ③ As at 25 February 2009, according to Shi Xing Chu Zi (2008) No. 48 verdict, Chengde

Intermediate People’s Court of Hebei Province sentenced the defendant Chengde Dixian Textile Company Limited committed a crime for smuggling the most ordinary goods, imposing a fine RMB

68,734,451.21 and besides, the smuggling of goods involved should be confiscated and turned over to the state treasury. The Advance People’s Court of Hebei Province confirmed the ruling of formal order (2008) Shi Xing Chu Zi No. 48 in the ruling of (2009) Ji Xing Er Zhong Zi No. 44 on 23 April 2009. The ruling was the final order. The Company made accounting treatment for the asset fined to decrease the initial amount of fixed asset RMB 665,355,112.46.

④ According to Restructuring Plan (draft), the Company auctioned the fixed assets under the name of parent company which decrease the initial amount of fixed asset RMB 40,843,712.31.The assets were purchased by Rongyida company limited for RMB 18,436,600.00 on 8 April 2009(referred to auction ruling Ji Sheng Pai Zi 20090408 No.2) ⑤ The loss for fine and penalty as well as auction assets loss is RMB 42,831,540.51. ⑥ Other decrease is the fixed asset of the bankrupt subsidiary except for the above reason. b. There is no temporarily idle fixed assets for the period.

c. There is no fixed assets increased by finance lease for the period. d. There is no fixed assets being leased by operating lease for the period. e. There is no fixed assets which hold for sale at the end of the year. f. There is no fixed assets without certificates of ownership at the end of the year (10) Construction in progress a. Information of construction in progress Opening balance Closing balance Name of project Book Impairment Book Impairment Carry amount Carry amount balance provision balance provision

101 Banhe Fibre Textile - - - 83,643,453.05 83,643,453.05 - Papermaking project 255,286,903.30 246,724,222.04 8,562,681.26 335,720,225.63 327,157,544.37 8,562,681.26 Thermal power stations 4,321,118.74 - 4,321,118.74 7,329,176.55 3,008,057.81 4,321,118.74 Chemical fiber plant - - - 66,167,154.98 66,167,154.98 -

Others - - - 10,865,739.16 10,865,739.16 - Total 259,608,022.04 246,724,222.04 12,883,800.00 503,725,749.37 490,841,949.37 12,883,800.00

Note: ① The book amount of construction in process written-off is RMB 143,035,867.46 and provision 143,035,867.46 accordingly. ② Other decrease is the assets of subsidiaries bankrupted. b. Except for the construction written-off and reversed by the bankrupt subsidiaries, there is no changes for construction in process. c. Impairment provision for construction in progress Opening Accruing Name of project Increase Decrease Closing balance balance reason

Banhe Fibre Textile 83,643,453.05 - 83,643,453.05 - --

Papermaking project 327,157,544.37 - 80,433,322.33 246,724,222.04 --

Thermal power stations 3,008,057.81 - 3,008,057.81 - --

Chemical fiber plant 66,167,154.98 - 66,167,154.98 - --

Others 10,865,739.16 - 10,865,739.16 - --

Total 490,841,949.37 - 244,117,727.33 246,724,222.04 --

Note: Affected by the shortage of capital and being a suspect of smuggling, the Company stopped all the construction in progress and the equipments made in process has left unused, so that most part of the equipments were cankered to lose the using value. For the above reason, the Company accrued the provision accordingly. (11) Intangible assets a . Information of intangible assets

102

Item Opening balance Increase Decrease Closing balance

1.Cost 125,581,008.13 - 94,505,932.50 31,075,075.63

Land use rights 125,581,008.13 - 94,505,932.50 31,075,075.63 2.Accumulated amortization 14,615,056.09 3,048,686.98 12,033,949.65 5,629,793.42 Land use rights 14,615,056.09 3,048,686.98 12,033,949.65 5,629,793.42 3.Book balance of intangible asset 110,965,952.04 -3,048,686.98 82,471,982.85 25,445,282.21 Land use rights 110,965,952.04 -3,048,686.98 82,471,982.85 25,445,282.21

4.Impairment provision 19,670,971.87 - 19,670,971.87 -

Land use rights 19,670,971.87 - 19,670,971.87 - 5.Carry amount of intangible asset 91,294,980.17 -3,048,686.98 62,801,010.98 25,445,282.21 Land use rights 91,294,980.17 -3,048,686.98 62,801,010.98 25,445,282.21

Note: ① The amortization for the period is RMB 3,048,686.98. ② The land use right auctioned resulted in the book balance decrease of intangible assets for RMB 36,974,390.28 (RMB 2,060,671.83 amortized), and received the auction payments RMB 8,836,642.45, loss for 26,077,076.00 recognized. ③ The parent company derecognized the initial amount of Banhe land for RMB 8,669,738.22 (RMB 679,129.49 amortized) as a reason of Banhe Fabre’s bankruptcy, loss for RMB 7,990,608.73 related. (12) Long-term prepaid expenses Opening balance Increase Amortization Other decrease Closing Reasons for other Item balance decrease Deversed for the Workshop rental bankruptcy of 2,009,612.55 2,009,612.55 0.00 expense subsidiary Fashion company

Cost 2,009,612.55 2,009,612.55 0.00

(13) Deferred tax asset a. Information of deferred tax asset Items Closing balance Opening balance

103 Deferred tax asset ：

Impairment loss 2,008,501.45 131,305,501.33 Total 2,008,501.45 131,305,501.33

Note: Deferred tax assets RMB 129,296,999.88 was recognized for the provision of disposed assets reversed.

b. Unrecognized deferred tax asset Item Closing balance Opening balance Deductible temporary differences 187,102,425.08 Deductible loss Total 187,102,425.08

Note: Deductible temporary differences includes deferred tax RMB 184,088,827.73 which recognized for the provision of long term equity investment RMB 736,355,310.93 and RMB

3,013,597.35 for other receivables RMB 12,054,389.38. The Company hasn’t been approved by the tax authority for not accruing tax payable, so the impairment provision for the above shouldn’t recognize the deferred tax. c. Deductible loss for unrecognized deferred tax asset will be at maturity in next period. Year ended Closing balance Opening balance Notes 2014 748,409,700.31 Total 748,409,700.31

d. The temporary differences resulted in deferred assets and liabilities Item Amount of temporary differences Impairment loss 8,034,005.79 Total 8,034,005.79

(14 ) Provision for impairment of assets Decrease Item Opening balance Increase Closing balance Reversed Written off 1.Impairment provision for 344,856,543.47 12,054,389.38 292,625,636.42 64,285,296.43 doubtful debts 2.Impairment provision for 5,996,046.09 5,996,046.09 - obsolete stocks 3.Impairment provision for 155,980,000.00 736,355,310.93 892,335,310.93 long-term investment 4.Impairment provision for 1,055,353,263.38 1,020,106,446.41 35,246,816.97 fixed assets 5.Impairment provision for 490,841,949.37 244,117,727.33 246,724,222.04 construction in progress 6.Impairment provision for 19,670,971.87 19,670,971.87 -

104 intangible asset

Total 2,072,698,774.18 748,409,700.31 - 1,582,516,828.12 1,238,591,646.37

Note: The increase of impairment provision for long term equity investment is accrued fully for the bankruptcy of its subsidiary Banhe Fibre, Fashion Company and Xiaban City Textile fully. (15) Other non-current asset Item Closing balance Opening balance Buildings and plants 36,821,474.54 Motor vehicle 21,181.31 Electronic equipment 38,320.79 Land use right 40,019,829.77 total 76,900,806.41

Note: ① Other non current assets is the auction assets of parent company and bankrupt subsidiary which Rongyida company limited purchased. The cost of parent company is RMB 18,620,966.00(including auction fee RMB184,366). The cost acquiring the mortgage asset which used for the credit right from Shanghai Pudong development bank Tianjing branch is RMB 14,300,000.00. The cost acquiring the bankrupt assets of Xiaban City Textile is RMB 5,730,560.16 (including auction fee RMB 56,800.42). The cost acquiring the bankrupt of Fashion company is RMB 18,497,360.24 (including auction fee RMB 183,142.18). The cost acquiring the bankrupt of Banhe Fibre is RMB 19,751,920.00 (acquired by transferring of assets). ② The Company doesn’t take the ownership transfer procedures for other non-current assets including buildings and plant, transportation vehicles and land use rights. (16 ) Short-term loans a. Types of short-term loans Types Closing balance Opening balance Pledge loan Mortgage 120,920,000.00 Guaranteed loan Credit loan 5,422,261.91 5,650,705.60 Guaranteed and mortgage loan 130,539,377.28 Total 5,422,261.91 257,110,082.88

Note: The base of the decrease of the short term loan is the restructuring plan (draft) which was approved by Chengde Intermediate People’s Court of Hebei Province on 30 December 2008 in the ruling of (2008) Cheng Min Po Zi.9-2 And the approved agreement of subsidiary Xingye Paper

105 on 10 May 2009 in the ruling 2008 Cheng Ming Po Zi 13-3 of Chengde Intermediate People’s Court of Hebei province to recognize the profit of restructuring and settle the debt. RMB 750,000.00 short term loan and related interest was paid in all.

b. There is no short term loan unsettled which is on due. (17) Accounts payable

a. Information of accounts payable Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year - - 800,000.00 1.95% 1 to 2 years 1,629.97 0.71% 2,155,651.17 5.27% 2 to 3 years 51,223.05 22.17% 2,273,085.99 5.55% Over 3 years 178,222.80 77.12% 35,700,781.88 87.23% Total 231,075.82 100.00% 40,929,519.04 100%

Note: The base of the accounts receivable decrease is the restructuring plan (draft) which was approved by Chengde Intermediate People’s Court of Hebei Province on 30 December 2008 in the ruling of (2008)Cheng Min Po Zi.9-2 and the approved agreement of subsidiary Xingye Paper On 10 May 2009 in the ruling 2008 Cheng Ming Po Zi 13-3 of Chengde Intermediate People’s Court of Hebei Province to recognize the profit of restructuring and debt settlement . RMB 18,573,886.49 debt was settled in all. b. The closing balance is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. c. There is no Large amount accounts payable over 1 year aging. (18) Advances from customers Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year - - - - 1 to 2 years - - 202,781.96 28.10% 2 to 3 years - - 151,532.95 21.00% Over 3 years - - 367,286.34 50.90% Total - - 721,601.25 100%

Note: The decrease of Advances from customers are the items written-off （RMB 710,994.16 ） and the restructuring profit（RMB 8,607.09 ）recognized according to the restructuring plan (draft) of parent company by Chengde Intermediate People’s Court of Hebei province in the ruling of (2008)Cheng Min Po Zi.9-2 on 30 December 2008 .

106 (19) Employee compensation Item Opening balance Increase Decrease Closing balance

1.Wages,bonuses,allowances and 54,368.95 120,000.00 54,368.95 120,000.00 subsidies 2.Social insurances 20,828,128.08 14,730,641.48 6,097,486.60 3.Compensations for the cancellation of 6,776,160.00 6,776,160.00 - the labor relationship Total 27,658,657.03 120,000.00 21,561,170.43 6,217,486.60

Note: The closing balance of social insurances is the accrued amount of Xingye Paper in 2007 for 1999 to 2007 owned, which haven’t been confirmed by the organization of Social Insurances.

(20) Taxes payable Taxes Closing balance Opening balance

Value added tax -46,893.39 43,075,086.52 Business tax - 125,249.50 Enterprise income tax - 8,593,107.08 Housing property tax 952,985.22 2,959,338.13 Individual income tax 12,176.28 692,285.76 Land use tax 4,340,876.20 6,253,566.94 Others - 3,282,940.09 Total 5,259,144.31 64,981,574.02

Note: ① RMB 15,372,537.49 taxes was paid according to the parent company’s restructuring program approved by the Chengde Intermediate People’s Court in Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 on 30 December 2008. RMB 56,970.22 taxes was paid and the restructuring profit RMB 15,094,080.82 was recognized according to the approved agreement of subsidiary Xingye Paper by Chengde Intermediate People’s Court in Civil Judge Letter of (2008)Cheng Min Po Zi 13-3 on 10 May 2008. ② After making up the loss for the previous year, there is no income tax needed to pay for the profit before tax of the period, but the event and deducting the loss of the disposed assets before tax are yet to be approved by the Tax Authority. (21 ) Interest payable Item Closing balance Opening balance Interest of the long term loan repaid with interest in equal periodic payments Bond interest Short term loan interest - 270,261,883.18

107 Total - 270,261,883.18

Note: The Company recognized the restructuring profit and paid the interest according to the parent company’s restructuring program approved by the Chengde Intermediate People’s Court of Hebei province in Civil Judge Letter of (2008) Cheng Min Po Zi.9-2 on 30 December 2008 and the approved agreement of subsidiary Xingye Paper by Chengde Intermediate People’s Court in Civil Judge Letter of (2008)Cheng Min Po Zi 13-3 on 10 May 2008. (See Notes 5(16) )

(22) Other payables a. Information of other payables Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 188,705,699.51 98.02% 8,383,047.08 14.70% 1 to 2 years 2,178,419.79 1.13% 21,274,179.05 37.30% 2 to 3 years - - 22,284,526.94 39.07% Over 3 years 1,626,137.44 0.85% 5,092,775.32 8.93% Total 192,510,256.74 100.00% 57,034,528.39 100.00%

Note: ① The Company recognized the restructuring profit and settled the debt according to the parent company’s restructuring program approved by the Chengde Intermediate People’s Court of Hebei province in Civil Judge Letter of (2008) Cheng Min Po Zi.9-2 on 30 December 2008 and the approved agreement of subsidiary Xingye Paper by Chengde Intermediate People’s Court in Civil Judge Letter of (2008) Cheng Min Po Zi 13-3 on 10 May 2009, RMB 2,765,444.07 debt was settled. ② RMB 44,000,000.00 was the loan from natural person in the balance year ended.

③The balance at the end of the year includes RMB 3,531,084.53 of the accrued loan interest of subsidiary Rongyida. b. Other payables belongs to the shareholders who hold 5% or more than 5% voting rights or related parties Item Closing balance Opening balance

Dahua Paper 1,177,216.37 58,860,818.27 Total 1,177,216.37 58,860,818.27

Note: The decrease is the restructuring profit recognized. c. The large amount of other payables over 1 year aging is the account of associate Dahua Paper Industry RMB 1,177,216.37 and the imposed fine 2,118,395.79 transferred from predictable

108 liability.

d. Description for the principle amount of other receivables Unit Closing balance Type Aging Chengde Relocating Leader Team Office 57,504,370.00 Loan Within 1 year Trustee in Bankruptcy of Fashion Company 26,410,000.00 Loan Within 1 year Liyan 22,590,000.00 Loan Within 1 year Trustee in Bankruptcy of Banhe Fibre 19,750,000.00 Loan Within 1 year Chengde Financial Bureau 16,629,895.47 Loan Within 1 year Shanghai mineral energy electric 12,000,000.00 Loan Within 1 year Trustee in Bankruptcy of Xiaban City Fibre 8,760,000.00 Loan Within 1 year Litianhong 8,000,000.00 Loan Within 1 year Zhangxiaoming 6,500,000.00 Loan Within 1 year Chenliping 5,000,000.00 Loan Within 1 year Hebei Senior People’s Court 2,118,395.79 Fine 1-2 years Dahua peper 1,177,216.37 Trade accounts Over 3 years Tanliang 1,000,000.00 Loan Within 1 year Qianzhenlin 910,000.00 Loan Within 1 year

(23 ). Long term payables Item Closing balance Opening balance Accounts for equipment of Century Win International Holding - 95,450,000.00 Total - 95,450,000.00

Note: The Company should pay RMB 95,450,000.00 back to Century Win International Holding Ltd. The beginning balance of long term payables is the accounts payable to the related party RMB 95,450,000.00 due to the equipment value for Century Win International Holding Ltd. Actual investment is higher than subscriber capital The Company recognized the restructuring profit fully according to the approved agreement of subsidiary Xingye Paper by Chengde Intermediate

People’s Court in Civil Judge Letter of (2008) Cheng Min Po Zi 13-3 on 10 May 2008. (24) Special payables Item Opening balance Increase Decrease Closing balance notes

Environment subsidiary 10,500,000.00 10,500,000.00 Chengde Financial Bureau 9,151,018.03 9,053,018.00 98,000.03 Total 19,651,018.03 9,053,018.00 10,598,000.03

Note: ① The amount of RMB 10,500,000.00 is the volunteer allowance from Chengde Financial Bureau.

109 ② The Company reduced the special payables RMB 53,018.00 and recognized the restructuring profit according to the Company’s restructuring program approved by the Chengde Intermediate People’s Court of Hebei province in Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 on 30 December 2008. ③ The Company reduced the special payables RMB 9,000,000.00 for the bankruptcy of subsidiary. (25) Estimated Liability

Item Opening balance Increase Decrease Closing balance Penalty 2,118,395.79 2,118,395.79 Total 2,118,395.79 2,118,395.79

Note: The opening balance is the amount of fine RMB 2,118,395.79 to settle which was calculated based on 3.082% of ordinary debt according to the criminal judgment (2008) Shi Xing Chu Zi No.48 of the Intermediate People's Court of Shijiazhuang in Hebei province on 25 February 2009. The decrease for the period is the amount transferred to other payables according to the criminal ruling (2009) Ji Xing Er Zhong Zi No 44 about maintenance of criminal judgments (2008) Shi Xing Chu Zi No.48 of the Senoir People's Court of Hebei province on 23 April 2009. (26) Paid in capital Increase and decrease Opening balance Issued stock Bonus Reserve Closing balance Others Sub-total newly share transferred share Total of 706,320,000.00 706,320,000.00 shares

Note: The registered capital of the Company before capital increase is RMB 438,600,000.00, which has been verified by Price Waterhouse Coopers Certified Public Accountants and reported in the Capital Verification Report coded Pu Hua Yong Dao Yan Zi [2003] 149. Upon the approval document No. [2004] 101 issued by the China Securities Regulatory Commission in July 2004, the Company increases its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures

110 for the change of business registration were not carried out completely. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. The issuance of mentioned above shares has not been verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. (27) Capital reserve Item Opening balance Increase Decrease Closing balance Share premium 391,996,587.96 391,996,587.96 Equity rights investment provision 1,399,556.41 1,399,556.41 Other capital surplus 2,575,000.00 2,575,000.00 Total 395,971,144.37 395,971,144.37

(28 ) Surplus reserve Item Opening balance Increase Decrease Closing balance Mandatory surplus reserve 76,791,550.17 76,791,550.17 fund Total 76,791,550.17 76,791,550.17

(29 ) Retained Earnings Rate of withdrawing Item Amount and allocating Retained Earnings at beginning of the year -1,416,436,100.68 -- Add: Total net profit attributable to parent Company 186,014,467.46 --

Closing balance at the year end -1,230,421,633.22 --

(30) Operating income and operating cost Item Current period Preceding period 1.Main business income 9,270,741.81 2.Other business income 1,861,544.19 operating cost 25,797,698.88 Total -14,665,412.88

Note: There is no operating sales and operating cost influenced by bankruptcy and restructuring for the period.

(31) General and administrative expenses Item Current period Preceding period Staff wages and salaries 1,356,667.33 5,369,848.39 Material consumption 66,316.48 320,253.04 Depreciation expense and production suspend loss 5,794,654.25 29,784,991.99

111 Electricity charge 90,444.57 450,000.34 Social insurance 7,663.25 9,801.65 Service fee for agent 773,500.00 797,071.06 Legal fare 232.00 403,997.00 Business entertainment 67,557.00 1,548,272.30 Tax 3,059,635.33 1,889,116.59 Inventories loss -17,502,909.78 Amortization of intangible assets 3,048,686.98 1,689,139.70 Others 239,443.25 5,206,365.81 Clearing expenses 2,430,097.65 6,348,350.50 Total 16,934,898.09 36,314,298.59

(32) Financial expense Item Current period Preceding period Interest expense 2,041,258.83 200,056,439.44 Less: Interest income 43.95 4,213.71 Other 8,718.98 63,188.07 Total 2,049,933.86 200,115,413.80

(33 ) Impairment loss / gain Item Current period Preceding period Bad debt loss 12,054,389.38 67,222,246.85 Inventory impairment loss -6,597,120.98 Provision for long-term investment 736,355,310.93 100,000,000.00 Fixed asset impairment loss 139,607,678.19 Intangible asset impairment loss 19,670,971.87 Total 748,409,700.31 319,903,775.93

Note: ① The provision for bad debt accrued is RMB 12,054,389.38. ② RMB 641,355,310.93 provision for long term investment fully accrued for the bankruptcy of subsidiaries Xiaban City Textile and Fashion Company. ③ The company revalued carry amount of the long term investment to Dahua Paper Industry Co., Ltd and accrued the impairment provision RMB 95,000,000.00 upon the revaluation. (34) Investment income a. Details for Investment income Item Current period Preceding period

Long term Investment income for costing method Long term Investment income for equity method Disposal income of long term Investment

112 Income from holding transaction financial assets Income from holding held-to-maturity investment Income from holding available-for-sale financial assets Disposal income of transaction financial assets Disposal income of held-to-maturity investment Disposal income of available-for-sale financial assets Other 618,834,602.04 Total 618,834,602.04

Note: The amount of current period is the results of operating activities of bankrupt subsidiaries reversed.

(35) Non-operating income Item Current period Preceding period Debt restructuring gains 829,105,872.23 1,056,972,999.81 Profit recognized under the same control 5,546,001.97

Benefits from exempt liabilities 1,688,493.61 50,000,000.00 Others 7,294,378.92 477,661.98

Fixed asset inventory surplus 300,000.00 Total 843,634,746.73 1,107,750,661.79

Note: ① The Company recognized the restructuring profit for RMB 829,105,872.23 according to the parent company’s restructuring program approved by the Chengde Intermediate People’s Court of Hebei province in Civil Judge Letter of (2008) Cheng Min Po Zi.9-2 on 30 December 2008 and the approved agreement of subsidiary Xingye Paper by Chengde Intermediate People’s Court in Civil Judge Letter of (2008) Cheng Min Po Zi 13-3 on 10 May 2009. ② The shareholder of the Company Chenrong transferred 100% of the share to the Company for RMB 1 on 27 July 2009. The consolidating profit RMB 5,546,001.97 under different control was recognized. ③ The profit of debt exemption is the debt profit of the controlled shareholder Chenrong for RMB 1,680,000.00. ④ Others include RMB 5,010,641.85 the trading difference of fixed assets reversed for the disposal of assets before and the difference RMB 1,573,450.73 resulted from reconciliation of deposit in bank . (36) Non-operating expense Item Current period Preceding period

113 Non current asset disposal loss 78,908,837.79 Fixed asset disposal loss 42,831,540.51 Intangible asset disposal loss 34,067,684.73 Long term prepaid expense disposal loss 2,009,612.55 Debt restructuring loss Expenses for fines 51,820.50 Penalty expenses 2,118,395.79

Others 286,542,971.88 161,816,150.25 Total 365,451,809.67 163,986,366.54 Note:

① The Company recognized the loss for auctioned fixed assets and fine RMB 42,831,540.51 and intangible assets RMB 34,067,684.73 according to the parent company’s restructuring program approved by the Chengde Intermediate People’s Court of Hebei province in Civil Judge Letter of (2008) Cheng Min Po Zi.9-2 on 30 December 2008 and the verdict letter by Chengde senior People’s Court in (2009) Ji Xing Zhong Zi No.44 .on 23 April 2009. ② Others include the loss for auctioned and written-off accounts receivable RMB 284,620,206.50 and the difference RMB 1,921,715.38 resulted from reconciliation of deposit in bank . (37 ) Income tax Tax Current period Preceding period Tax calculated based on taxation law and related rules for the current period Adjustment of deferred taxes 129,296,999.88 217,838,869.49 Total 129,296,999.88 217,838,869.49

Note: see note5-13. (38 ) The calculating method of Basic earnings per share and diluted earnings per share

Current period Preceding period Net profit attrubutable to common shareholders of the company P0 186,014,467.46 176,403,180.59 Influence of diluted potential ordinary stock The number of shares at the period-begin S0 706,320,000.00 706,320,000.00 Increased shares due to transferring of capital reserve or dividends distribution during the reporting period S1 Increased stock due to issuance of new shares or debt-to-equity swap during the reporting period Si Stock decreased for repurchase during the reporting period Sj Amount of split-share during the reporting period Sk Number of months during the reporting period M0

114 Number of months from the next month to the end of the reporting period for increase of shares Mi 12 12 Number of months from the next month to the end of the reporting period for decrease of shares Mj The total amount of share year ended 706,320,000.00 706,320,000.00

Increased shares due to stock warrant 、Stock option 、convertible bonds Sl Number of months during the reporting period M0 12 12 Number of months from the next month to the end of the reporting period for increase of shares Mk The weighted average amount of ordinary shares increased due to warrant 、share option 、convertible bonds =Sl×Mk÷M0 The weighted average amount of ordinary shares outstanding S=S0 ＋S1 ＋

Si×Mi÷M0 －Sj×Mj÷M0 －Sk S 706,320,000.00 706,320,000.00 Basic earnings per share =P0÷S 0.26 0.25 Diluted earnings per share=(P0+influence of diluted potential ordinary stock)/(S+ The weighted average amount of ordinary shares increased due to warrant 、share option 、convertible bonds 0.26 0.25

(39) There is no other comprehensive profit for the current period. (40) Notes to cash flow statement a. Cash receipts relating to other operating activities Item Amount Payments or receipts 3,280,501.96 Interest income 43.95 The difference resulted from reconciliation of deposit in bank 1,573,450.73 Total 4,853,996.64

b. Cash payments relating to other operating activities

Item Amount Clearing expenses 6,530,097.65 Material consumption 66,316.48 Electricity charge 90,444.57 Social insurance 7,663.25 Service fee for agent 773,500.00 Legal fare 232 Business entertainment 67,557.00 Others 259,764.08 Difference of deposit in bank 1,921,715.38 Payments or receipts 772,243.78 Total 10,489,534.19 c. There is no cash received relating to other investment activities for the period.

115 d. There is no cash payments relating to other investment activities for the period.

e. There is no cash received relating to other financing activities for the period. f. There is no cash payments relating to other financing activities for the period.

(41) Supplemental information of cash flow statement a. Supplemental information: Supplemental information Current period Preceding period 1. Adjustments to reconcile net income to net cash provided by operating activities: Net profit 200,326,006.96 154,922,534.56 Add: Impairment provision for assets -834,107,127.82 259,278,650.06 Depreciation of fixed assets, consumption & depreciation of fuel and gas, depreciation of production materials 5,794,654.25 27,920,977.32 Amortization for intangible assets 3,048,686.98 4,074,040.76 Amortization for long-term prepayment 48,327.36 Loss on disposal of fixed assets, intangible assets and others long-term assets 78,908,837.79 Loss upon rejection of fixed assets Loss on variance of fair value Finance cost 2,041,258.83 200,115,413.80 Loss on investment Decrease of deferred tax assets 129,296,999.88 217,838,869.49 Liability increase of deferred tax Decrease of inventories -10,918,268.13 45,356,356.93 Decrease of operating receivable account items 117,813,630.92 287,651,188.68 Increase of operating payable account items 10,773,687.95 -118,872,545.20 Others 290,102,534.12 -1,083,103,523.24 Net cash flow from operating activities -6,919,098.27 -4,769,709.48 2. Significant investing and financing activities for non cash items: Liabilities capitalized Convertible bonds payable mature in one year Financing leased fixed assets 3. Net increase (decrease) for cash and cash equivalents: Ending balance for cash 58,256.11 447,257.73 Decrease: beginning balance for cash 447,257.73 6,316,017.15 Increase: ending balance for cash equivalents Decrease: beginning balance for cash equivalents Net increase (decrease) in cash and cash equivalents -389,001.62 -5,868,759.42

b. Information of new acquired and disposal of subsidiaries and other operating units Item Current period Preceding period

1.Information of new subsidiaries and other operating units

116

1). The cost of new subsidiaries and other operating units 1.00

2).Cash and cash equivalent paid for new subsidiaries and other operating units 1.00 Minus ： Cash and cash equivalent hold by new subsidiaries and other operating units 5,153.06

3).Net cash from new subsidiaries and other operating units -5,152.06

4).Net asset from new subsidiaries 5,546,002.97

Current asset 12,214,426.06

Non-current asset 88,196,905.00

Current liability 94,865,328.09 Non-current liability 2. Information for disposal of subsidiaries and other operating units 1). The price of subsidiaries and other operating units disposed 2). Cash and cash equivalent received by disposal of subsidiaries and other operating units Minus ：Cash and cash equivalent hold by new subsidiaries and other operating units 3).Net cash by disposal of subsidiaries and other operating units 4).Net asset of disposed subsidiaries Current asset Non-current asset: Current liability Non-current liability

c. Cash and cash equivalent Item Closing balance Opening balance

1.cash 58,256.11 447,257.73 Cash 12,639.38 Deposit in bank available to pay 58,256.11 434,618.35 Other monetary cash in bank available to pay Deposits and required reserve in central bank available to pay Deposits in other banks Inter-bank money 2.Cash equivalent Bond investment Due within three months 3.Net cash and cash equivalent 58,256.11 447,257.73

(42) Note to changes of owner’s equity statement

117 Changes of owner’s equity is resulted from net profit only. See note 5-29.

6. ACCOUNTING TREATMENT OF ASSET SECURITIZATION

There is no securitization transaction for assets.

7. RELATED PARTIES AND RELATED PARTY TRANSACTIONS (1 ) Information of the parent company

There is no parent company directly controlled for the company. The related parties which being relationship of control is the controlled shareholder Chenrong which hold 29.49% share of the

Company. (2) Information of the subsidiaries Rate of Name of Types of Types of Registered Legal Type of Registered Rate of Organization share(% subsidiaries subsidiries company place Person business capital vote(%) code ) Hebei Xiaban Wholly Limited Shuxia Clothes Chengde $4000000 100% 100% 60126026-2 City Textile owned liability n Wang producing Chengde Dixian Wholly Limited Shuxia Clothes Chengde $24000000 100% 100% 60126040-6 fashion owned liability n Wang producing Chengde Xingye Wholly Limited Shuxia Paper Chengde $10,0000000 75% 75% 60125211-5 Paper Industry owned liability n Wang producing Chengde Banhe Wholly Limited Shanxi Clothes Chengde $6,0000000 65% 65% 74341034-2 Fiber Textile owned liability ahuisi producing Gold Axe Yingshu Wholly Limited Investment Weijing Export $1 100% 100% owned liability Group Island Waste paper Chengde Huaxin Wholly Limited Sulian recycling RMB waste paper Chengde 90% 90% 74544580-5 owned liability Xu and 1000000 collection processing Chengde rongyida Real Limited Rong Estate RMB Chengde 100% 100% 68434235-0 Estate Wholly liability Chen development 10000000 development owned

(3) Information of associates and joint ventures Compa Type Rate Rate Orga Regis Regist Closing Closing Closing opera ny Type of Legal of of of net Relations nizat tered ered balance balance of balance of ting investe company person busines share( vote( profit hip ion place capital of asset liability net asset sales d s %) %) cod- 1.Assoc iates 2.Joint

118 venture s

Affiliate Suning Hebei Limited Wangzh Produc $2900 23,456, 69,755,786. 46,299,575 d Banhe Sunin 20% 20% - liability ensong ing 0000 210.61 34 .73 Compan Fibre g y

Chengd Affiliate e Limited Chen Wangzu Produc $1000 d - - Beirifan liability gde xian ing 000 Compan g y Chengd Affiliate 63640 e Limited Chen Wangzu Produc 266,969 266,345,32 d 00000 45% 45% 624,579.62 - - Dahua liability gde xian ing ,909.27 9.65 Compan JPY Paper y Affiliate Dixian Limited Chen Wangzh Produc $8000 d Light - - liability gde onglai ing 000 Compan Rail y

(4) Other related parties: Name of related parties Relationship with the Company

Japan New Century Shareholder of holding subsidiary’s associated Company

Century Win International Holding Shareholder of subsidiary

Chengde Beirifang Joint Venture with 50% of equity

Dahua Paper Industry 45% of equity participation

Suning Banhe Fibre Textile 20% of equity participation

(5 ) Transactions of related parties a. Equipments leased The subsidiary of the Company, Chengde Banhe Fibre Textile Co., Ltd. leased 215 sets of equipments to Suning Banhe Fibre Textile Co., Ltd. without lease contracts in the year of 2006.

However, due to smuggle, the production of Suning Banhe Fibre Textile Co., Ltd. did not start up and the equipments rent expenses are unpaid. b. Other Transactions of related parties The controlling shareholder of the Company Chenrong transferred 100% share of Rongyida Real Estate Development Company to the Company for RMB 1 on 27 July 2009. On the very day, the owner’s equity of Rongyida was RMB 5,546,002.97 and the Company recognized a non-operating revenue RMB 5,546,001.97 in the consolidated statement . (6) Amounts receivable from and payable to related parties Item Related parties Closing balance Opening balance

119 Account receivables Japan New Century - 7,044,666.04 Account receivables LingFeng Textiles (ShenZhen) - 381,767.91 Account receivables Banhe Fibre Textile - 7,102,764.69 Advances to suppliers Banhe Fibre Textile - 25,000,000.00 Advances to suppliers Japan New Century - 56,453,443.24 Other payables Japan New Century - 30,792,000.00

Other payables Suning Banhe Fibre Textile 13,312.00 4,685,985.28 Other payables Dahua Paper Industry 44,196,901.26 44,182,431.26 Other payables Fashion Company - 117,272,855.08 Other payables Banhe Fibre Textile - 28,120,367.33 Other payables LingFeng Textiles (ShenZhen) - 80,824,254.97 Other payables Dahua Paper Industry 1,177,216.37 58,360,818.27 Other payables Xiaban City Textile - 455,829,494.30 Other payables Century Win International Holding - 95,450,000.00

Note: Auction is the main reason for derecognizing of accounts receivable of related party. The decrease of other payables is the restructuring profit and debt settlement recognized according to restructuring plan and agreement, the amount of debt settled is RMB 296,013.90 (Shenzhen Lingfeng), other decreases are the profit recognized.

8. SHARE-BASED PAYMENT There is no Share-based payment for the period.

9. CONTINGENCIES There is no contingency for the period.

10. COMMITMENT As to 31 December 2009, Capital expenditures which was contracted and of no necessary to recognize in the financial statements are as follows:

Item Closing balance Opening balance

Invested in joint stock Company －Dahua Paper Industry - -

Invested in holding Company －Banhe Fibre Textile 8,439,024.71 8,439,024.71

Invested in Joint Venture －Beirifang 4,035,100.00 4,035,100.00

Invested in holding Company －Dixian Light Rail 48,421,200.00 48,421,200.00

120 Total 60,895,324.71 60,895,324.71

Dahua Paper Industry Co., Ltd. was founded as a joint venture Company invested by Nippon

Paper Industries Co.Ltd .The registered capital was USD 5,000,000 when founded. Upon approval coded Ji Shang Wai Zi [2004] No.41 issued by the Hebei Province Ministry of Commerce, Dahua

Paper Industry Co., Ltd. has increased the total investment from USD 5,000,000 to JPY 6,364,000,000 and the registered capital increased to JPY 6,364,000,000. The investment of the

Company has increased to JPY 2,864,000,000, accounting for 45 ％ equity. On 24 June 2005, Nippon Paper Industries Co., Ltd and Japan New Century Co.Ltd have agreed the share-transfer contract, which indicated that Nippon Paper Industries Co. Ltd transferred 55 ％ equity of Dahua Paper Industry Co., Ltd. to Japan New Century Co. Ltd The above alteration has approved by the

Hebei Province Ministry of Commerce. Dahua Paper Industry Co., Ltd. obtained new business license due to rename. On 29 June 2005, the Company agreed the share-transfer contract and transferred 45% equity of Dahua Paper Industry Co., Ltd. to Xinye Papermaking Co., Ltd. As to 31 December 2006, Xingye Papermaking Co. Ltd. has contributed capital to Dahua Paper Industry Co., Ltd. with RMB 206,215,729.65. And Dahua Paper Industry Co., Ltd was cancelled its licenses on 28 April 2009 by Chengde Industrial and Commercial Bureau as a reason of not submitting the annual inspection material of 2007. Banhe Fiber Textile is invested by Dixian Fashion and Yamashita Shoji Co., Ltd. invested 35% and 65% shareholding respectively and the registered capital was USD 15,000,000. Upon approval coded Ji Wai Jin Mao Zi Zi [2003] No.37 issued by the Hebei Province Ministry of Commerce on 24 March 2003, the Banhe Fiber Textile increase the registered capital of from USD 15,000,000 to USD 60,000,000 on 7 July 2003. Xiaban City Textile then joined as a new shareholder. The distribution of shareholding then became Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 20%, 55% and 25% respectively. Up to 31 December 2006, Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB 114,890,975.29 respectively, therefore the rest capital of RMB 8,439,024.71 should be invested. The Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Beifang Textile Co., Ltd, however, both Companies has been revoked business licenses on 27 March 2008.

121 11. EVENTS AFTER THE BALANCE SHEET DATE

There is no adjustment matters after the Balance Sheet Date which need to be disclosed.

12. OTHER MATERIAL EVENTS (1) Debt restructuring

a. On 1 November 2008, the creditor of Chengde Xingchen Architecture Fixing company limited submitted its application for bankruptcy to Chengde Intermediate People's Court of Hebei province. And the court approved it on 10 November. In the ruling of 2008 Cheng Ming Po Zi 9-2 from Chengde Intermediate People's Court of Hebei province, the restructuring plan (draft) was approved and the restructuring procedures ended. According to the plan, the Company disposed the assets which vendible and repaid the restructuring expense and its debts .On 27 April 2009, Chengde Intermediate People's Court of Hebei province confirmed the debt settlement of restructuring plan had been finished in 2008 Cheng Ming Po Zi 9-5. b. On 8 December 2008, Chengde Intermediate People's Court of Hebei province confirmed to accept the application of Chengde Yonghe Concrete company limited for liquidation in the ruling of 2008 Cheng Ming Po Zi No.13. On 11 March 2009, the court approved the application in ruling 13-2 and confirmed the agreement of Xingye Paper with its creditors in ruling 13-3 on 10 May 2009. After that, the agreement procedures was ended. (2) Corporate consolidation The dominant stockholder of the Company Rongyida Co., Ltd transferred 100% of its share to the Company for RMB 1. After the transfer, Rongyida became the wholly owned subsidiary of the Company. Rongyida was built by Wangfei and Chenliping on 20 February 2009 with registered capital RMB 10,000,000. On 27 July 2009, Wangfei and Chenliping and the two shareholders signed the Equity Transfer Agreement with Chenrong to transfer their equity for RMB 9,000,000 and RMB 1,000,000. The same day, Chenrong sold it to the Company for 1. On the day transferred the owner’s equity of Rongyida was RMB 5,546,002.97 and the Company recognized a non operating revenue RMB 5,546,001.97 in the consolidated statement. The procedures of equity change hasn’t been finished yet. (3) Others a. South Security Stock limited company (hereafter referred to as South Security) and its

122 subsidiaries South Security HK Co., Ltd hold 10,884 shares of the Company. In June 2009, the liquidation team of South security reached an agreement with the People’s government of Chengde to transfer 108,440,000 unit of the share for HK$ 76,188,000 after being approved by Shenzhen

Intermediate People's Court and the voting opinion of chairman committee of South Security. What the government did is aimed at saving the company and to push forward the constructing.

According to the present policies, the government and the domestic organization are forbidden to hold the share, so the government of Chengde consigned 5 people to hold instead, including

Tianyun Li, Zhenlin Qian, Yan Chen, Jiang Xu and Haihong Zhou. b. On 8 February 2009, according to the ruling of Chengde Intermediate People's Court (2008)

Cheng Min Po Zi 10-1, (2008) Cheng Min Po Zi 11-1 and (2008) Cheng Min Po Zi 12-1, (2008), Chengde Banhe Fiber Co., Ltd , Chengde Dixian Fashion Co., Ltd and Hebei Xiaban City Textile Co., Ltd were bankrupt respectively. c. On 4 January 2008, Shijiazhuang People's Procuratorate of Hebei Province sued to the Shijiangzhuang Immediate People’s Court for the following reaons: Chengde Dixian Textile Company Limited set up 7 falsehood foreign investment Companies of “Chengde Banhe Fiber”, “Dixian Light rail”, “Xingye Papermaking”, “Dixian Fashion”, “Suning Meihua”, “Suning Puhua” and “Suning Leiyi” to escape tax of RMB 68,734,451.21 by pretending common import goods to foreign investment import equipments. The above action offended criminal law of China and should be penalty for smuggling common goods. On 25 February 2009, Shijiangzhuang Immediate People’s Court sentenced Chengde Dixian Textile Company Limited criminal of smuggling common goods and fined RMB 68,734,451.21. All relevant goods should be turned in to treasury. Shuxian Wang appealed to the Advance People’s Court of Hebei Province during the legal period. The Court rejected the appeal and sustain the original judgment according to verdict letter of (2009) Ji Xing Er Zhong Zi No. 44 on 23 April 2009. The ruling was the final order.

13. NOTES TO THE MATERIAL EVENTS OF PARENT COMPANY FINANCIAL STATEMENT (1) Accounts receivables a. Accounts receivables disclosed based upon types

123 Closing balance Opening balance

Bad debt Book balance Book balance Bad debt provision provision Item Rate Rate Amou in Amou in Rate in Rate in total Amount Amount nt total nt total total (%) (%) (%) (%) 1. Individual accounts - - - - 134,571,285.86 97.40% 122,910,623.44 97.60% with large amount 2. Individual accounts without large amount but with major risk after - - - - 1,055,500.36 0.76% 1,055,500.36 0.84% integrated into credit risk combination 3. Others with small - - - - 2,535,920.15 1.84% 1,964,635.21 1.56% amount Total - - - - 138,162,706.37 100% 125,930,759.01 100%

Note: ① The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. ② The accounts receivable with book balance RMB 136,452,770.37 and its provision RMB 125,492,771.81 was auctioned in the period. Rongyida Co., Ltd purchased it for RMB 51,420.17 on 8 April 2009.(referred to auction confirmation ruling Ji Sheng Pai Zi 20090408 No.1). All loss for the auction is RMB 10,908,578.39. ③ Except for auction right of credit, the Company wrote off the accounts receivable for RMB 2,189,936.00 which were over 3 years aging and expected no recovery (provision for RMB 437,987.20 had been accrued before that), the whole auction made loss for RMB 1,751,948.80. b. There is no provision accrued for individual accounts with large amount or without large amount but impairment tested singly. c. There is no accounts receivable which have been accrued fully or high rate provision before the beginning of the year and reversed this year. d. There is no accounts receivable reversed by restructuring or by other ways. e. Accounts receivable written-off Nature of accounts The amount Related Name of the companies Reason for Written-off receivable Written-off parties(yes/no) Uncollectible for over 3 Shanghai Tianbiao Trade accounts 2,085,936.00 no years Weichang Jiuyuan Uncollectible for over 3 no Trade accounts 54,000.00 architecting Advisory years

124 company Chengde Construction Uncollectible for over 3 no Trade accounts 50,000.00 Prospecting years Total 2,189,936.00

Note: Items above were expected no recovery for over 3 years aging.

f. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights.

g. Accounts receivable derecognized Item Amount written-off Loss written-off

Yufa company 79,114,550.26 - Korea Gaozhisha 11,391,123.66 - Chengde Improt and Export company 4,814,258.69 3,833,337.61 Lanyan Group 8,000,000.00 - New Century 7,044,666.04 - Japan Tianbiao 5,757,806.51 - Chengde Banhe clothe tax 5,713,083.85 2,843,140.11 Antianxiushan 3,724,953.90 - Shaoxing Office 2,715,275.09 2,162,028.84 Fumian Company 1,652,254.33 - Chengde Banhe Fibre tax 1,389,680.84 1,106,528.79 Yecun Trading 1,167,696.69 - CAL 934,026.16 - Jieweiying 696,995.62 - Longbing 416,950.18 - Hangzhou Bafu Fabirc 398,159.12 198,145.55 Changzhou Office 364,267.61 181,279.30 Beizi 297,926.90 - HK Ride 631,772.00 503,046.37 Lvchanghai 62,871.00 - Jiuyuan Clothes 48,240.00 38,410.94 Tianjing Taida 48,145.20 - Suning Meihua Fabric 46,858.72 37,311.10 Japanese School 10,750.00 5,349.78 Yitengzhong 10,458.00 - Total 136,452,770.37 10,908,578.39

Note: The above accounts receivable was wrote off by auction. h. There is no securitisation transaction for accounts receivable. (2) Other receivables a . Other receivables disclosed upon types

125 Closing balance Beginning balance Item Book balance Bad debt provision Book balance Bad debtprovision Rate in Rate in Rate in Amount Amount Rate in total Amount Amount total total total 1.Individual accounts 64,521,111.50 99.90% 20,084,632.25 99.98% 604,182,639.89 98.84% 158,066,671.52 98.57% with large amount 2.Individual accounts without large amount but with major - - - - 978,940.30 0.16% 978,940.30 0.61% risk after integrated into credit risk combination 3. Others with small 66,085.13 0.10% 3,762.92 0.02% 6,118,110.30 1.00% 1,310,889.92 0.82% amount Total 64,587,196.63 100.00% 20,088,395.17 100.00% 611,279,690.49 100% 160,356,501.74 100%

Note: ① The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. ② The other receivable of parent company with book balance RMB 463,302,414.81 and its provision RMB 119,626,278.88was auctioned. Rongyida Co., Ltd purchased it for 740,385.06 on 8 April 2009 (referred to auction ruling Ji Sheng Pai Zi 20090408 No.1. All loss for the auction is RMB 342,935,750.87. ③ Except for auction right of credit, the Company wrote off the other receivable for RMB 116,074,368.23 which were over 3 years aging and expected no recovery ( provision for RMB 32,464,202.94 had been accrued before that), the whole auction made loss for RMB 83,610,165.29. b. There is no provision accrued for individual accounts with large amount or without large amount but impairment tested singly. Provision for Content Book balance bad debt Rate accrued Reason for accruing Xiaban City Bureau of Finance 40,169,264.50 20,084,632.25 50% 2-3 years aging

126 Total 40,169,264.50 20,084,632.25 - -

c. There is no other receivable which have been accrued fully or high rate provision before the beginning of the year and reversed this year. d. Accounts receivable written-off Related Name of company Type Amount written-off Reason for written-off parties(yes/no) Payments or Uncollectible for over 3 Shenzhen Lingfeng 40,000,000.00 No receipts years Payments or unable to recover for Xiaban City 29,910,159.32 Yes receipts debtor’s bankruptcy Payments or unable to recover for Banhe Fibre 23,086,078.03 Yes receipts debtor’s bankruptcy Payments or Uncollectible for over 3 House accounts 12,206,028.10 No receipts years Payments or unable to recover for Fashion company 5,976,371.12 Yes receipts debtor’s bankruptcy Payments or Uncollectible for over 3 No Deposit in bank 1,782,324.22 receipts years Payments or Uncollectible for over 3 No Court 1,339,177.55 receipts years Payments or Uncollectible for over 3 No Other monetary items 593,569.16 receipts years Payments or Uncollectible for over 3 No Shenzhen Dahua Tiancheng 500,000.00 receipts years Payments or Uncollectible for over 3 No Chengde Principle Construction 200,000.00 receipts years Payments or Uncollectible for over 3 No Staff Warming Fee 117,203.00 receipts years Payments or Uncollectible for over 3 No Financial Bureau 59,302.27 receipts years Payments or Uncollectible for over 3 No Chengde Xuangua 50,000.00 receipts years Payments or Uncollectible for over 3 No Shijiazhuang Xuri Airline Advisory 48,000.00 receipts years Payments or Uncollectible for over 3 No Hubei Senior Court 30,500.00 receipts years Payments or Uncollectible for over 3 No Shenzhen Security Centre 29,914.40 receipts years Shenzhen Xingyahui Payments or Uncollectible for over 3 No 25,000.00 Advertisement receipts years Payments or Uncollectible for over 3 No Others with small amount 120,741.06 receipts years Total 116,074,368.23

127 Note:

Other small amount items is defined as less than RMB 20,000.00, 19 items included. Items above were expected no recovery for over 3 years aging and unable to reach the contact with the debtors. e. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. f. The big amount of other receivable is land account for intangible asset temporarily.

g. Information for 5 biggest amount of other receivables Rate to the total Name Relationship Amount Age of others(%) Xiaban City Bureau of Finance, Superviser 40,169,264.50 2-3 years 62.19% Rongyida Co., Ltd Subsidiary 24,351,847.00 within 1 year 37.70% Electricity supplying -- 32,037.98 within 1 year 0.05% Shibainian Staff 14,500.00 within 1 year 0.02% Suning Banhe Fibre Associate 13,312.00 within 1 year 0.02% Total -- 64,580,961.48 -- 99.98% Note: The subsidiary Rongyida Co., Ltd has borrowed RMB 73,351,847.00 from the bankruptcy supervisor from April to December in 2009. RMB 49,000,000.00 of that has been settled, the left not. h. Other receivables of related parties

Name Relationship Amount Rate to the total of others(%) Rongyida Co., Ltd Subsidiary 24,351,847.00 37.70% Suning Banhe Fibre Associate 13,312.00 0.02% Total -- 24,365,159.00 37.72%

i. Other accounts derecognized Item Amount derecognized Loss for derecognizing

Xingye Paper 159,893,470.23 159,893,470.23 Fashion Company 113,306,096.51 112,774,507.16 Japanese Paper Making 58,360,818.27 - Jinfu Company 50,643,321.00 50,527,575.39 Shenzhen Lingfeng 6,774,283.24 - New Century 30,792,000.00 - Banhe Fibre 13,024,898.03 - Dachen Paper Industry 9,280,976.93 7,389,947.28 Financial Bureau 9,184,470.01 4,570,689.98

128 Suning Banhe Fibre 4,588,899.78 3,653,896.32 Suning financial Payment Centre 2,000,000.00 995,308.38 Lanwenzhi 1,459,318.92 1,161,977.88 Hebei Suning Financial Bureau 1,000,000.00 497,654.19 Dixian Light Rail Co., Ltd. 635,099.53 - Shibainian 497,535.81 396,161.25 Chenmeizhu 319,058.44 254,049.23 Huoxueyan 182,404.32 172,471.12 Mengxueyan 174,069.00 - Shibainian(rotate fund) 159,735.00 127,188.47 Lidongming 111,877.40 105,784.89 Wanghuilai 101,379.85 95,859.00 Jiandongzhi 100,000.00 - Gaoshuming 95,968.55 - Songshiqing 76,357.54 60,799.44 Liufuming 68,108.71 64,399.71 Yibing 64,527.00 - Songshiqiang 58,289.60 46,412.90 Wangyouxiang 50,000.00 - Electricity Bond 50,000.00 -

Zhangqing 48,000.00 45,386.06 Chenzhiguo 32,866.24 26,169.64 Weiguochuan 20,000.00 - Other small amount items 148,584.90 76,042.35 Total 463,302,414.81 342,935,750.87

Note: Other small amount items is defined as less than RMB 20,000.00, 47 items included. The above other accounts was wrote off by auction.

j. There is no securitization transaction for other receivable. (3) Long-term equity investment Reason for Com Increa Rate Cash Accoun Initial Rate of difference Impairm Provision pany Opening se and Closing of bonus ting investment share( of rate of ent accrued for inve balance decrea balance vote( for the method cost %) share 与 provision the period sted se %) period rate of vote

Investment in affiliated Company listed as follows:

129 Suni ng

Ban Cost 46,980,00 46,980,00 46,980,000 46,980,000.00 - 20% - - he method 0.00 0.00 .00 Fibr e 46,980,00 46,980,00 46,980,000 Sub-total 46,980,000.00 - - - 0.00 0.00 .00 2.Investment in subsidiaries as follows:

Fash ion Cost 149,408,2 149,408,2 149,408,23 149,408,230. 149,408,230.11 - 75% 0% bankrupt - com method 30.11 30.11 0.11 11 pany Xiab an Cost 431,604,2 431,604,2 431,604,20 431,604,203. City 431,604,203.41 - 75% 0% bankrupt - method 03.41 03.41 3.41 41 Text ile Xin gye Cost 622,500,0 622,500,0 622,500,000.00 - 75% 75% pape method 00.00 00.00 r Ron Cost gyid 1.00 - 1.00 1.00 100% 100% method a Gol Cost 8,300,000. 8,300,000. d 8,300,000.00 - 100% 100% method 00 00 Axe 1,211,812, 1,211,812, 581,012,43 581,012,433. Sub-Total 1,211,812,434.52 1.00 - 433.52 434.52 3.52 52 1,258,792, 1,258,792, 627,992,43 581,012,433. Total 1,258,792,434.52 1.00 - 433.52 434.52 3.52 52

(4) Operating income and operating cost

Item Current period Preceding period Operating income 4,494,064.24 Operating cost 18,735,669.63 Total -14,241,605.39 Note: There is no operating income and operating cost as a result of bankruptcy and restructuring. (5) Supplemental information for cash flow statement Supplemental information Current period Preceding period 1. Adjustments to reconcile net income to net cash provided by operating activities:

130 Net profit -685,845,647.70 800,030,056.75 Impairment provision for assets 56,097,058.03 62,608,260.78 Depreciation of fixed assets, consumption & depreciation of fuel and gas, depreciation of production materials 2,185,730.49 Amortization for intangible assets 158,945.21 Amortization for long-term prepayment 48,327.36 Loss on disposal of fixed assets, intangible assets and others long-term assets 19,580,185.50 Loss upon rejection of fixed assets Loss on variance of fair value Finance cost 120,656,087.01 Loss on investment Decrease of deferred tax assets 129,296,999.88 -72,051,552.85 Liability increase of deferred tax Decrease of inventories 1,012,716.02 Decrease of operating receivable account items 600,495,955.07 3,622,842.42 Increase of operating payable account items -394,820,110.18 -219,698,913.17 Others 268,316,677.79 -700,357,775.99 net Cash Flows from Operating Activities -6,878,881.61 -1,785,275.97 2. Significant investing and financing activities for non cash items: Liabilities capitalized Convertible bonds payable mature in one year Financing leased fixed assets 3. Net increase (decrease) for cash and cash equivalents: Ending balance for cash 16,900.44 365,685.40 Decrease: beginning balance for cash 365,685.40 3,250,011.31 Increase: ending balance for cash equivalents Decrease: beginning balance for cash equivalents Net increase (decrease) in cash and cash equivalents -348,784.96 -2,884,325.91

(6) There is no counter purchase affairs during the period.

14.SUPPLEMENT INFORMATION (1) Non-operating losses and profits

Item Amount

Losses/gains on disposal of non-current assets -78,908,837.79

Net profit and loss from debt restructuring 829,105,872.23

Net losses/profit from other non-operating items -304,350,725.61 Amount of income tax

Amount of minority interest(after tax) -38,409,535.33

131

Total 407,436,773.50 Note: All non-operating losses and profit are listed for pre-tax.

(2) There is no difference of accounting data resulted from different standards a. There is no difference for net profit and net asset based on international accounting standard and the Chinese Accounting Standards. b. The statements was disclosed based on international accounting standard only , not on others. (3) Return on net assets and Earnings Per Share Weighted average Earnings per share Profit of reporting period Return on net assets Basic earnings per Diluted earnings （%） share per share

Net profit attribute to the shareholders of ordinary share -128.87 0.26 0.26 Net profit for shareholders of Ordinary share after deduction of non-operating losses/profit 153.40 -0.31 -0.31

132 Section XII. Documents for Reference 1. Accounting statements carrying with confirmation and seals of Legal Representative of the Company, Person in Charge of the Financial Affairs and Person in Charge of Accounting Institution 2. Original of Auditors’ Report carrying with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company publicly disclosed on Securities Times and Hong Kong Commercial Daily. The Company will provide timely the above documents for reference provided that China Securities Regulatory Commission or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association.

The Board of Directors of Chengde Dalu Co., Ltd. April 28, 2010

133