LU THAI TEXTILE CO., LTD. ANNUAL REPORT ==2003== Shandong

LU THAI TEXTILE CO., LTD. ANNUAL REPORT (Adjustment based on International Accounting Standards)

==2003==

Shandong · Zibo April 1, 2004

CONTENTS I. IMPORTANT NOTES------2 II. COMPANY PROFILE------2 III. SUMMARY FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT------3 IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS------5 V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES------7 VI. ADMINISTRATIVE STRUCTURE------9 VII. BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING------10 VIII. REPORT OF BOARD OF DIRECTORS------11 IX. REPORT OF SUPERVISORY COMMITTEE------19 X. SIGNIFICANT EVENTS------21 XI. FINANCIAL REPORT (ATTACHED)------23 XII. DOCUMENTS AVAILABLE FOR REFERENCE------23

I. IMPORTANT NOTES The Board of Directors of Luthai Textile Co., Ltd. (hereinafter referred to as the Company) and its directors hereby confirm that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. This annual report is written in both Chinese and English. Should there be any difference in interpretation of the two versions, the Chinese version shall prevail. Mr. Chen Youhan, Mr. Xu Zhinan, Mr. Chen Ruimou and Mr. Wang Yonggui, Director of the Company, were absent from the Board meeting due to some reasons; Mr. Xu Zhinan and Mr. Chen Ruimou entrusted Mr. Liu Shizhen, Chairman of the Board, to vote on them behalf, Independent Director Mr. Wang Yonggui entrusted Independent Director Zhou Zhiji to vote on his behalf, Mr. Chen Youhan did not entrust other to vote. Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers (China) Certified Public Accountants respectively issued the domestic unqualified Auditors’ Report and international unqualified Auditors’ Report for the Company. Chairman of the Board of the Company Mr. Liu Shizhen, Chief Accountant Mr. Su Huasheng and Person in Charge of Financing Ms. Qu Qingfeng hereby confirm that the Financial Report enclosed in the Annual Report is true and complete.

II. COMPANY PROFILE 1. Legal Name of the Company: In Chinese: 鲁泰纺织股份有限公司 In English: LU THAI TEXTILE CO., LTD.

2. Legal Representative: Liu Shizhen

3. Liaison Methods of Secretary of the Board of Directors and Authorized Representative in Charge of Securities Affairs: Secretary of the Board of Authorized representative in Directors charge of securities affairs Name Qin Guiling Zheng Weiyin Liaison No. 81, Songling East Road, No. 81, Songling East Road, address Zichuan District, Zibo Zichuan District, Zibo Telephone (86)533-5285166 (86)533-5285166;3586827 Fax (86)533-5282188 (86)533-5282188 E-mail [email protected] [email protected]

4. Registered Address: No. 11, Mingbo Road, High-tech Industrial Development Zone, Zibo, Shandong Office Address: No. 81, Songling East Road, Zichuan District, Zibo No. 11, Mingbo Road, High-tech Industrial Development Zone, Zibo Post Code: 255100 E-mail: [email protected] Internet Web Site: www.lttc.com.cn

5. Newspapers for Disclosing the Information of the Company: Securities Times, Shanghai Securities News and Ta Kung Pao The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Internet Web Site Designated by China Securities Regulatory Commission for Publishing the Annual Report: www.cninfo.com.cn

6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: LUTHAI A, LUTHAI B Stock Code: 000726, 200726

7. Other Relevant Information of the Company Registration date after change: Aug. 7, 2003 Place: Zibo Municipal Administration Bureau for Industry and Commerce Registered number of enterprise legal person’s business license: QGLZZ Zi No.: 000066 Registered number of taxation: 370302613281175 Particulars about certified public accountants engaged by the Company: Domestic: Shandong Zhengyuan Hexin Certified Public Accountants Address: Rm. F, 20/F of Real Estate Bldg., Jinan (No. 88, Jingqi Road, Jinan) Overseas: PricewaterhouseCoopers Zhongtian Certified Public Accountants Ltd. (former PricewaterhouseCoopers (China) Certified Public Accountants) Address: 12/F, Rui An Plaza, No. 333, Huai Hai Middle Road, Shanghai, and PRC

III. SUMMARY FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT 1. Accounting data as of the year 2003 Unit: In RMB’000 Total profit 231,325 Net profit 195,156 Net profit after deducting non-recurring gains and losses 192,635 Profit from main operations 418,057 Other operating profit 29,057 Operating profit 241,960 Investment income -10 Financial expense -10,625 Net cash flow arising from operating activities 82,277 Net increase/decrease in cash and cash equivalents 31,851

Note: Impact on net profit due to non-recurring gains and losses amounting to RMB 2,521,000, its composing is: non-operating income amounting to RMB 6,114,000, non- operating expenses amounting to RMB 10,328,000, subsidy income amounting to RMB 2,203,000, reversal of impairment amounting to RMB 6,874,000, impact on income tax amounting to RMB 1,240,000 and minority interests amounting to RMB 1,102,000. Explanation for difference in net profit and net assets under IAS and CAS Unit: RMB’000 1. Net profit under IAS 195,156 Adjustment:

Depreciation -3,000 Other operating income -422 Net profit under CAS 191,734 2. Net assets under IAS 1,446,327 Effect of accumulated amount as of past year 44,778 Capital reserve -28 Retained profit -38,974 Translation balance of foreign currency 28 Net assets under CAS 1,452,131 2. Major accounting data and financial indexes over the past three years Unit: RMB’000 Indexes/Items 2003 2002 2001 Income from main operations 1,270,512 950,880 785,693 Net profit 195,156 128,542 120,518 Total assets 2,584,956 1,785,690 1,477,554 Shareholders’ equity (excluding minority interests) 1,446,327 1,356,751 1,314,320 Earnings per share (RMB/share) 0.46 0.37 0.45 Net assets per share (RMB/share) 3.42 3.85 4.85 Net assets per share after adjustment (RMB/share) 3.42 3.84 4.84 Net cash flow per share arising from operating 0.19 0.76 -0.13 activities (RMB) Return on equity (%) 13.49% 9.47% 9.17% 3. Supplemental statement of financial indexes Earnings per share Return on equity (%) (RMB/share)

Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 28.90 29.83 0.98 0.98 Operating profit 16.73 17.26 0.57 0.57 Net profit 13.49 13.92 0.46 0.46 Net profit after deducting non-recurring 13.32 13.74 0.46 0.46 gains and losses

4. Particulars about changes in shareholders’ equity during the report period Unit: RMB’000 Translation Total Share Share Capital Retained Item balance of shareholders’ capital premium reserve profit foreign currency equity Amount at the period-begin 352,027 765,795 86,878 152,051 1,356,751 Increase in the report period 70,405 29,694 28 195,156 295,283 Decrease in the report period 70,405 135,302 205,707 Amount at the period-end 422,432 695,390 116,572 28 211,905 1,446,327 Increase of shareholders’ equity compared with the period-begin is because the Reason for change Company realized net profit in 2003.

IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT THE SHAREHOLDERS

1. Statement of changes in shares of the Company Unit: shares Increase / decrease this time (+, -) Before the Shares capital After the Rationed Bonus Additional change transferred from Others Sub-total change shares shares issuance public reserve I. Unlisted shares 1. Sponsors’ shares 98,527,000 19,705,400 19,705,400 118,232,400 Including: State-owned shares

Domestic legal person’s share 49,263,500 9,852,700 9,852,700 59,116,200 Foreign legal person’s share 49,263,500 9,852,700 9,852,700 59,116,200 Others 2. Raised legal person’s shares

3. Inner employees’ shares 33,800,000 6,760,000 -40,560,000 -33,800,000 0 4. Preference shares or others Total unlisted shares 132,327,000 26,465,400 -40,560,000 -14,094,600 118,232,400 II. Listed shares

1. RMB ordinary shares 84,500,000 16,900,000 40,560,000 57,460,000 141,960,000 2. Domestically listed foreign 135,200,000 27,040,000 27,040,000 162,240,000 shares

3. Overseas listed foreign shares

4. Others Total listed shares 219,700,000 304,200,000 III. Total shares 352,027,000 70,405,400 70,405,400 422,432,400

2. Issuance and listing of the share (1) Issuance of shares over the past three years The Company additionally issued 50 million RMB ordinary shares to increase its share capital in Dec. 2000 at the issuing price of RMB 17.80 per share. The said shares were listed at Shenzhen Stock Exchange for trade on Dec. 25, 2000. (2) Change in total share and structure of share in the report period In the report period, the Company implemented 2002 Profit Distribution Plan: transfer capital public reserve into share capital to all shareholders at the rate of 2 for 10. After transfer, the total share of the Company has increased by 20%, from 352027000 shares to 422432400 shares. In the report period, the Company’s shares held by inner employees have reached three years from additional issuance of A shares, as approved by Shenzhen Stock Exchange, 40,560,000 inner employees’ shares (404,382 shares held by senior executives were frozen) were listed fro trade on Dec. 26, 2003, thus, the Company’s circulation A shares increased to 141,960,000 shares.

3. About shareholders at the end of the report period (1) At the end of the report period, the Company had totally 40096 shareholders, including 9660 shareholders of B-share. (2) Particulars about change in shares held by the top ten shareholders

Increase / Number Shares held decrease in Proportion of share Nature of Name of Shareholder at the year- Type of shares the report (%) pledged shareholders end (share) year (share) or frozen ZIBO LUCHENG TEXTILE CO., +9,852,700 59,116,200 14.00 Non-circulating Pledge Sponsor shareholder LTD. TAILUN TEXTILE CO., LTD. +9,852,700 59,116,200 14.00 Non-circulating Nil Foreign shareholder BTFE–VALUE PARTNERS +6,279,360 7,657,622 1.81 Circulating Nil Shareholder of B share INTELLIGENT FD-CHINA B SHS FD SOUTH CAPITAL NOMINEES +1,360,153 5,520,153 1.31 Circulating Nil Shareholder of B share LIMTED ZHU SHENG DI +3,007,103 4,937,482 1.17 Circulating Nil Shareholder of B share YIN FENG SECURITIES +3,298,251 4,675,354 1.11 Circulating Nil Shareholder of B share INVESTMENT FUNDS DEUTSCHE BANK AG LONDON +3,449,437 4,387,103 1.04 Circulating Nil Shareholder of B share TOYO SECURITIES ASIA +1,364,280 3,729,728 0.88 Circulating Nil Shareholder of B share LIMIYED-A/C CLIENT VALUE PARTNERS INTELLIGENT +3,384,741 3,384,741 0.80 Circulating Nil Shareholder of B share FUNDS-CHINESE MAINLAND FOCUS FUND DAIWA SECS EMBC AC ITOCHU -600,000 3,300,000 0.78 Circulating Nil Shareholder of B share HONG KONG LTD

Note: ① Among the top ten shareholders, the top two shareholders are sponsor shareholders of the Company, and there existed no associated relationship between them; the change of shares held by them was due to transferring capital public reserve into share capital. The changes of shares held by the 3rd shareholder to the 10th shareholder was due to purchase and selling of A-share and B-share. ② The Company was unknown whether there exists associated relationship or consistent action among the other shareholders except for sponsor shareholders.

(3) Brief introduction to the controlling shareholder and the shareholder holding over 10% of total shares ① Zibo Lucheng Textile Co., Ltd. (hereinafter referred to as “Lucheng Textile”) Legal representative: Liu Zibin Registered capital: RMB 8.67 million Business scope: Lucheng Textile was engaged in production and marketing of textile, knitwear, garments and other sewing products. Lucheng Textile was the first largest shareholder of the Company as well as the actual controlling shareholder. Lucheng Textile

was founded in Sep. 1998 based on Zibo the 7th Cotton Textile Plant, original sponsor of the Company. It is a Limited Company that its shares held by natural persons. Of them, Mr. Liu Shizhen held 21% of total shares, which is the first largest shareholder of Lucheng Textile. Basic information of Liu Shizhen: Chinese nationality, he has not enjoy the residence power in the other country or area; he took the post of Chairman of the Board and General Manager of the Company for a term of six years. As at the end of the report period, Lucheng Textile held 59.1162 million shares of the Company, taking 14% of total share capital of the Company, and the said shares have not been listed for trade, while was pledged to Min Sheng Bank for loan since July 2003, the pledging term was from July 3, 2003 to July 3, 2004. The said public notice was published in Shanghai Securities News, Securities Times and Ta Kung Pao dated July 5, 2003. ② Tailun (Thailand) Textile Co., Ltd. (hereinafter referred to as “Tailun Textile”) Legal representative: Xu Zhinan Business scope: Yarn spinning Note: Tailun (Thailand) Textile Co., Ltd. is the coordinate largest shareholder of the Company as well as foreign sponsor. At end of the year 2003, the Tailun Textile held 59.1162 million shares of the Company, taking 14% of total shares. The said shares have not been listed for trade, pledged or frozen.

4. Particulars about change in shares held by the top ten shareholders of circulation share Shareholders’ name (full name) Number of circulation share held Type (A-share, B-share, H- at the year-end (share) share and other) BTFE–VALUE PARTNERS 7,657,622 B-share INTELLIGENT FD-CHINA B SHS FD SOUTH CAPITAL NOMINEES 5,520,153 B-share LIMTED ZHU SHENG DI 4,937,482 B-share YIN FENG SECURITIES 4,675,354 A-share INVESTMENT FUNDS DEUTSCHE BANK AG LONDON 4,387,103 B-share TOYO SECURITIES ASIA 3729728 B-share LIMIYED-A/C CLIENT VALUE PARTNERS 3,384,741 B-share INTELLIGENT FUNDS-CHINESE MAINLAND FOCUS FUND DAIWA SECS EMBC AC ITOCHU 3,300,000 B-share HONG KONG LTD MERRILL LYNCH PIERCE 3,134,744 B-share FENNER &SMITH ING GOOD CAPTURE INVESTMENTS 3,055,500 B-share The Company was unknown whether there exists associated relationship or consistent action among the top ten shareholders of circulation share.

V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES

1. Basic information Shares Transferring held at the capital Shares held at the Name Title Sex Age Office term year-begin reserve into year-end share capital Chairman of the May 7, 2001- 143,312 28,662 171,974 Liu Shizhen Male 64 Board/General Manager May 7, 2004 Vice Chairman of the May 7, 2001- 0 0 Chen Youhan Male 71 Board May 7, 2004 Director and concurrently May 7, 2001- 0 0 Xu Zhinan Male 74 Deputy General Manager May 7, 2004 Director and concurrently May 7, 2001- 0 0 Liu Zibin Male 39 Deputy General Manager May 7, 2004 Tengyuan May 7, 2001- 0 0 Director Male 64 Yingli May 7, 2004 May 7, 2001- 0 0 Chen Ruimou Director Male 60 May 7, 2004 Director and concurrently May 7, 2001- 33,124 6,625 39,749 Su Huasheng Male 60 Chief Accountant May 7, 2004 Director and concurrently May 7, 2001- 16,900 3,380 20,280 Wang Fangshui Male 43 Chief Engineer May 7, 2004 May 7, 2001- 19,942 3,988 23,930 Sun Zhigang Director Male 42 May 7, 2004 Director and concurrently May 7, 2001- 20,280 4,056 24,336 Qin Guiling Female 38 Secretary of the Board May 7, 2004 May 7, 2001- 0 Wang Yonggui Independent director Male 35 May 7, 2004 May 7, 2001- 0 Hong Xiaobin Independent director Male 31 May 7, 2004 May 7, 2001- 0 You Shisong Independent director Male 68 May 7, 2004 May 7, 2001- 0 0 Wu Yuhua Independent director Male 60 May 7, 2004 May 7, 2001- 0 0 Zhou Zhiji Independent director Male 41 May 7, 2004 Supervisor and 22,308 4,461 26,769 May 7, 2001- Li Tongmin concurrently Manager of Male 48 May 7, 2004 Production Dept. Supervisor and 33,800 6,760 40,560 May 7, 2001- Zhao Kegui concurrently Chief Male 57 May 7, 2004 Economist Supervisor and 47,320 9,464 56,784 May 7, 2001- Zhu Lingwen concurrently Manager of Male 50 May 7, 2004 Layout Dept.

Among the above directors, Director Mr. Liu Zibin took Chairman of the Board and concurrently General Manager of Zibo Lucheng Textile Co., Ltd., and Mr. Xu Zhinan took the post of Chairman of the Board of Tailun (Thailand) Textile Co., Ltd., which are sponsor shareholder of the Company.

2. Particulars about the annual remuneration ① For directors and supervisors and concurrently the post of senior executive, the Company determined their payment and bonus based on their office title, contribution and Plan on Invigoration and Obligation for Senior Executive of the Company, and checked by the Compensation Committee of Board of Directors and approved by the Board of Directors for implementation. ② Among directors and supervisors in office at present, there was only one director, namely Mr. Chen Youhan, received no pay from the Company and the Shareholding Company. The Company respectively paid allowance of RMB 3000 (tax excluded) per month to Independent Director, namely Wu Yuhua, Zhou Zhiji, Hong Xiaobin, You Shisong and Wang Yonggui. ③ The total annual payment of directors, supervisors and senior executives received from the Company was RMB 4.565 million. The total payment of the top three directors drawing the highest payment was RMB 2.033 million, and the total payment of the top three senior executives drawing the highest payment was RMB 2.033 million. The limits of annual payment drew by directors, supervisors and senior executives: 2 persons enjoy payment between RMB 770,000 and RMB 820,000, 2 persons enjoy payment between RMB 400,000 and RMB 430,000, 6 persons enjoy payment between RMB 300,000 and RMB 400,000 and 3 persons enjoy RMB 70,000 and 100,000. 3. Particulars about changes in directors, supervisors and senior executives As examined and approved by the Shareholders’ General Meeting 2002, the Company additionally elected Mr. You Shisong, Mr. Wang Yongui and Mr. Hong Xiaobin as Independent Directors of the Company in the report period, at the same time, dismissed Mr. Li Jinghe from the post of director because the said director did not attend the Board meeting without entrusting other directors to present on his behalf for twice in succession when the Supervisory Committee of the Company examined performance of director’s duty, disobeyed the relevant regulation of the Articles of Association of the Company, and advised the Board of Directors to dismiss him. The other directors, supervisors and senior executives of the Company remained unchanged. 4. About employees: By the end of the report period, the Company had totally 7428 employees at their posts. Of them, 5980 production personnel, 342 sales personnel, 862 technicians, 52 financial personnel and 192 administration personnel. 2026 persons graduated from 3-years regular college. At present, the Company has 48 retirees, which joined the Social Insurance.

SECTION VI. ADMINISTRATIVE STRUCTURE 1. Particulars about the Company’s administrative structure Strictly pursuant to Company Law, Securities Law and relevant laws and regulations, the Company kept improving its legal person administrative structure, set up the modern corporation system and standardized the Company’s operation. In the report period, the according to the requirements of the Rules of Administration of Listed Companies and Normative Opinions of the Shareholders’ General Meeting, the Company amended the

Articles of Association of the Company, and engaged three more Independent Directors required by China Securities Regulatory Commission, making the members of Independent Directors exceeded over 1/3 among the Board of Directors. The actual status of the Company’s administrative structure basically in accordance with the requirements in relevant normative files about the listed company’s administration, no obvious difference existed.

2. Particulars about the Independent Directors in implementing their duties In the report period, according to the requirements of the Guide Opinions on Establishing System of Independent Director in Listed Company, on May 8,2003, the 2002 Annual Shareholders’ General Meeting additionally elected Mr. Wang Yonggui, Mr. You Shisong and Mr. Hong Xiaobing as the independent directors of the Company, they attended the 18th, 19th, 20th, 21st , 22nd, 23rd, 24th meeting of the 3rd Board of Directors following this meeting. Independent Director Mr. Zhou Zhiji and Mr. Wu Yuhua attended all the meetings of Board of Directors of the Compnay in the report period. The Independent Directors implemented their responsibilities by offering advices for the Company’s production and operation.

3. Separation of business, personnel, assets, organization and finance from control shareholder (1) Separation of business: The Company was absolutely separated from control shareholder in business and had absolutely independent system of production, supplying and sales and independent operation capability of making decision by itself. (2) Separation of personnel: The Company was absolutely independent in terms of labor, personnel and payroll management, and held independent and complete capability of making decision by itself. Vice General Manager, Mr. Liu Zibin took the part-time job of Chairman of the Board and General Manager of Lucheng Company but there occurred no actions harmful of the interest of the Company and shareholders. (3) Separation of assets: The Company had integrated legal person property right and possessed independent production system, auxiliary production system and equipment; held independent ownership of intangible assets such as industrial property right, trademark, and non-patent technologies, etc. (4) Separation of organization: The Company was independent in organization and never shared office with control shareholder. (5) Separation of finance: The Company had an independent finance department, independent accounting assessment system and financial management system, and independent bank account.

4. Valuation and encouragement mechanism of senior executives and establishment and implementation of relevant encouragement system in the report period. According to the Plan of Encouragement and Binding of Senior Executives of the Company, the Stipend Committee of the Board of Directors evaluated the implementation of the operation achievement in 2003 and worked out reward plan of senior executives, and submitted to the Board of Directors for approval and implementation.

SECTION VII. BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING

The Company held totally one Shareholders’ General Meeting in the report period, namely 2002 Annual Shareholders’ General Meeting. Shandong Deheng Lawyers’ Firm issued legal position papers on the meeting. 1. Notification, calling and holding of the Shareholders’ General Meeting The notice of the Shareholders’ General Meeting was published on Shanghai Securities, Securities Times and Ta Kung Pao dated Mar. 28, 2003. The Shareholders’ General Meeting was held at Multi-functional Hall on the 3/F of the Company’s Staffs’ Club at 9:30am on May 8, 2003. Totally 46 shareholders and shareholders’ proxies attended the meeting, representing 104862453 shares with vote right, taking 29.79% of the total share capital of 352027000 shares. Among them, 44 domestic shareholders and 2 foreign shareholders were present at the meeting, taking 55589053 shares and 49273400 shares respectively in conformity with relevant regulation of Company Law and Article of Association.

2. Resolutions of the Shareholders’ General Meeting The resolutions examined by the Shareholders’ General Meeting were as follows: (1) Work Report 2002 of the Board of Directors; (2) Work Report 2002 of the Supervisory Committee; (3) Proposal on 2002 Financial Settlement and 2003 Financial Budget of the Company; (4) Proposal on 2002 Profit Distribution; (5) Proposal on Reengaging Domestic and International Certified Public Accountants; (6) Proposal on Amending the Articles of Association of the Company; (7) Proposal on Engaging Mr. Hong Xiaobing, Mr. You Shisong and Mr. Wang Yonggui as Independent Directors of the 3rd Board of Directors; (8) Proposal on Dismissing the Director Mr. Li Jinghe. The resolutions were published on Shanghai Securities, Securities Times and Ta Kung Pao dated May 13, 2003.

3. Election and change of directors and supervisors of the Company 2002 Annual Shareholders’ General Meeting of the Company added election of Mr. Hong Xiaobing, Mr. You Shisong and Mr. Wang Yonggui as Independent Directors of the 3rd Board of Directors and dismissed Director Mr. Li Jinghe from his position. Supervisors of the Company remained unchanged in the report period.

SECTION VIII. REPORT OF THE BOARD OF DIRECTORS 1. Analysis to financial report and operating results of the Board of Directors In the report period, the whole operation of the Company was as follows: The Company realized an income from main operations of RMB 1,270,512,000 in the whole year, an export income of USD 126,623,000, a profit from main operations of RMB 418,057,000 and a net profit of RMB 195,156,000, which increased by 33.61%, 31.54%, 51.86% and 51.82% respectively compared with the previous year. In the report period, the expansion project of COM spinning of 20,000 ingots has been put into production; instruments installation of the expansion project of trimming of liquid ammonia has been finished and put into practical operation, the capital of both projects is raised from additionally issued A-shares. The projects invested by self-owned capital were: Invested RMB 88.72 million for the technique reconstruction of top grade colored weaving production; Invested RMB 35.76 million and established Xinjiang Lutai Harvest Cotton Co.,

Ltd. of which the Company held 51% equity, through the implementation of the above projects, the production chain of the Company was prolonged, the instruments of the yarn- dyed fabric was perfected, production structure was more reasonable, the added-value of the products was increased, marketing competition power of the products was strengthened and profit earning capability was increased. Invested RMB 60 million and established Zibo Lutai Huanzhong Medicine making Co., Ltd., 75% equity was held by the Company. In the report period, the Company fully exerted its advantages in scale, market and capital, etc., increased the reserve of cotton and yarn used in production in the early stage of this period, at the same time strengthened production management and cost control, reduced the effect of the volatile cotton price on the Company’s production. In the report period, the Company made full use of the favorable market credit and clients’ resources accrued for years, actively developed the business of order on Internet, effectively decreased the grave influence of emergency SARS in the report period, made the production and operation maintained favorable trend and further increased the Company’s operation profit. In the report period, the Company further increased its input of technique innovation and strengthened development. In 2003, edl by the science and technology committee of the Company, the Company developed 13 new technique items, conquered the technique of trimming fold of outside material of liquid ammonia super united, realized the bulk production of the pure cotton double elasticity trimming technique. The success of practical weaving of XLA elastic outside material filled the blank of our country. At present, the products of the Company have 28 serials, nearly 100000 specs and varieties and satisfied the requirements of all kinds of clients. The Company will meet the people’s increasing living requirements better by developing technique, increase the metabolism of the products and upgrade the outside material of the yarn-dyed fabric of shirts. In the report period, the Company continued to implement the international standardization management of ISO9000 and ISO140000, finished the transition of ISO9000 from 1994 version to 2000 version. In August of 2003, the Company smoothly passed the professional health safety management system attestation of OHSMS18000, made the system management of the Company further improved. 2. Operation in the report period (1) Scope of main operations and the operation 1.The operation scope of the Company: The Company is a textile enterprise of highly comprehensive production, which is mainly engaged in the spinning, bleaching and dyeing, weaving, rear trimming and garments manufacturing with the outside material of yarn-dyed fabric used in shirts as the leading product. Over 80% of the Company’s products are exported and the Company enjoys a market coverage over thirty countries and areas of Japan, Korea, America, Britain and Italy etc., which is the largest production base of colored weaving in Asia.

2.The operation of the Company classified according to products Unit: RMB’000 Gross profit of Revenue Operating cost Products operation In 2003 In 2002 In 2003 In 2002 In 2003 In 2002 Spinning 20,301 14,890 19,246 9,810 1,055 5,080 Grey cloth 0 193 0 552 0 -358

Yarn-dyed outside 1,018,199 772,651 684,186 559,837 334,013 212,814 material of shirts Shirts 219,685 149,304 140,236 98,422 79,449 50,881 Lint 10,069 7,249 2,820 Others 2,258 13,842 1,538 9,982 720 3,860 Total 1,270,512 950,880 852,455 678,603 418,057 272,277

3. Market distribution of products of the Company Unit: RMB’000 Areas In 2003 Proportion (%) In 2002 Proportion (%) Japan and Korea 271,517 21.37 237,419 24.97 Hong Kong 275,474 21.68 257,061 27.03 Southeast Asia 296,463 23.33 191,966 20.19 Europe and America 177,447 13.97 104,458 10.99 Others 5,163 0.41 5,180 0.54 Mainland of China 244,448 19.24 154,796 16.28 Total 1,270,512 100.00 950,880 100.00

4. In the report period, no significant change happened on the main operations, products varieties and structure.

(II) Operation and performance of holding companies and share-holding companies of the Company Unit: RMB’0000 Business Products or Net Proportion of Names of companies Registered capital Total assets quality services profit shares held Beijing Lu Thai Shirt Production Shirts RMB 560 935.70 22.92 60% Co., Ltd. enterprise Qingdao Bonded Area Trade Trade and RMB 160 85.94 -1.43 75% Lu Thai International consultation Trade Co., Ltd. Beijing Sichuang Production Garments and USD 200 2515.00 -284.4 65% Costume Co., Ltd. and sales raiment Dongying Luxin Spinning Yarns RMB 10000 14166.98 760.97 65% Textile Co., Ltd. Lu Thai (Hong Kong) Export and International HKD 600 678.32 14.62 100% Co., Ltd. import trade trade Xinjiang Lu Thai Production Lint RMB 7011 25764.09 32.42 51% Harvest Cotton Co., and sales Ltd. Zibo Lu Thai Production Chinese patent RMB 8000 8263.5 0 75% Huanzhong and sales medicine Pharmaceutical Co., Ltd. Zibo Shidanlu Production Cosmetic RMB 200 243.10 4.30 10.5% Cosmetic Co., Ltd.

(III) Major suppliers and customers In the report period, the total purchase amount of the top five suppliers of the Company was RMB 386.8 million, taking 37.72% of the total annual amount of purchase. In the report period, the total sales amount of the top five customers of the Company was RMB 471 million, taking 37.07% of the total annual amount of sales.

(IV) Problems and difficulties occurred in the operation and the countermeasures In the report period, the production and operation status of the Company was good, but the increase in the cotton price and SARS affected the operation environment to certain extent. In the report period, the price of main material of the production cotton kept increasing and resulted in an increase in the production cost of the Company. Because the Company made anticipation of the cotton price trend in the early of the report period, and reserved some cotton, at the same time the Company actively adjusted the products structure and increased the proportion of high value added products, and increased the price of the products and average margin. During the period of SARS, the Company actively developed business of order through Internet; fully exerted the favorable business credit of the Company, resulting in the increase of the order of the Company and not the reverse, consequently ensured the consistency and stability of the Company. Generally, although unfavorable factors existed in the report period, the Company gained ideal operation achievements by the accordant effort of the whole Company, all economic indexes increased greatly, the net profit even increased 50% than the corresponding period of last year.

(V) Completion of profit forecast The Company has neither forecast the profit as of the year in public nor disclosed the profit status as of the year in public. In the report year the Company completed a sales income of RMB 1,270,512,400, which was 117.59% of the plan as of the year; realized net profit of RMB 191,733,900, which increased 52.72% than the corresponding period of last year, the pre-profit explanation has been illustrated in the 3rd Quarterly report of 2003.

III. Investment of the report year (I) Particulars about the proceeds raised in the report period 1.Particulars about investment projects, progress and income of raised proceeds Unit: RMB’0000 Total amount of raised proceeds used in 14984.61 the report period Total amount of raised proceeds 86770.00 Total amount of raised proceeds used 86770.00 accumulatively Compliance with Planned Change of Accrued amount of Practical amount planned progress Committed projects amount of projects or income of input and estimated input not earnings or not Technical renovation project of 26731.00 No 0 27849.00 Yes top grade yarn-dyed outside material Technical renovation project of 10004.14 Yes 0 9527.55 Yes

rear trimming of top grade outside material Trimming project of liquid 5000.00 No 2906.48 5581.78 Yes ammonia COM spinning project of 20,000 13500.00 No 0 14263.40 Yes ingots Dongying Tianxin joint venture 6500.00 No 0 6500.00 Yes project Supplement of circulating funds 7000.00 No 0 7000.00 Yes Technical renovation project of 3027.00 No 0 3170.59 Yes spinning Renovation project of bleaching 3192.00 No 0 3305.40 Yes and dyeing equipments Constituent company of Hong 636.00 No 0 636.66 Yes Kong Expansion project of COM 12000.00 No 12078.13 13762.32 Yes spinning of 20,000 ingots Total 87590.14 - 14984.61 91596.70 - Explanation on not reaching the At the end of the report period, the investment projects with the proceeds raised through planned progress and earnings additionally offering of A shares has all been finished and put into production and operation. Explanation on reasons and Reason of change of technical renovation project of rear trimming of top grade outside procedures of change material: the price of equipments decreased than the predicted through bidding purchase, saving funds of RMB 56,250,000. After examined and approved by 2001 Shareholders’ General Meeting, the planned investment of this project was changed from RMB 156,300,000 to RMB 100,041,400 and the saved funds amounting to RMB 56,250,000 was put into the expansion project of 20,000 ingots COM spinning. Explanation: Since the Company is a production enterprise of a coordinated process of spinning, weaving, dyeing and trimming, of which technical renovation project of rear trimming of top grade outside material, trimming project of liquid ammonia is the working procedure of rear trimming of yarn-dyed fabric and the project of 20,000 ingots COM spinning, technical renovation of spinning and renovation project of bleaching and dyeing equipments provide raw materials and work of prophase preparation for the production of yarn-dyed fabric. The semi-manufactured goods among each working procedure are not accounted independently and adopted measure of cost transfer. Thus, the aforesaid projects are implemented and put into production as planned in progress, but the income cannot be counted independently. The income of the above projects is reflected finally in the sales income of finished goods of yarn-dyed fabric.

2. Changes in investment projects In the report period, there was no change in investment projects.

(II) Investment with the proceeds not raised through public offer in the report period (1) In the report period, the technical reform project of high-graded yarn-dyed fabric invested with RMB 88.72 million has been finished completely and has been put into production and operation. (2) In the report period, the Company invested RMB 35.76 million to establish Xinjiang Lu Thai Harvest Cotton Company Limited, 75% equity is held by the Company, which is

mainly engaged in the planting, processing and sales of economic crops, food crops and crops of edible oil; purchase, processing and sales of cotton and byproducts of cotton; production and sales of cotton yarn, cotton terylene yarn and other textiles relevant to cotton, in Awati County, Xinjiang. This company was registered in Industrial and Commercial Bureau of Awati County, Xinjiang on June 18, 2003 and was put into production and operation. In the report period, this company realized sales income amounting to RMB 48.8635 million and net profit amounting to RMB 324,200. (3) In the report period, together with Zibo Industrial Development Co., Ltd., the Company invested RMB 60 million to jointly set up Lu Thai Huanzhong Pharmaceutical Co., Ltd., 75% equity is held by the Company, which is mainly engaged in the production and sales of troche of Chinese traditional medicine, granule, capsule, oral solution, syrup, liniment, suppository, chelating agents, pill (bolus, water pill) and lotion and other businesses approved by industrial and commercial administration departments of the State. The project of GMP of this company was under construction and it was estimated to be put into production in April 2004.

IV. Analysis to the Company’s financial position and operating results in the report period (I) Contrastive analysis to financial indexes in the report period Unit: RMB’000 Names of indexes Dec. 31, 2003 Dec. 31, 2002 Increase/decrease proportion (%) Total assets 2,584,956 1,785,690 44.76% Shareholders’ equity 1,446,327 1,356,751 6.60% Profit from main 418,057 275,278 51.87% operations Net profit 195,156 128,542 51.82% Net increase in cash 31,851 -1,372 2421.50% and cash equivalents

(II) Reasons of changes in financial indexes in the report period In the report period, the Company’s total assets increased by 44.76% over the same period of last year, which was mainly because that Xinjiang Lu Thai Harvest Cotton Company Limited, Shandong Zibo Lu Thai Huanzhong Pharmaceutical Co., Ltd. and Hong Kong (Lu Thai) Co., Ltd. were newly listed in the consolidated scope. Shareholders’ equity increased by 6.60% over the same period of last year, which was mainly due to the said three companies newly increased in the consolidated scope and increase in net profit realized in the report period. Profit from main operations increased by 51.87% over the same period of last year, which was mainly due to the increase in sales income and enhancement of gross profit ratio of products in the report period. Net profit increased by 51.82% over the same period of last year, which was mainly due to the increase in sales income and enhancement of gross profit ratio of products in the report period. Net increase in cash and cash equivalents increased by 2421.50% over the same period of last year, which was mainly due to the said three companies newly increased in the consolidated scope in the report period.

V. Plan in the new year: In the new year, the Company faces such unfavorable factors as increase in price of raw materials. If the price of raw materials continues to increase, the Company’s gross profit ratio of products shall decrease; the Company’s market for main products is international market. The decrease in export drawback rate for textile in 2004 shall impact direct influence on the Company’s operating achievements. Thus, in the next year, the Company shall further reinforce development strategy planning and enhance the development quality; further strengthen the market expansion with both emphasis in domestic and foreign markets, especially speeding up the development of domestic market; deepen the cost management and increase the income and reduce the expenditure; reinforce the technical improvement, give prominence to quality management, adjust product structure, increase the share of products with high additional value and reduce the influence of unfavorable factors on profit rate in a maximum way; effectively implement internationally standardized management such as ISO9000, ISO14000 and OHSMS18000 etc. so as to prepare for further expanding the markets in Europe and America after export quota of textile being cancelled in 2005. The investment projects in the new year are as follows: (1) Investing RMB 210 million to implement the expansion project of 40,000 ingots of COM spinning. The project is to be conducted by two stages, one is to be put into production in the 2nd quarter of 2004 and the 2nd stage is to be put into production in the 1st quarter of 2005. (2) Investing RMB 180 million to conduct the technical reform project of high-graded yarn-dyed fabric, which is to be put into production in the 3rd quarter of 2004. (3) It is planned to jointly establish Lufeng Weaving and Dyeing Co., Ltd. with Hong Kong United Fashion Co., Ltd.. This company is mainly engaged in the production and sales of outside materials of weaving and dyeing with registered capital amounting to RMB 100 million, where the Company invests RMB 75 million, taking 75% of the registered capital. (4) Investing RMB 30 million to conduct the production line project of high-graded shirts with annual output amounting to 2 million pieces, which is to be put into production in June 2004. (1), (2) and (3) in the said items are still subject to Annual Shareholders’ General Meeting 2003 for consideration and approval before its implementation.

VI. Routine work of the Board of Directors (I) Meetings and resolutions of the Board in the report period In the report period, the Company totally held eight meetings of the Board with details as follows: 1. On Mar. 26, 2003, the 16th Meeting of the 3rd Board of Directors was held in the 6th Reception Room of the Company. 13 directors should be present and actually 12 of them attended the Meeting. Moreover, 3 supervisors attended the Meeting as nonvoting delegates, in compliance with relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting considered and passed Annual Report and its Summary 2002, Work Report of General Manager 2002, Financial Settlement Report 2002 and Financial Budget Report 2003, Profit Distribution Plan 2002, Proposal on Investing RMB 88.72 million to Conduct Technical Reform Project of High-graded Yarn-dyed Fabric, Proposal on Engaging Three Independent Directors and Giving Them Allowances at RMB 3000 Per Person Per Month, Proposal on Renewal of Auditors, Proposal on Encouragement and Assessment Results of Senior Executives for 2002, Proposal on Changing Members in Auditing Committee of the Board of the Company, Proposal on Confirming the Basic Wage

of General Manager and Giving Special Contribution Award to Senior Advisers and Proposal on Holding Annual Shareholders’ General Meeting 2002. 2. On April 17, 2003, the 17th Meeting of the 3rd Board of Directors was held in the 6th Conference Room of the Company. 13 directors should be present and actually 7 of them attended the Meeting. 2 directors entrusted agents to be present, in accordance with relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting considered and passed the 1st Quarterly Report for 2003, Proposal on the Supervisory Committee’s Requesting the Board to Dismissing Director Li Jinghe, Proposal on Amending the Articles of Association of the Company and Proposal on Providing Guarantee amounting to RMB 5 million for Beijing Sichuang.

3. On June 16, 2003, the 18th Meeting of the 3rd Board of Directors was held in the Company’s Conference Room. 15 directors should be present and actually 10 of them attended the Meeting, in compliance with relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting considered and passed Proposal on Investing and Establishing Xinjiang Lu Thai Harvest Cotton Co., Ltd..

4. On Aug. 18, 2003, the 19th Meeting of the 3rd Board of Directors was held in the Company’s Conference Room. 15 directors should be present and actually 11 of them attended the Meeting. 2 directors entrusted others to attend the Meeting and 3 supervisors of the Company attended the Meeting as nonvoting delegates, in compliance with the provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting discussed and passed Semi-annual Report and its Summary 2003 and Proposal on No Distribution in the Middle of 2003.

5. On Aug. 18, 2003, the 20th Meeting of the 3rd Board of Directors was held in the Company’s Conference Room. 15 directors should be present and actually 11 of them attended the Meeting. 2 directors entrusted others to be present and 3 supervisors attended the Meeting as nonvoting delegates, in compliance with the relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting discussed and passed Proposal on Adjusting Profit Plan for 2003 and Proposal on Investing RMB 60 Million to Jointly Establishing Shandong Lu Thai Huanzhong Pharmaceutical Co., Ltd. with Zibo Industrial Development Co., Ltd..

6. On Sept. 18, 2003, the 21st Meeting of the 3rd Board of Directors was held in the Company. 15 directors should be present and actually 14 of them attended the Meeting. 3 supervisors attended the Meeting as nonvoting delegates, in compliance with relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting considered and passed Rectification Report on Tour Inspection of CSRC Jinan Securities Regulatory Office, Engaging Mr. Su Hua as Financial Principal of the Company and Project on Amending the Articles of Association of the Company.

7. On Oct. 18, 2003, the 22nd Meeting of the 3rd Board of Directors was held in the Company’s Conference Room. 15 directors should be present and actually 6 of them attended the Meeting. 8 persons voted through means of communications and 3 supervisors of the Company attended the Meeting as nonvoting delegates, in compliance with the

requirements in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting considered and passed the 3rd Quarterly Report for 2003.

8. On Nov. 18, 2003, the 23rd Meeting of the 3rd Board of Directors was held in the Company’s Conference Room. 15 directors should be present and actually 7 of them attended the Meeting. 6 persons voted through means of communications and 3 supervisors of the Company attended the Meeting as nonvoting delegates, in compliance with the requirements in Company Law of the P.R.C. and the Articles of Association of the Company. The Meeting considered and passed Proposal on Providing Guarantee amounting to RMB 50 million for Xinjiang Lu Thai Harvest Cotton Company Limited from Industrial and Commercial Bank Awati County Sub-branch and Proposal on Proposal on Providing Guarantee amounting to RMB 50 million for Xinjiang Lu Thai Harvest Cotton Company Limited from Agricultural Bank Awati County Sub-branch.

(II) Implementation of the Board on resolutions of Shareholders’ General Meeting In the year, according to the requirements in Company Law of the P.R.C. and the Articles of Association of the Company, the Board of the Company strictly implemented the rights and obligations authorized by the Shareholders’ General Meeting and seriously implemented all resolutions considered and passed by the Shareholders’ General Meeting, which made them be implemented and carried out seriously. Moreover, the Board implemented the profit distribution project for year 2002 and conducted serious implementation on the financial budget considered and passed by the Shareholders’ General Meeting, which has gained good economic benefits.

VII. Profit distribution preplan for year 2003 Audited by Shandong Zhengyuan Hexin CPAs Co., Ltd., the net profit of the Company after audited in 2003 was RMB 193,016,580.29. According to the provisions in Company Law of the P.R.C. and the Article of Association of the Company, 10% of the net profit was appropriated as statutory reserve amounting to RMB 19,301,658.03 and 5% of the net profit was appropriated as welfare funds amounting to RMB 9,650,829.01, adding the retained earnings in previous years amounting to RMB 14,445,965.30, the profit available for distribution in the period was RMB 178,510,058.55. The Board of the Company suggested the profit distribution preplan for year 2003 as follows: based on the total share capital amounting to 422,432,400 shares at the end of year 2003, distributing cash dividends amounting to RMB 3.75 (tax included) for every 10 shares, of which, for B shares, the dividends were paid according to HKD converted from middle price of norm exchange released by People’s Bank of China in the next day when Annual Shareholders’ General Meeting 2003 is held (Tax exempted according to the provisions in GS (1993) No. 45 document). The actual dividend distributed was RMB 158,412,150.00 and the rest profit amounting to RMB 20,097,908.55 was carried down to the future years. VIII. Other events to be disclosed The Company had no other event to be disclosed.

SECTION IX. REPORT OF THE SUPERVISORY COMMITTEE I. Particulars about work of the Supervisory Committee in the report year

In the report year, the Supervisory Committee totally held three meetings and attended eight meetings of the Board of Directors as non-voting delegates. The meetings of the Supervisory Committee are as follows: 1. The 8th meeting of the 3rd Supervisory Committee was held in the meeting room in the 2/F of the Company on Mar. 26, 2003. Three supervisors were expected to attend the meeting and actually all of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting mainly examined and approved Annual Report for 2002 and Summary and Work Report for 2002. 2. The 9th meeting of the 3rd Supervisory Committee was held in the meeting room of the Company on Apr. 22, 2003. Three supervisors were expected to attend the meeting and actually all of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting mainly examined and approved Proposal on Disengaging Post of Director of Mr. Li Jinghe. 3. The 10th meeting of the 3rd Supervisory Committee was held in the 6th meeting room of the Company on Aug. 18, 2003. Three supervisors were expected to attend the meeting and actually all of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting examined and approved Semiannual Report for 2003 and Summary. II. Independent opinions expressed by the Supervisory Committee 1. Particulars about operation according to law In the report period, the Supervisory Committee of the Company examined wholly and patiently the procedure of decision-making of the Company, implementation of internal control system and duties of directors and managers and believed that the internal control system of the Company was perfect and the procedure of decision-making was normative and found no actions of breaking laws, regulations and Articles of Association or harmful of the interest of the Company. 2. Inspection of the Company’s financing The Supervisory Committee has checked the financial reports made by Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers China Certified Public Accountants and thought conformably the reports have truthfully and accurately reflected the Company’s financial status and business results. The Supervisory Committee checked relevant procedure and result of appropriation of provision for partial inventories’ price-falling and provision for fixed assets’ deprecation of the Company and believed that it was in accordance with the regulation of Notification on Relevant Items of Dealing Well with Provision for Every Asset’s Depreciation by Listed Companies, and the appropriation base and proportion was in accordance with the regulation of the Company’s internal control system and the actual situation of the Company. The appropriation was in favor of the further improvement of assets’ quality of the Company and dropped the risk of assets to the lowest and was in favor of the further development of the Company. The influence of the appropriation on the operation result of the Company this year: an decrease of net profit of this year totally RMB 21.27 million, taking by 1.41% of audited net assets of the Company at the end of 2003. The Supervisory Committee believed it in the reasonable scope. 3. The actual investment item of the last raised capital was in conformity with promised investment item. Bur for COM Spinning Item of 20,000 Ingots, 2001 Annual Shareholders’ General Meeting approved to change its investment means from establishing a joint

enterprise named Zibo Luhua Textiles Co., Ltd. by and Zibo Thaimei Ties Co., Ltd. the Company which invests 90% to investing independently by the Company. The investment scale had no change. The investment has been put into operation in July 2002. Ended as at Dec. 31, 2003, the last raised capital of the Company has been finished using. 4. Whether the trade price of purchase and sale of assets of the Company is reasonable or not. In the report period, the 18th meeting of the 3rd Board of Directors of the Company decided to invest RMB 35.76 million and purchase the net assets of Xinjiang Awati County Fengshou No. 3 Field, accounting for 51% of net assets after assessment, invested in the net assets and established Xinjiang Lu Thai Fengshou Cotton Co., Ltd. with the employees of the original No. 3 Field. The registered capital of the company is RMB 70.12 million and the Company holds 51% equity. As the basic date of June 30, 2002, Shenzhen Sinocoms Appraisal Co., Ltd. assessed the purchased assets and issued the assessment report with ZQXZPBZ (2002) NO. A140. Meanwhile, Xinjiang Xinde Limited Certified Public Accountants audited the financial situation of Fengshou No. 3 Field ended as at Feb. 28, 2003 and issued the auditor’s report with XXDKSZ (2003) NO. 218. The purchase of assets existed no internal transaction, the purchase price was fair and reasonable and there was no phenomenon of damaging right and interest of partial shareholders and causing running off of the Company’s assets. The Company has no sale of assets in the report period. 5. Whether the related transactions are fair In opinion of the Supervisory Committee, the related transactions of the Company were based on the fairness, justness and publicity and there existed no transactions harmful of the interest of listed company. 6. Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers China Certified Public Accountants issued auditor’s reports with non-reservation opinion according to domestic and international accounting rules. SECTION X. SIGNIFICANT EVENTS I. In 2003, there were no significant lawsuits and arbitrations. II. Purchase and sale of assets of the Company in the report period In the report period, the 18th meeting of the 3rd Board of Directors of the Company decided to invest RMB 35.76 million and purchase the net assets of Xinjiang Awati County Fengshou No. 3 Field, accounting for 51% of net assets after assessment, invested in the net assets and established Xinjiang Lu Thai Fengshou Cotton Co., Ltd. with the employees of the original No. 3 Field. The registered capital of the company is RMB 70.12 million and the Company holds 51% equity. As the basic date of June 30, 2002, Shenzhen Sinocoms Appraisal Co., Ltd. assessed the purchased assets and issued the assessment report with ZQXZPBZ (2002) NO. A140. Meanwhile, Xinjiang Xinde Limited Certified Public Accountants audited the financial situation of Fengshou No. 3 Field ended as at Feb. 28, 2003 and issued the auditor’s report with XXDKSZ (2003) NO. 218. The purchase of assets existed no internal transaction, the purchase price was fair and reasonable and there was no phenomenon of damaging right and interest of partial shareholders and causing running off of the Company’s assets. The Company has no sale of assets in the report period. III. Significant related transactions in the report period For the detail of the related transaction in the report period, please refer to “Note 7. Relationship with related parties and related transactions” of financial and accounting report on Page 49 of the report. IV. Important contracts and their implementation

1 In the report year, the Company had kept as custodian, contracted or leased any other company’s assets as follows: In the report period, the Company leased the land with 92.09 mu, house with 6484.71 sq.m. and one gas station of Zibo Lucheng Textiles Co., Ltd. and paid the rent of RMB 2,332,572,24 for the year 2002. 2. Significant guarantee In the report period, the Company respectively provided guarantee for current capital loan not exceeding RMB 50 million of Xinjiang Lu Thai Fengshou Cotton Co., Ltd. from Industrial and Commercial Bank of China Awati County Branch and Agriculture Bank of China Awati County Branch and the total amount of guarantee is RMB 100 million with the term of one year. In the report period, the guarantee has not been implemented. 3. Entrusting other managing cash assets in the report year and in the future: In the report year and before the report year, the Company had never entrusted any other party to manage the Company’s cash assets. There will not the item in future plan. 4. Other significant contracts: ended Dec. 31, 2003, the significant contracts on purchase of equipment the Company signed but not implemented are as follows: Items Amount: RMB Imported weaving equipment 66,692,287.24 Imported dyeing and finishing equipment 9,456,194.90 V. Particulars about implementation of promises made by the Company or shareholders holding over 5% of total shares In 2003, 2002 profit distribution proposal promised by the Company was implemented completely in May 2003, the invested projects has been finished on schedule. There are no commitments in other respects. VI. Engagement of Certified Public Accountants by the Company The Company reengaged Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd. (the original PricewaterhouseCoopers China Certified Public Accountants) as its financial auditor organizations of the Company. The audit expense paid in the report year was respectively RMB 450,000 and 900,000. The two auditor organizations have provided auditor service for the Company for 7 years. VII. The situations that the Company, the Board of Directors or its directors had been checked, given administrative punishment or given circular notices of criticism by CSRC or been condemned publicly by the Stock Exchange and the check of CSRC and its expedited organization In the report year, the Company, the Board of Directors or its directors had neither been checked, given administrative punishment or given circular notices of criticism by China Securities Regulatory Commission nor been condemned publicly by the Stock Exchange. CSRC Jinan Office made a circling check for the Company from Aug. 18, 2003 to Aug. 22, 2003 and promulgated Notification of Rectifying and Reforming to the Company on Sep. 2, 2003. After receiving the notification, the Company immediately organized relevant departments to patiently carry out and put forward to measures of rectifying and reforming and held the 21st meeting of the 3rd Board of Directors of the Company on Sep. 18, 2003 and examined and approved Report of Rectifying and Reforming. The report was published in Securities Times, Shanghai Securities News and Ta Kung Pao dated Sep. 20, 2003.

VIII. In the report period, the Company occurred no significant events listed in Article 62 of Securities Law and Article 17 of Implementation Rules for Information Disclosure of the Companies Publicly Issuing Shares In the report period, the Company occurred no significant events listed in the above regulations.

SECTION XI. FINANCIAL REPORT (ATTACHED)

SECTION XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting statements carried with personal signatures and seals of legal representative, chief accountants and person in charge of handling accounting organization. 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed publicly on Securities Times, Shanghai Securities News and Ta Kung Pao.

Board of Directors of Luthai Textile Co., Ltd. Apr. 1, 2004

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2003

普华永道中天会计师事务所有限公司 12th Floor, Shui On Plaza 333 Huai Hai Zhong Lu Shanghai 200021 People's Republic of China Telephone +86 (21) 6386 3388 Facsimile +86 (21) 6386 3300

Report of the Auditors

To the Shareholders of Luthai Textile Joint Stock Company Limited

We have audited the accompanying consolidated balance sheet of Luthai Textile Joint Stock Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related consolidated income and cash flow statements for the year then ended. These consolidated financial statements set out on pages 2 to 29 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion the consolidated financial statements present fairly in all material respects the financial position of the Group as of 31 December 2003 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Zhong Tian CPAs

28 March 2004

Business is undertaken in the registered name of 普华永道中天会计师事务所有限公司 .

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003

Year ended 31 December (all amounts in RMB thousands) Notes 2003 2002

Sales 1 1,270,512 950,880

Cost of sales (852,455) (675,602)

Gross profit 418,057 275,278

Other operating income 29,057 6,557

Distribution costs (50,203) (38,383) Administrative expenses (154,951) (88,399)

Operating profit 2 241,960 155,053

Finance cost – net 3 (10,625) (2,057)

Share of result in a non-consolidated subsidiary 11 (10) (10)

Profit from ordinary activities before tax 5 231,325 152,986

Income tax expense 5 (33,721) (21,692)

Group profit after tax 197,604 131,294

Minority interest 20 (2,448) (2,752)

Net profit 6 195,156 128,542

Earnings per share (basic and diluted) 6 RMB 0.46 RMB 0.37

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003

31 December 31 December (all amounts in RMB thousands) Notes 2003 2003 2002 2002

ASSETS

Non-current assets Property, plant and equipment, net 8 1,403,031 1,040,905 Land use rights 9 96,786 32,446 Intangible assets 10 9,626 11,074 Investment in a non-consolidated subsidiary 11 431 6,808 Available-for-sale investment 12 215 215 1,510,089 1,091,448 Current assets Inventories 13 458,271 283,764 Receivables and prepayments 14 413,839 239,572 Cash and cash equivalents 15 202,757 170,906 1,074,867 694,242

Total assets 2,584,956 1,785,690

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2003

31 December 31 December (all amounts in RMB thousands) Notes 2003 2003 2002 2002

SHAREHOLDERS’ EQUITY

Capital and reserves Ordinary shares 19 422,432 352,027 Share premium 19 695,390 765,795 Reserves 21 116,600 86,878 Retained earnings 211,905 152,051 1,446,327 1,356,751 Minority interest 20 96,180 44,621

LIABILITIES

Non-current liabilities Borrowings 17 - 15,000 Other liabilities 2,673 - 2,673 15,000 Current liabilities Trade and other payables 16 310,144 237,953 Current tax liabilities 2,982 6 Borrowings 17 726,650 131,359 1,039,776 369,318

Total liabilities 1,042,449 384,318

Total shareholders’ equity and liabilities 2,584,956 1,785,690

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003

Share Share Retained (all amounts in RMB thousands) Notes capital premium Reserves earnings Total

Balance at 1 January 2002 270,790 847,032 66,887 129,611 1,314,320 Dividend relating to year 2001 - - - (86,111) (86,111) Net profit 6 - - - 128,542 128,542 Transfer to reserves 21 - - 19,991 (19,991) - Capitalisation of share premium 19 81,237 (81,237) - - - Balance at 31 December 2002 352,027 765,795 86,878 152,051 1,356,751

Balance at 1 January 2003 352,027 765,795 86,878 152,051 1,356,751 Dividend relating to year 2002 - - - (105,608) (105,608) Net profit 6 - - - 195,156 195,156 Transfer to reserves 21 - - 29,694 (29,694) - Capitalisation of share premium 19 70,405 (70,405) - - - Currency translation difference - - 28 - 28

Balance at 31 December 2003 422,432 695,390 116,600 211,905 1,446,327

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003

Year ended 31 December (all amounts in RMB thousands) Notes 2003 2002

Cash flow from operating activities

Net profit 195,156 128,542

Adjustment for: Minority interest 20 2,448 2,752 Tax 5 33,721 21,692 Depreciation 8 109,162 66,479 Amortisation of land use rights 9 4,545 3,263 Amortisation of intangible assets 10 3,777 2,493 Impairment charge of property, plant and equipment 8 10,809 - Loss on disposal of property, plant and equipment 2 2,803 231 Gain on disposal of a non-consolidated subsidiary - (14) Provision for inventories 2 10,463 6,828 Impairment charge of investment 2 2,300 - Share of result in a non-consolidated subsidiary 11 10 10 Provision for/(reversal of) doubtful debts 10,522 (218) Interest expenses 3 16,158 6,653 Interest income 3 (2,844) (2,959) Dividend income (8) -

Changes in working capital 399,022 235,752

Inventories (177,389) (29,451) Receivables and prepayments (94,645) (42,897) Trading investments - 40,000 Trade and other payables 2,192 97,551

Cash generated from operations 129,180 300,955

Interest paid (16,158) (6,653)

Tax paid (30,745) (25,114)

Net cash generated from operating activities 82,277 269,188

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2003

Year ended 31 December (all amounts in RMB thousands) Notes 2003 2002

Cash flow from investing activities Investment in a non-consolidated subsidiary 11 - (6,367) Proceeds from consolidation of Luthai (Hong Kong) Textile Co., Ltd. (“Luthai HK”) 11 6,367 Acquisition of subsidiary Xinjiang Luthai, net of cash acquired (Note A) 25,444 - Purchase of property, plant and equipment (464,876) (313,388) Purchase of land use rights (22,972) (24,164) Purchase of intangible assets (2,329) (124) Proceeds from sale of property, plant and equipment 10,373 525 Proceeds from disposal of a non-consolidated subsidiary - 7,214 Dividend received 8 - Interest received 2,844 2,959

Net cash used in investing activities (445,141) (333,345)

Cash flow from financing activities Proceeds from borrowings 864,618 153,867 Repayments of borrowings (381,327) (7,508) Dividend paid to group shareholders (106,211) (86,126) Dividend paid to minority shareholders (2,365) - Proceeds from minority shareholders 20,000 2,552

Net cash generated from financing activities 394,715 62,785

Increase/(decrease) in cash and cash equivalents 31,851 (1,372)

Movement in cash and cash equivalents At beginning of year 170,906 172,278 Increase/(decrease) in cash and cash equivalents 31,851 (1,372)

At end of year 15 202,757 170,906

Non-cash transactions

The principal non-cash transactions are the capitalisation of share premium (Note 19).

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2003

Note to the Cash Flow Statement

A. Acquisition Of A Subsidiary

On 18 June 2003, the group acquired 51% of the share capital of Xinjiang Luthai Harvest Cotton Co., Ltd. (“Xinjiang Luthai”).

The assets and liabilities arising from the acquisition are as follows:

(all amounts in RMB thousands)

Cash 61,204

Inventory 6,074

Receivables and prepayments 85,773

Property, plant and equipment, net 82,055

Trade and other payables (65,315)

Borrowing (99,673)

Net assets of the subsidiary 70,118

Total purchase price at the Group’s 51% share of the net assets of the subsidiary 35,760

Less: Cash of the subsidiary acquired (61,204)

Net cash inflow on acquisition of the subsidiary (25,444)

The accounting policies on pages 9 to 14 and the notes on pages 15 to 29 form an integral part of these consolidated financial statements

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

ACCOUNTING POLICIES

Background information

Luthai Textile Joint Stock Company Limited (the “Company”) is a joint stock limited company established in Shandong Province of the People’s Republic of China (“PRC”). The principal activities of the Company and its subsidiaries (the “Group”) are the manufacture and sale of various textiles and garment products, including cotton, cotton yarn, dyed yarn, fabric and shirts. The Group mainly operates in the mainland of PRC. The address of the Company’s registered office is as follows:

South Side, Nan Ying North Road Zibo High and New Technology Development Zone Zibo City, Shandong Province The People’s Public of China

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below:

A. Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The consolidated financial statements have been prepared under the historical cost convention.

B. Consolidation

Subsidiary undertakings, which are those companies in which the Company, directly or indirectly has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. All inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, the accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Company.

A listing of the Company’s principal subsidiaries is set out in Note 23.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

C. Foreign currencies

The Group maintains its books and accounting records in Renminbi (“RMB”). Foreign currency transactions in the Group companies are accounted for at the exchange rates prevailing at the date of the transactions. Foreign currency monetary assets and liabilities are translated at the applicable exchange rates prevailing at the balance sheet date. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement.

Income statement and cash flows of foreign entity are translated into the Group’s reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange difference arising from the translation of the net investment in foreign entity is taken to shareholders’ equity. When a foreign entity is sold, such exchange difference is recognised in the income statement as part of the gain or loss on sale.

D. Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and impairment losses.

Depreciation is calculated on the straight -line method to write off the cost of the each asset to its residual value, estimated at 10 per cent of cost, over its estimated useful life as follows:

Buildings 20 years Plants and machinery 13 years Electronic equipment and motor vehicles 5 years

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit.

Repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Construction in progress represents fixed assets under construction or installation. Cost comprises of the original cost of property, plant and equipment, installation costs, construction costs and other direct costs. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed.

E. Land use rights

Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which the Group’s factories and buildings are situated. Amortisation of land use rights is calculated on a straight-line basis over the period of the land use rights varying from 10 to 50 years.

The land use rights will be renewed upon expiration of their present use period.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

F. Intangible assets

Expenditure on acquired intangible assets is capitalised and amortised using the straight-line method over their useful lives as stated in the contract or their estimated beneficial period as follows:

Electricity use rights 10 years Water use rights 10 years Computer software 10 years Trademark and patent 1 year

G. Investments

The Group classified its debt and equity securities into the following categories: trading, held-to- maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of purchases and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with fixed maturity that the management has the intent and ability to hold to maturity are classified as held-to- maturity and are included in non-current assets; during the year the Group did not hold any investments in this category. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; these are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets.

All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value, whilst held-to- maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments are included in the income statement in the period in which they arise. Unrealised gain and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in equity. The fair value of investments is based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities.

H. Leases

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

I. Inventories

Inventories are stated at the lower of cost or net realisable value. Cost is determined by the weighted-average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads, but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and estimated selling expenses.

J. Trade receivables

Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers.

K. Notes receivable

Notes receivable are carried at face value of the notes which approximate fair value.

L. Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash in hand and deposits held at call with banks.

M. Share capital

(1) Ordinary shares with discretionary dividends are classified as equity. (2) External costs directly attributable to the issuance of new shares are shown as a deduction in equity from the proceeds. (3) Dividends on ordinary shares are recognised in equity in the period in which they are declared.

N. Borrowings

Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

O. Deferred income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The principal temporary differences arise from depreciation on property, plant and equipment, provisions for receivables, inventories and property, plant and equipment. Tax rates enacted by the balance sheet date are used to determine deferred income tax.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

P. Defined contributions to pension scheme

The Group participates in a government pension scheme. The annual contribution amount is provided based on the amount determined by the local government agency. Under this scheme, retirement benefits of existing and retired employees are assured by the National United Retirement Fund and the Group has no further obligations beyond the annual contributions. It is the directors’ intention to continue making such payments in the future.

Q. Revenue recognition

Sales are recognised upon delivery of products and customer acceptance when significant risks and rewards of ownership of the goods are transferred to the customer. Sales are shown net of value added tax and discounts, and after eliminating sales within the Group.

Other revenues earned by the Group are recognised on the following bases: Interest income – on an accrual basis, unless collectibility is in doubt. Dividend income – when the right to receive payment is established.

R. Financial instruments

(1) Financial risk factors

The Group’s activities expose to it to a variety of financial risks, including the effects of changes in Government Bonds Exchange quoted prices, foreign currency exchange rates and interest rates.

(i) Foreign exchange risk

The Group’s sales, notes receivable and trade receivables are exposed to foreign exchange risk arising from various currency exposures primarily with respect to US Dollars and the Group’s purchases and trade payables are exposed to foreign exchange risk primarily with respect to Euro, Japanese Yen and Swiss Franc. The Group hedges the foreign currency exposure of its significant contract commitments to purchase certain production parts and raw materials. The forward contracts used in its programme mature in 12 months or less, consistent with the related purchase commitments.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

R. Financial instruments (continued)

(1) Financial risk factors (continued)

(ii) Interest rate risk

The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. As at 31 December 2003, 57% of the Group’s borrowings were at fixed interest rates as stipulated by the People’s Bank of China of PRC. Floating rates are generally lower than fixed rates.

(iii) Credit risk

The carrying amounts of cash and cash equivalents, receivables and prepayments, and trading investments represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Cash and trading investments transactions are limited to reputable financial institutions.

(2) Fair value estimation

Fair value of publicly traded securities is based on quoted market prices at the balance sheet date. In assessing the fair value of non-traded financial instruments, the Group uses a variety of methods, such as quoted market prices or estimated discounted value of future cash flows, and makes assumptions that are based on market conditions existing at each balance sheet date.

The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

S. Comparative figures

Where necessary, certain comparative figures have been adjusted to conform to changes in presentation in the current year.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

1 Sales

Sales mainly represent invoiced sales of textile products to third parties and related companies (Note 22), net of value added tax and discounts, and comprise the following:

2003 2002 Sales outside mainland PRC - Asia Hong Kong SAR 278,585 251,448 Japan 160,485 151,859 Rest of Asia 382,159 258,337 821,229 661,644

- Europe 139,903 83,288

- South America 31,183 19,464

- Others 11,973 5,004

Sales within mainland PRC 266,224 181,480

1,270,512 950,880

2 Operating profit

The following items have been included in arriving at operating profit: 2003 2002

Depreciation on property, plant and equipment (Note 8) 109,162 66,479 Impairment of property, plant and equipment (included in “Administrative expenses”) (Note 8) 10,809 - Loss on disposal of property, plant and equipment 2,804 231 Amortisation of land use rights (Note 9) 4,545 3,263 Amortisation of intangible assets (included in “Administrative expenses”) (Note 10) 3,777 2,493 Impairment of investments (included in “Administrative expenses”) 2,300 - Operating lease rentals payable – property 5,214 5,213 Operating lease rentals payable – machinery 150 1,338 Gain on disposal of a non-consolidated subsidiary - (14) Profit on sale of trading investments (included in “Other operating income”) - (473) Staff costs (Note 4) 144,184 123,682 Cost of inventories included in cost of sales 852,455 675,602 Provision for /(reversal of) doubtful debts 10,692 (218) Provision for inventories 10,463 6,828

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

3 Finance cost – net

2003 2002

Interest expenses 16,158 6,653 Interest income (2,844) (2,959) Net foreign exchange gains (2,689) (1,637)

10,625 2,057

4 Staff costs

2003 2002

Wages and salaries 115,131 101,365 Defined contribution plan 13,479 9,959 Housing fund 3,468 2,463 Welfare 12,106 9,895 144,184 123,682

Average number of persons employed by the Group during the year: Full time 7,279 6,032 Part time 1,318 795 8,597 6,827

5 Income tax expense

2003 2002

Current tax 33,721 21,692

As at 31 December 2003, the Group has no significant deferred tax assets and liabilities.

In accordance with the relevant statutory tax rules in the coastal open zone where the Company is located, the Company is subject to a statutory tax rate of 24 per cent.

Beginning from 1995, the Company has been granted a concessionary tax rate of 12 per cent subject to its output value of export products exceeding 70 per cent of output value of the products of the enterprise. The Local Ministry of Foreign Trade and Economic Cooperation has verified that output value of export products for the year ended 31 December 2003 had exceeded 70 per cent of output value of products of the enterprise. Accordingly, the income tax has been provided at 12 per cent.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

5 Income tax expense (continued)

The reconciliation of profit before tax and income tax expense is as follows:

2003 2002

Profit before tax of the Group 231,325 152,986

Tax calculated at a tax rate of 12% (2002: 12%) 27,759 18,358 Effect of different tax rates of subsidiaries 2,826 2,581 Income not subject to tax (667) (114) Effect of expenses not deductible for tax purposes 3,803 867 Income tax expense 33,721 21,692

6 Earnings per share

Basic and diluted earnings per share have been calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. As there are no potentially dilutive securities, there is no difference between basic and diluted earnings per share.

2003 2002

Net profit attributable to shareholders 195,156 128,542 Weighted average number of ordinary shares in issue (thousands) 422,432 352,027 Earnings per share (RMB per share) 0.46 0.37

7 Dividends

On 28 March 2004, the Board of Directors proposed a dividend of RMB 0.375 per share, totalling RMB 158,412,000 for the year ended 31 December 2003. The proposed dividend distribution is subject to shareholders’ approval in the next general meeting. These financial statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2004. The dividend declared in respect of 2002 and 2001 were, respectively, RMB 105,608,000 and RMB 86,111,220.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

8 Property, plant and equipment

Electronic Plants & equipment & Construction Buildings machinery motor vehicles in progress Total

Balance at 1 January 2002 158,154 513,235 14,417 71,160 756,966 Additions 5,135 7,816 6,166 332,057 351,174 Transfer of construction in progress 103,606 207,858 2,976 (314,440) - Disposals - (664) (92) - (756) Depreciation charge (Note 2) (8,536) (53,230) (4,713) - (66,479)

Balance at 31 December 2002 258,359 675,015 18,754 88,777 1,040,905

At 31 December 2002 Cost 288,693 904,135 27,498 88,777 1,309,103 Accumulated depreciation and impairment provision (30,334) (229,120) (8,744) - (268,198)

Net book amount 258,359 675,015 18,754 88,777 1,040,905

Electronic Plants & equipment & Construction Buildings machinery motor vehicles in progress Total

Balance at 1 January 2003 258,359 675,015 18,754 88,777 1,040,905 Additions 31,102 32,269 9,271 422,634 495,276 Transfer of construction in progress 42,038 310,702 757 (353,497) - Disposals (2,178) (10,365) (475) (161) (13,179) Impairment charge (Note 2) - (10,588) (221) - (10,809) Depreciation charge (Note 2) (21,339) (82,337) (5,486) - (109,162)

Balance at 31 December 2003 307,982 914,696 22,600 157,753 1,403,031

At 31 December 2003 Cost 357,930 1,241,229 37,605 157,753 1,794,517 Accumulated depreciation and impairment provision (49,948) (326,533) (15,005) - (391,486)

Net book amount 307,982 914,696 22,600 157,753 1,403,031

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

9 Land use rights

2003 2002

Balance at 1 January 32,446 11,545 Additions 68,885 24,164 Amortisation charge (Note 2) (4,545) (3,263)

Balance at 31 December 96,786 32,446

At 31 December Cost 115,130 46,010 Accumulated amortisation (18,344) (13,564)

Net book amount 96,786 32,446

10 Intangible assets

Electricity Water use Computer Trademark Total use rights rights software and patent

Balance at 1 January 2002 4,310 9,133 - - 13,443 Additions - - 124 760 884 Amortisation charge (Note 2) (808) (1,684) (1) (760) (3,253)

Balance at 31 December 2002 3,502 7,449 123 - 11,074

At 31 December 2002 Cost 8,080 11,045 124 760 20,009 Accumulated amortisation (4,578) (3,596) (1) (760) (8,935)

Net book amount 3,502 7,449 123 - 11,074

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

10 Intangible assets (continued)

Electricity Water use Computer Trademark Total use rights rights software and patent

Balance at 1 January 2003 3,502 7,449 123 - 11,074 Additions - 401 - 1,928 2,329 Amortisation charge (Note 2) (809) (1,028) (12) (1,928) (3,777)

Balance at 31 December 2003 2,693 6,822 111 - 9,626

At 31 December 2003 Cost 8,080 10,686 124 1,928 20,818 Accumulated amortisation (5,387) (3,864) (13) (1,928) (11,192)

Net book amount 2,693 6,822 111 - 9,626

11 Investment in a non-consolidated subsidiary

2003 2002

Balance at 1 January 6,808 7,651 Share of result before tax (10) (10) Addition of investment in Luthai HK - 6,367 Consolidation of Luthai HK (6,367) - Disposal of a non-consolidated subsidiary - (7,200)

Balance at 31 December 431 6,808

Investment in a non-consolidated subsidiary represents the Company’s unquoted equity investments in Qingdao Luthai International Trading Co., Ltd. (“Qingdao Luthai”) (Note 23).

As the financial statements of Qingdao Luthai were not material to the Group, it had been accounted for by the equity method of accounting in the consolidated financial statements of the Group.

Included in investment in a non-consolidated subsidiary at 31 December 2002 was an amount of RMB 6,367,000 for the Company’s investment in a subsidiary, Luthai (Hong Kong) Textile Co., Ltd. (“Luthai HK”) incorporated in 2002 which has commenced operation in 2003 and consequently has been consolidated in the Group’s financial statements during the year.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

12 Available-for-sale investment

2003 2002

Balance at 1 January 215 215

Balance at 31 December 215 215

Available-for-sale investment represents the Company’s 10.5% unquoted equity investment in Zibo Stanluian Cosmetics Co., Ltd. that was incorporated in PRC. The investment is carried at cost, as its fair value cannot be reliably determined without incurring excessive costs. The directors are of the opinion that the investment is classified as non-current assets as it is not expected to be realised within twelve months of the balance sheet date.

13 Inventories

31 December 2003 2002 Raw materials (at cost) 276,052 129,254 Work in progress (at cost) 120,805 92,278 Work in progress (at net realisable value) 552 - Finished goods (at cost) 49,116 54,371 Finished goods (at net realisable value) 11,746 7,861

458,271 283,764

14 Receivables and prepayments

31 December 2003 2002 Trade receivables 36,588 21,046 Provision for doubtful debts (2,010) (1,122) 34,578 19,924 Other receivables 64,439 5,037 Provision for doubtful debts (10,279) (475) 54,160 4,562 Notes receivable (a) 105,349 76,263 VAT tax refund receivable (b) 92,732 80,410 Prepayments 115,908 52,562 Amount due from Tianxin (Note 22) 3,612 1,782 Employee housing loans 7,500 4,069

413,839 239,572

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

14 Receivables and prepayments (continued)

(a) Notes receivables represent irrevocable letters of credit denominated in foreign currencies, and bills of exchange denominated in RMB received from customers, with maturity dates within one year and six months of balance sheet date, respectively.

(b) At 31 December 2003, bank borrowings amounting to RMB 60,000,000 are secured on VAT tax refund receivable (2002: RMB 60,000,000) (Note 17).

15 Cash and cash equivalents

31 December 2003 2002

Cash at bank and in hand 131,665 74,834 Short term bank deposits 71,092 96,072

202,757 170,906

The interest rates on short term bank deposits range from 0.1% to 6% per annum (2002: 0.125% to 3.5%).

16 Trade and other payables

31 December 2003 2002

Notes payable (a) 73,977 140,815

Trade payables 65,689 38,870 Advances from customers 46,100 8,796 Payroll and welfare payables 35,637 23,393 Dividend payables 496 1,099 Taxes other than income taxes payable (1,515) 3,584 Accrued expenses 6,948 8,703 Amount due to shareholder – Lucheng (Note 22) 1 562 Other payables 82,811 12,131 236,167 97,138

310,144 237,953

(a) Notes payable represent commercial bills denominated in RMB payable to suppliers, with maturity dates within six months of balance sheet date.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

17 Borrowings

31 December 2003 2002 Current Bank borrowings – secured (a) 90,000 60,000 Bank borrowings – unsecured 610,422 30,000 Inter-company commercial bills discounted to banks 26,228 41,359

726,650 131,359

Non-current Bank borrowings – unsecured - 15,000

Total borrowings 726,650 146,359

(a) Included in these current bank borrowings are an amount of RMB 60,000,000 (2002: RMB 60,000,000) secured over VAT tax refund receivable (Note 14(b)), and another amount of RMB 30,000,000 guaranteed by a third party.

The effective interest rates of the borrowings at the balance sheet date were as follows:

2003 2002

Bank borrowings 3.26% 4.80% Inter-company commercial bills discounted to banks 4.5% 2.88%

The carrying amounts of borrowings approximate their fair values.

Maturity of non-current borrowing:

31 December 2003 2002 Between 1 and 2 years - 15,000

18 Commitments

(a) Capital commitments

Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements is as follows:

31 December 2003 2002 Property, plant and equipment 76,148 166,105

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

18 Commitments (continued)

(b) Operating lease commitments – where the Group is a lessee

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

31 December 2003 2002

Not later than 1 year 5,161 4,970 Later than 1 year and not later than 5 years 11,321 11,838 Later than 5 years 12,570 14,555

29,052 31,363

19 Ordinary shares and share premium

31 December 2003 2002

Number of shares (in thousands) 422,432 352,027

Registered, issued and fully paid ordinary shares of RMB 1.00 each (a) Non-tradable - Domestic legal person shares 59,116 49,264 - Foreign legal person shares 59,116 49,263 - Employee shares 33,800 (b) Tradable - A shares 141,960 84,500 - B shares 162,240 135,200 422,432 352,027 Share premium 695,390 765,795 Total 1,117,822 1,117,822

All shares rank pari passu in all respects.

Pursuant to the resolution of the Annual General Meeting of the Company on 8 May 2003, the Board of Directors of the Company capitalised RMB 70,405,400 Share Premium as at 31 December 2002 on a 2-for-10 basis (2002: RMB 81,237,000). After the capitalisation, the total Share Capital of the Company increased from 352.03 million shares to 422.43 million shares.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

20 M inority interest

2003 2002

Balance at 1 January 44,621 39,897 Addition in investment in subsidiaries 51,476 2,552 Share of net profit of subsidiaries 2,448 2,752 Dividend paid (2,365) (580)

Balance at 31 December 96,180 44,621

21 Reserves

Statutory Public Discretionary Currency common welfare common translation reserve fund reserve reserve Total

Balance at 1 January 2002 42,577 20,968 3,342 - 66,887 Appropriation during the year 13,327 6,664 - - 19,991 Balance at 31 December 2002 55,904 27,632 3,342 - 86,878

Balance at 1 January 2003 55,904 27,632 3,342 - 86,878 Appropriation during the year 19,796 9,898 - - 29,694 Currency translation difference - - - 28 28 Balance at 31 December 2003 75,700 37,530 3,342 28 116,600

The PRC laws and regulations require PRC enterprises to provide for statutory common reserve fund and statutory public welfare fund which are appropriated from net profit as reported in the statutory financial statements prepared under the PRC accounting regulations prior to any dividend appropriation. All statutory common reserve fund and statutory public welfare fund are created for specific purposes.

The Company is required to allocate at least 10 per cent of its net profit to the statutory common reserve fund until this fund reaches 50 per cent of the registered capital. The statutory common reserve fund can only be used, upon approval by the relevant authorities, to offset accumulated losses or to increase capital. However, the remaining unconverted statutory common reserve fund should be maintained at a minimum of 25 per cent of registered capital. An appropriation of 10 per cent of net profit has been allocated to the statutory common reserve fund for the year ended 31 December 2003 (2002: 10 per cent).

An appropriation of 5 per cent of net profit has been made to the statutory public welfare fund for the year ended 31 December 2003 (2002: 5 per cent). This fund should be used for the collective welfare of the employees.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

21 Reserves (continued)

According to the PRC listing rules and relevant regulations, distributions of profit should be made based on the lower of the retained earnings as stated in the statutory financial statements and the retained earnings as stated in the financial statements prepared in accordance with IFRS. On this basis, the retained earnings of the Company as of 31 December 2003 were RMB 178,510,000 (2002: RMB 120,054,000).

In accordance with the Company’s Articles of Association, an appropriation to a discretionary common reserve fund can be made after the statutory appropriations, subject to shareholders’ approval at the Annual General Meeting. At the Annual General Meeting to be held in May 2004, no discretionary common reserve fund is to be proposed (2002: nil).

22 Related party transactions

The Company is controlled by Zibo Lucheng Textile Co., Ltd. (“Lucheng”) (Note 16) that incorporated in PRC, which owns 14% of the Company’s shares. The largest shareholder of Lucheng is Mr. Liu Shizhen, the Chairman of the Board of Directors and the General Manager of the Company.

In addition to the related party information shown elsewhere in the financial statements, the following significant transactions between the Group and related parties took place during the financial year at terms agreed between the parties as set out below:

Related party Relationship

Dongying City Tianxin Woven Co., Ltd. (“Tianxin”) Minority shareholder of Dongying Luxin (Note 14) Woven Co., Ltd. (“Dongying Luxin”), a subsidiary of the Company (Note 23)

(a) Transactions between the Company and Lucheng

(i) Sales of goods

2003 2002

Slow-moving and scraped fabric and fragmentary cloths 166 143

The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

22 Related party transactions (continued)

(a) Transactions between the Company and Lucheng (continued)

(ii) Purchases of goods

2003 2002

Fabric and fragmentary cloths - 707 Other garment products 38 975

38 1,682

The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices.

(iii) Salaries of temporary staff

Salaries paid to Lucheng for the temporary staff provided on commercial terms and conditions and at market prices, approximated RMB 6,862,000 (2002: RMB 6,721,000).

(iv) Lease agreements

On 1 January 2003, the Company renewed a lease agreement with Lucheng for a piece of land and certain buildings on this land. Lucheng has guaranteed a lease term of 15 years, which is renewable annually, with monthly lease payments of RMB 121,854 and RMB 43,541 for the land and certain buildings respectively. The areas of the land and building leased are 61,424.03 m2 and 6,484.07 m2 respectively. The Company has constructed its Luthai Industrial Park on this land in the year 2001.

On 12 August 2001, the Company signed a lease agreement with Lucheng for a gasoline station. The lease term is 5 years with monthly lease payment of Rmb 28,986 for the land and gasoline storage facilities constructed on it.

The directors believe that these leases were carried out on commercial terms and conditions and at market prices. Lease payments in year 2003 amounted to RMB 2,333,000 (2002: RMB 2,333,000).

(b) Transactions between Dongying Luxin and Tianxin

(i) Sales of goods

2003 2002

Cotton yarns related products 1,671 323

The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices.

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

22 Related party transactions (continued)

(b) Transactions between Dongying Luxin and Tianxin (continued)

(ii) Purchases of goods and services

Basis 2003 2002

Cotton yarns related raw materials Market price 1,976 - Cotton yarns related semi-finished goods Market price 154 491 Tools and auxiliary materials Cost 3,443 693 Utilities Cost plus 10% 8,968 6,845

14,541 8,029

(iii) Purchase of general services

On 24 February 2001, Dongying Luxin signed an agreement with Tianxin related to the rental of buildings and daily services from Tianxin. The directors believe that this agreement was carried out on commercial terms and conditions and on market prices. Relevant payments in year 2003 approximated RMB 1,887,000 (2002: RMB 1,887,000).

In 2003, the total remuneration of the directors and the supervisory committee members amounted to RMB 4,560,000 (2002: RMB 4,272,000).

LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

23 Principal subsidiary undertakings

Particulars of the Company’s subsidiaries are as follows:

% Interest held Country of and proportion Name incorporation of voting rights Principal activities

2003 2002

Consolidated subsidiaries

Dongying Luxin (Note 22) PRC 65% 65% Manufacture and sales of cotton yarns related products

Beijing Innovative Garment Co., Ltd. PRC 65% 65% Manufacture and (“Beijing Innovative”) sales of shirts

Beijing Luthai Shirt Co., Ltd. PRC 60% 60% Manufacture and (“Beijing Luthai”) sales of textiles and garment products

Lutai HK Hong Kong 100% 100% Trading, import and SAR export of textile products

Xinjiang Luthai PRC 51% - Manufacture and sales of cotton and cotton yarns

Shandong Luthai Huanzhong PRC 75% - Manufacture and Pharmacy Co., Ltd. sales of Chinese traditional medicine

Non-consolidated subsidiary

Qingdao Luthai (Note 11) PRC 75% 75% General trading

24 Approval of financial statements

The financial statements were authorised for issue by the Board of Directors on 28 March 2004.