天津泰達生物醫學工程股份有限公司 Tianjin TEDA Biomedical

IMPORTANT

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

If you are in any doubt as to the action to be taken, you should immediately consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Tianjin TEDA Biomedical Engineering Company Limited (the “Company”), you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

天津泰達生物醫學工程股份有限公司 Tianjin TEDA Biomedical Engineering Company Limited (a joint stock company incorporated in the People’s Republic of China with limited liability) (Stock code: 8189) MAJOR AND CONNECTED TRANSACTION IN RESPECT OF THE PROPOSED ACQUISITION OF THE REMAINING 49% EQUITY INTERESTS IN FULILONG

Independent financial adviser to the independent board committee of Tianjin TEDA Biomedical Engineering Company Limited

Hantec Capital Limited

A letter from the independent board committee of the Company and a letter from the independent financial adviser, Hantec Capital Limited in relation to the Acquisition are set out on page 21 and pages 22 to 33 of this circular respectively.

A notice convening an extraordinary general meeting of the Company to be held at 9th Floor, Block A2, Tianda High-Tech Park, No.80, The 4th Avenue, TEDA, Tianjin, the People’s Republic of China at 9:00 a.m. on Friday, 13 October 2006 is set out on pages 159 to 160 of this circular.

This circular will remain on the GEM website at http://www.hkgem.com on the “Latest Company Announcements” page for at least 7 days from the day of its posting.

28 August 2006 CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OPERATED BY THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “STOCK EXCHANGE”)

GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the main board of the Stock Exchange and no assurance is given that there will be a liquid market in the securities traded on GEM.

The principal means of information dissemination on GEM is publication on the Internet website operated by the Stock Exchange. GEM-listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website at http://www.hkgem.com in order to obtain up-to-date information on GEM-listed issuers.

– i – CONTENTS

Page

Definitions ...... 1

Letter from the Board Introduction ...... 4 The Equity Transfer Agreement ...... 5 Information on the Group ...... 8 Information on Fulilong ...... 9 Reasons for and benefits of the Acquisition ...... 11 Management discussion and analysis of the results of Fulilong ...... 13 Financial effects of the Acquisition ...... 17 Major and connected transaction ...... 18 EGM ...... 19 Procedures to demand a poll ...... 19 Recommendation ...... 20 Other information ...... 20

Letter from the independent board committee ...... 21

Letter from Hantec Capital Limited ...... 22

Appendix 1 – Accountants’ report on Fulilong ...... 34

Appendix 2 – Financial information of the Group ...... 61

Appendix 3 – Unaudited pro-forma financial information ...... 142

Appendix 4 – General information ...... 148

Notice of Extraordinary General Meeting ...... 159

– ii – DEFINITIONS

In this circular, the following expressions shall have the following meanings unless the context indicates otherwise:

“Acquisition” the proposed conditional acquisition of the Sale Equity pursuant to the terms and conditions of the Equity Transfer Agreement

“associate” has the meaning as defined in the GEM Listing Rules

“Board” the board of Directors

“Company” 天津泰達生物醫學工程股份有限公司 (Tianjin TEDA Biomedical Engineering Company Limited), a joint stock company established in the PRC on 8 September 2002 with limited liability and the H Shares of which are listed and traded on GEM (Stock Code: 8189)

“Completion” completion of the sale and purchase of the Sale Equity under the Equity Transfer Agreement

“Consideration” the aggregate consideration of RMB33,402,971.87 payable to the other shareholders of Fulilong for the Sale Equity under the Equity Transfer Agreement

“Domestic Shares” the domestic invested shares of nominal value of RMB0.10 each in the share capital of the Company, which are subscribed for in RMB

“Directors” the directors of the Company

“EGM” an extraordinary general meeting of the Company to be convened to consider the Acquisition

“Equity Transfer Agreement” The conditional equity transfer agreement dated 25 June 2006 entered into among the Company, Wan Tai, the other shareholders of Fulilong and Fulilong in relation to the Acquisition

“GEM” the Growth Enterprise Market of the Stock Exchange

“GEM Listing Rules” the Rules Governing the Listing of Securities on GEM

“Fulilong” 廣東福利龍複合肥有限公司 (Guangdong Fulilong Compound Fertilizers Company Limited#), a company established in the PRC on 20 August 1996 with limited liability and owned as to 51% by the Company and 49% by the other shareholders of Fulilong as described in this circular before the Acquisition

– 1 – DEFINITIONS

“Group” the Company and its subsidiaries

“H Shares” the overseas listed foreign invested shares of nominal value of RMB0.10 each in the share capital of the Company, which are listed on GEM and subscribed for and traded in HK$

“Hong Kong” the Hong Kong Special Administrative Region of the PRC

“Independent Board Committee” an independent committee of the board of Directors comprising Professor Xian Guoming and Mr. Guan Tong, the independent non-executive Directors, formed for the purpose of advising the Independent Shareholders in relation to the Acquisition

“Independent Third Party(ies)” person(s) which, to the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, is/are independent of and not connected with the Company, any of the directors, supervisors, chief executive, promoters, substantial shareholders or management shareholders (both as defined in the GEM Listing Rules) of the Company and of its subsidiaries and their respective associates

“Independent Shareholders” Shareholders who are not interested or involved in the Acquisition

“Latest Practicable Date” 25 August 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained in this circular

“other shareholders of Fulilong” Mr. Cao Ai Xin, Mr. Huang Kun Yao, Ms. Zhang Li Zhi, Mr. Huang Chuan Rong and Mr. Gan Shi Fan

“PRC” or “China” the People’s Republic of China and for the purpose of this circular, does not include Hong Kong, the Macau Special Administrative Region and Taiwan

“Sale Equity” the remaining 49% equity interests in the registered capital of Fulilong, of which 42.53%, 4.9%, 0.98%, 0.29% and 0.29% are from Mr. Cao Ai Xin, Mr. Huang Kun Yao, Ms. Zhang Li Zhi, Mr. Huang Chuan Rong and Mr. Gan Shi Fan respectively, to be acquired in accordance with the terms and conditions of the Equity Transfer Agreement

– 2 – DEFINITIONS

“SFO” the Securities and Future Ordinance (Chapter 571 of the laws of Hong Kong) as amended, supplemented and/or modified from time to time

“Shaanxi Xing Fu” 陝西興福肥業有限責任公司 (Shaanxi Xing Fu Fertilizer Company Limited#), a company established in the PRC on 25 May 2004 with limited liability and owned as to 40% by Fulilong and 60% by Shaanxi Xing Hua

“Shaanxi Xing Hua” 陝西興化化學股份有限公司 (Shaanxi Xinghua Chemistry Co., Ltd.), a company established in the PRC in 1997 with limited liability and an Independent Third Party

“Shandong TEDA” 山東泰達生物工程有限公司 (Shandong TEDA Bio- engineering Co., Ltd.), a company established in the PRC on 18 September 2004 with limited liability and a 51% owned subsidiary of the Company

“Shareholders” shareholders of the Company

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“Wan Tai” 天津萬泰生物發展有限公司 (Tianjin Wan Tai Bio- Development Company Limited#), a company established in the PRC on 3 September 2001 with limited liability and a wholly-owned subsidiary of the Group

“HK$” Hong Kong Dollars, the lawful currency of Hong Kong

“RMB” Renminbi, the lawful currency of the PRC

“%” per cent

For the purpose of this circular, conversion of RMB into HK$ is calculated by using the exchange rate of RMB1.04 = HK$1.00. Such exchange rate is used for the sole purpose of illustration only and does not constitute a representation that any amounts have been, could have been or may be exchanged at this or any other exchange rates or at all.

# For identification purpose only

– 3 – LETTER FROM THE BOARD

Executive Directors: Registered Office: Mr. Wang Shuxin (Chairman) No. 12 Tai Hua Road Mr. Xie Kehua The 5th Avenue Mr. Zhang Songhong TEDA Tianjin Non-executive Directors: PRC Mr. Feng Enqing Mr. Liu Zhenyu Mr. Xie Guangbei

Independent non-executive Directors: Professor Xian Guoming Mr. Guan Tong

28 August 2006

To: Shareholders

Dear Sir/Madam,

INTRODUCTION

On 30 June 2006, the Directors announced that on 25 June 2006, the Company, Wan Tai, the other shareholders of Fulilong and Fulilong entered into the Equity Transfer Agreement pursuant to which the Company and Wan Tai conditionally agreed to acquire the remaining 49% equity interests in Fulilong from the other shareholders of Fulilong.

The purpose of this circular is to provide you with details of the Equity Transfer Agreement and to seek approval from the Shareholders on the Acquisition.

– 4 – LETTER FROM THE BOARD

THE EQUITY TRANSFER AGREEMENT

Date

25 June 2006

Parties

(1) the Company;

(2) Wan Tai, a wholly-owned subsidiary of the Group;

(3) the other shareholders of Fulilong, comprising:

(i) Mr. Cao Ai Xin, who contributed RMB6,944,000 towards (which represents approximately 42.53% of) the registered capital of Fulilong before the Acquisition;

(ii) Mr. Huang Kun Yao, who contributed RMB800,000 towards (which represents approximately 4.9% of) the registered capital of Fulilong before the Acquisition;

(iii) Ms. Zhang Li Zhi, who contributed RMB160,000 towards (which represents approximately 0.98% of) the registered capital of Fulilong before the Acquisition;

(iv) Mr. Huang Chuan Rong, who contributed RMB48,000 towards (which represents approximately 0.29% of) the registered capital of Fulilong before the Acquisition; and

(v) Mr. Gan Shi Fan, who holds contributed RMB48,000 towards (which represents approximately 0.29% of) the registered capital of Fulilong before the Acquisition;

save that Mr. Gan Shi Fan and Mr. Cao Ai Xin are the director and general manager of Shandong TEDA respectively and Mr. Cao Ai Xin is the director of Fulilong, all the other shareholders of Fulilong are Independent Third Parties. Mr. Gan and Mr. Cao had no shareholding interest in the Company as at the Latest Practicable Date; and

(4) Fulilong.

Assets to be acquired

The Sale Equity being the aggregate contribution by the other shareholders of Fulilong of RMB8,000,000 towards the registered capital of Fulilong, representing 49% equity interests in Fulilong.

– 5 – LETTER FROM THE BOARD

Consideration

The Consideration for the Acquisition is RMB33,402,971.87 (equivalent to approximately HK$32,118,242.18). The Consideration has been arrived at after arm’s length negotiation among the parties to the Equity Transfer Agreement having taken into account the audited net asset value of Fulilong as at 31 December 2005 prepared in accordance with generally accepted accounting principles in the PRC and the Sale Equity in the registered capital of RMB16,326,500 of Fulilong. 49% of that audited net asset value of Fulilong as at 31 December 2005 of approximately RMB68,169,330.35 is RMB33,402,971.87. The Directors consider that the Acquisition is on normal commercial terms and in the ordinary and usual course of business of the Company and the terms of the Equity Transfer Agreement are fair and reasonable so far as the Company and the Shareholders as a whole are concerned and in the interest of the Company. Professor Xian Guoming and Mr. Guan Tong, the independent non-executive Directors, did not have any objection to the Acquisition.

The Consideration for the Acquisition of the remaining 49% equity interests in Fulilong is approximately RMB33.40 million, which is arrived at based on 49% of the audited net asset value of Fulilong as at 31 December 2005 of approximately RMB68.17 million, prepared in accordance with accounting standards in the PRC which are consistent with those in Hong Kong. As the net asset value of Fulilong has been increased from approximately RMB30.80 million to approximately RMB68.17 million, the Consideration for the Acquisition per interest in Fulilong is higher than the consideration per interest in the Company’s subscription for the 51% equity interests in Fulilong as described above.

The Consideration will be payable to the other shareholders of Fulilong in accordance with the number of their equity interests in the registered capital of Fulilong and the net asset value of such equity interests as shown on the audited accounts of Fulilong for the year ended 31 December 2005 prepared in accordance with the generally accepted accounting principles in the PRC and in the following manner:

(i) RMB28,993,771.32 (equivalent to approximately HK$27,878,626.27) shall be payable to Mr. Cao Ai Xin;

(ii) RMB3,340,303.45 (equivalent to approximately HK$3,211,830.24) shall be payable to Mr. Huang Kun Yao;

(iii) RMB668,060.69 (equivalent to approximately HK$642,366.04) shall be payable to Ms. Zhang Li Zhi;

(iv) RMB200,418.21 (equivalent to approximately HK$192,709.82) shall be payable to Mr. Huang Chuan Rong; and

(v) RMB200,418.21 (equivalent to approximately HK$192,709.82) shall be payable to Mr. Gan Shi Fan.

– 6 – LETTER FROM THE BOARD

The Consideration will be satisfied by cash and financed as to approximately RMB19 million by the Group’s internal resources and as to RMB15 million by bank borrowing, the repayment of which shall be secured by the Group’s product stock. 10% of the Consideration should be paid as deposit to the other shareholders of Fulilong upon signing of the Equity Transfer Agreement and the remaining 90% of the Consideration is payable to the other shareholders of Fulilong upon the fulfillment of the conditions i and iii described in the section headed “Conditions” of this circular.

Conditions

Completion is subject to and conditional upon the fulfillment of the following conditions on or before 30 September 2006 (which was extended to 31 October 2006 pursuant to the Supplemental Agreement to the Equity Transfer Agreement dated 16 August 2006):

i. the approval of the Equity Transfer Agreement and the transaction contemplated thereby by the Shareholders;

ii. the filing of the relevant document in relation to the Acquisition with the State-owned Assets Supervision and Administration Department (國有資產監督管理部門);

iii. the filing of the relevant document in relation to the Acquisition with the local Administration of Industry and Commerce (當地工商行政管理局);

iv. the issue of announcement and circular in relation to the Acquisition by the Company according to the GEM Listing Rules;

v. the completion of a financial and legal “due diligence” review on the assets (including the land and properties) and undertakings of Fulilong by the Company and the results of such review are satisfied by the Company in all aspects;

vi. the issue of a legal opinion by a firm of PRC lawyers confirming the assets (including the land and properties) and undertakings of Fulilong in such form to the satisfaction of the Company; and

vii. the Company being satisfied that the representations and warranties given by the other shareholders of Fulilong under the Equity Transfer Agreement remaining true and accurate and not materially misleading in any aspect at completion of the Acquisition as if repeated at completion of the Acquisition and at all times between the date of the Equity Transfer Agreement and completion of the Acquisition.

– 7 – LETTER FROM THE BOARD

As at the Latest Practicable Date, none of the above conditions has been fulfilled except the issue of an announcement by the Company in relation to the Acquisition on 30 June 2006. The Company may at its absolute discretion, waive in writing, at any time, any of the above conditions except conditions (i) to (iv) which cannot be waived by the Company. The Company shall seek prior Independent Shareholders’ approval if any of the conditions (v) to (vii) is waived. In the event that any of the conditions is not fulfilled or (where applicable) waived prior to 30 September 2006 which was extended to 31 October 2006 as mentioned above (or such other date as the parties to the Equity Transfer Agreement may agree), the Equity Transfer Agreement shall lapse and the 10% deposit paid under the Equity Transfer Agreement shall be refunded to the Group.

Representations and Warranties

Under the Equity Transfer Agreement, the other shareholders of Fulilong have given certain representations and warranties in relation to the business operations and financial condition of Fulilong. The Company shall be entitled to claim the other shareholders of Fulilong in case that any of the representations and warranties is breached.

INFORMATION ON THE GROUP

The Company is principally engaged in the research and development and commercialization of diabetic health products, other medical and health products and fertilizer products throughout the PRC.

The audited consolidated net assets of the Group was approximately RMB33.30 million and RMB97.87 million as at 31 December 2004 and 31 December 2005 respectively. The unaudited consolidated net assets of the Group were approximately RMB97.2 million as at 30 June 2006. The following table shows the audited consolidated results of the Group for the two years ended 31 December 2005 and the unaudited consolidated results of the Group for the six months ended 30 June 2006 prepared in accordance with generally accepted accounting principles in Hong Kong:

For the six For the For the months ended year ended year ended 30 June 31 December 31 December 2006 2005 2004 (Unaudited) (Audited) (Audited) RMB’000 RMB’000 RMB’000

Turnover 148,680 205,032 58,646 Loss before taxation (286) (1,431) (18,996) Loss before minority interest (286) (1,676) (19,078) (Loss)/profit attributable to shareholders (2,062) 773 (15,546)

– 8 – LETTER FROM THE BOARD

INFORMATION ON FULILONG

Background of Fulilong

Fulilong was established in August 1996 and commenced its principal business in the production and marketing of compound fertilizer in September 1996. As at 31 December 2005, Fulilong owned five production lines located at Dongguan of Guangdong Province, the PRC and another one located at Xingping of Shaanxi Province, the PRC, which adopts the advanced technology of “Melt Granulation Method with High Tower”. The six production lines have an annual production capacity reaching approximately 800,000 tonnes of compound fertilizers. Fulilong has also entered into a cooperation agreement in June 2005 with 貴州化肥廠有限公司 (Guizhou Chemical Fertilizer Factory Company Limited) (“Guizhou Chemical”), a fertilizer manufacturer in Qingzhen City of Guizhou Province, the PRC, to set up a production base with an annual capacity of 200,000 tonnes of highly concentrated urine based compound fertilizers under which Guizhou Chemical is responsible for establishing the production plant while Fulilong is responsible for the technical support and design and the provision of the production equipment. The production plant will belong to Guizhou Chemical and Guizhou Chemical shall manufacture according to the production plan of Fulilong, which shall purchase all products manufactured by Guizhou Chemical. It is expected that the production base will commence trial production by October 2006. Fulilong has been approved as “New and High Technology Enterprises” by the Department of Science and Technology of Guangdong Province (廣東省科學技術廳) since June 2003 and its quality control management system was awarded ISO9001 certification in July 2003. In December 2005, the Company completed the subscription for 51% equity interests in the registered capital (as enlarged by the Company’s subscription) of Fulilong.

The following table shows the net profit before and after taxation and extraordinary items of Fulilong for the two years ended 31 December 2005:

For the year ended For the year ended 31 December 2005 31 December 2004 (Audited) (Audited) (prepared (prepared in accordance in accordance with accounting with accounting principles principles generally generally accepted in accepted in Hong Kong) Hong Kong) RMB’000 RMB’000

Net profit before taxation and extraordinary items 11,270 10,780 Net profit after taxation and extraordinary items 11,270 10,780

Please refer to Appendix 1 to this circular for more financial information on Fulilong.

– 9 – LETTER FROM THE BOARD

Shareholding structure of Fulilong

The following diagrams illustrate the shareholding structure of Fulilong as at the date of this circular and immediately after the Completion:

As at the date of this circular

Mr. Cao Ai Xin Mr. Gan Shi Fan the Company Mr. Huang Kun Yao Ms. Zhang Li Zhi Mr. Huang (Note 1) Chuan Rong (Note 2)

51%

51% 42.53% 4.9% 0.98% 0.29% 0.29%

Shaanxi Xing Hua Shandong TEDA Fulilong (Note 3)

60% 40%

Shaanxi Xing Fu

Immediately after the Completion

Wan Tai the Company (Note 4)

95% 5% 51%

Shaanxi Xing Hua Shandong TEDA Fulilong (Note 3)

60% 40%

Shaanxi Xing Fu

Notes:

1. Mr. Cao is a director of Fulilong and the general manager of Shandong TEDA.

2. Mr. Gan is a director of Shandong TEDA.

3. Shaanxi Xing Hua, an Independent Third Party, is a company established in the PRC in 1997.

4. Wan Tai is a wholly-owned subsidiary of the Group.

After the Completion, Fulilong will become a wholly-owned subsidiary of the Group and the whole results of Fulilong will be consolidated in the accounts of the Company so long as Fulilong remains as a wholly-owned subsidiary of the Group.

– 10 – LETTER FROM THE BOARD

Board composition

The Group has no present intention to change the composition of the board of directors of Fulilong after the Completion. As at the Latest Practicable Date, the board of directors of Fulilong comprises Mr. Wang Shuxin (who is also the chairman and executive Director of the Company), Mr. Zhang Songhong (who is also the executive Director of the Company), Mr. Hao Zhihui (who was a supervisor of the Company until 10 August 2006 and currently is the chief executive of the Company), Mr. Cao Ai Xin and Mr. You Huanyu (who is a manager in the marketing department of the Company).

REASONS FOR AND BENEFITS OF THE ACQUISITION

The PRC is currently the largest producer and consumer of chemical fertilizers. The consumption of compound fertilizers represents 25% of the total consumption of chemical fertilizers of the PRC and, as compared with an average global consumption level of 30%, is far below the 50% to 80% level of that of developed countries.

Since September 2004, the Group, through Shandong TEDA, was authorised to distribute compound fertilizers under “Fulilong” brandname and commenced to enter into the compound fertilizer market in the PRC dedicating to build up a brandname of high quality compound fertilizers with the application of high technology. Shandong TEDA contributed to a significant extent to the turnover of the Group. As stated in the audited consolidated accounts of the Company for the year ended 31 December 2005, prepared in accordance with accounting principles generally accepted in the PRC, the sales turnover of compound fertilizers of the Group for the year ended 31 December 2005 was RMB156,115,759, representing 76.1% of the total turnover of the Group for the same period and contributing RMB6,740,000 to the sales gross profit of the Group. The gross profit margin of licensed distribution of such products was 4.3%. Before completion of the Group’s subscription for its equity interests, Fulilong has its own production base in Dongguan City, Guangdong Province, the PRC. In May 2004, it invested in 40% equity interests in Shaanxi Xing Fu, the production plant of which is based in Shaanxi Province, the PRC and in June 2005, it entered into a cooperation agreement with Guizhou Chemical in Qingzhen City, Guizhou Province, the PRC to set up a production base in Guizhou Province, the PRC. By the subscription of the equity interests in Fulilong in December 2005, the Group obtained the interests in these production bases through Fulilong which became a 51% owned subsidiary of the Group after the subscription. For the six months ended 30 June 2006, the sales turnover of fertilizer products increased to RMB129,441,050, representing 87.1% of the total turnover of the Group for the same period and the gross profit margin of fertilizer products increased to 9.7%. The reason for the increase in the gross profit margin of fertilizer products is that the Group also gained the profit generated during the production stage after the obtaining of the interests of the production bases as described above. The unaudited loss of the Group recorded in the first half of this year was RMB285,547 but the unaudited profit attributable to the minority interests was RMB1,776,227 and the unaudited loss attributable to the equity holders of the Company was RMB2,061,774. After the Acquisition of the remaining 49% equity interests in Fulilong, the whole results of Fulilong will be consolidated into the accounts of the Group and the Directors expect that the financial performance of the Group will then be improved.

– 11 – LETTER FROM THE BOARD

As announced by the Company on 5 January and 26 May 2006, one piece of collective construction land occupied by Fulilong wholly for its production workshops (the “Collective Construction Land”) was not and, still has not been as at the Latest Practicable Date, granted with a land use right certificate under the “Administrative Rules of Guangdong Province for Circulation of Collective Construction Land Use Rights” (廣東省集體建設用地使用權流轉管理辦法) effective from 1 October 2005 (the “Administrative Rules”). The gross floor area of the production workshops on the Collective Construction Land is 6,289.50 square metres, representing approximately 58.09% of the total gross floor area of Fulilong’s production workshops in Dongguan City, the PRC. If the land use right certificate cannot be obtained and Fulilong is required to move its production workshops from the Collective Construction Land, the production and business operation of Fulilong will be adversely affected and the benefits to the Group as described above may not be sustained. However, the Gaobu Branch of Dongguan Land and Resources Bureau has confirmed in writing on 29 April 2006 (the “Confirmation”) that Fulilong had submitted an application for the land use right certificate and such application was expected to have been processed completely by end of December 2006. The Company instructed its legal advisers as to PRC laws (the “Company’s PRC legal advisers”) to carry out necessary due diligence works in this respect. According to the Company’s PRC legal advisers, Article 14 of the Administrative Rules provides that in the case when the grant or lease or using as capital injection of the land use right to a collective construction land, the owner and the occupier of the collective construction land shall apply to the land administration authority at the municipal or county level with the proof of the ownership of the collective construction land and the relevant contract for registration and the related right certificate and the land administration authority at the municipal or county level shall process the application in accordance with the laws. Having reviewed and based on the relevant documents of Fulilong including the contract made between 高叅鎮冼沙五坊經濟合作社 (Gaobu Town Xiansha Wufang Economic Cooperative#) and Fulilong dated 25 June 1996 in respect of the transfer of the land use right to the Collective Construction Land to Fulilong (the “Transfer Contract”), the Confirmation and enquiries made by the Company’s PRC legal advisers with the Dongguan Land and Resources Bureau, which is the land administrative authority supervising the grant of land use right within Dongguan City, the Company’s PRC legal advisers are of the opinion that (i) the Transfer Contract did not comply with the PRC laws at that time and accordingly, the land use right to the Collective Construction Land did not pass to Fulilong; (ii) since the Administrative Rules become effective from 1 October 2005, Fulilong can apply under the Administrative Rules for the land use right certificate of the Collective Construction Land; (iii) the Gaobu Branch of Dongguan Land Bureau issued the Confirmation confirming that Fulilong had submitted an application for the land use right certificate and such application was expected to have been processed completely by end of December 2006, the result of Fulilong‘s application is to be confirmed and there is no material legal obstacle for Fulilong to obtain the land use right certificate; and (iv) in the meantime, although the Transfer Contract was made before the Administrative Rules, Fulilong can continue to use the Collective Construction Land because the local land administrative authorities have never taken prohibitory measures in respect of the transfers of collective construction land which were common in Guangdong Province, the PRC and the Gaobu Branch of Dongguan Land and Resources Bureau has accepted the application of Fulilong. On the basis of the Confirmation and the

# For identification purpose only

– 12 – LETTER FROM THE BOARD legal opinion of the Company’s PRC legal advisers, the Directors are of the view that it is only a question of time for Fulilong to obtain the land use right certificate in respect of the Collective Construction Land and it is not necessary to take any contingency measures for not obtaining the same. The Company will make an announcement as soon as practicable when the Company is aware of any new development in respect of Fulilong’s application for land use right certificate. Apart from the one in respect of the Collective Construction Land, Fulilong is not required to obtain any land use right certificate. The Group completed its subscription for the equity interests in Fulilong. The Directors further consider the benefits of the Acquisition of the remaining 49% equity interests in Fulilong as described above, and are of the view that the Acquisition is fair and reasonable and to the interests of the Company and the Shareholders as a whole.

MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF FULILONG

Set out below is a summary of the key financial data of Fulilong, which are extracted from the accountants’ report of Fulilong contained in Appendix 1 to this circular.

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Audited) (Audited) (Audited) (Unaudited) (Audited)

Results Turnover 195,884 223,735 207,874 54,634 80,745 Gross profit 30,881 22,085 18,710 5,877 8,065 Gross profit margin 15.8% 9.9% 9.0% 10.8% 10.0% Profit before taxation 16,407 10,780 11,270 3,214 1,045 Net profit for the year/period 16,407 10,780 11,270 3,214 1,045 Net profit margin 8.4% 4.8% 5.4% 5.9% 1.3% Net asset at end of year/period 30,727 41,507 68,169 44,721 69,214

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 (Audited) (Audited) (Audited) (Audited)

Assets and liabilities Non-current assets 16,642 20,971 26,745 19,311 Current assets 84,190 85,854 62,735 88,515 Current liabilities 69,905 65,118 21,311 38,612 Non-current liabilities 200 200 ––

– 13 – LETTER FROM THE BOARD

Financial and business performance

Year ended 31 December 2003

The turnover and gross profit of Fulilong for the year amounted to approximately RMB195.9 million and RMB30.9 million respectively, representing a growth of approximately 173% and 259% as compared with those recorded for the year ended 31 December 2002 respectively. The significant increase in turnover was attributable to the expansion of sales network to Hainan, Guangxi and Zhejiang Provinces, the PRC. Fulilong was able to sell its products at a higher margin in these new markets where the demand, was high. Accordingly, the gross margin increased from approximately 12% in 2002 to 15.8% in 2003. Distribution and administrative expenses rose in line with the increase in sales. Fulilong recorded a higher overall growth in profit after taxation, amounting to approximately RMB16.4 million.

Year ended 31 December 2004

The turnover and gross profit of Fulilong for the year amounted to approximately RMB223.7 million and approximately RMB22.1 million respectively, representing an increase of approximately 14% and a decrease of 28% as compared with those recorded for the year ended 31 December 2003 respectively. During the year, Fulilong adjusted its product mix and spent more efforts on the sales of products with relatively higher gross profit margin compared with other products of Fulilong and large market share, which increased its turnover. However, the increase in raw material prices such as ammonium phosphate (磷銨) and potassium fertilizer (鉀肥) in approximately 13% dragged down the gross profit of Fulilong. The gross profit showed a decrease of approximately RMB8.8 million compared with that of 2003. The gross margin decreased from approximately 15.8% in 2003 to 9.9% in 2004. As the sales network of Fulilong starting to take shape, its distribution and administrative expenses were stabilized. During the year, Fulilong recorded a profit after taxation of approximately RMB10.8 million.

Year ended 31 December 2005

The turnover and gross profit of Fulilong for the year amounted to approximately RMB207.9 million and approximately RMB18.7 million respectively representing a fall of approximately 7% and 15% as compared with those recorded for the year ended 31 December 2004 respectively. During the year, Fulilong adjusted its distribution strategies and focused not only on the southern part of China but also expanded its market to the western and northern parts of China including Shanxi, Gansu, Beijing, Tianjin, Shijiazhuang and Taiyuan in order to increase the market share of Fulilong’s compound fertilizers throughout China. The sales of Fulilong in these new markets were 12% as compared with the total sales of Fulilong for the year ended 31 December 2005. As it took time to develop the distribution network, turnover decreased. The new market was less competitive than the existing market in southern part of China. Fulilong was able to sell its products at a higher price. But the proportion of these products at higher margin was not high enough, as compared with the existing products, the gross margin of which continued to drop due to increase material costs. The gross margin decreased from 9.9% for the year ended 31 December 2004 to 9.0% for the year ended 31 December 2005. The Directors are of the

– 14 – LETTER FROM THE BOARD view that the increase of the material costs was within a reasonable range and there is potential growth for Fulilong’s compound fertilizers in the PRC market and thus the Acquisition is fair and reasonable and to the interest of the Shareholders as a whole notwithstanding the decrease in the gross profit margin of Fulilong. Fulilong recorded a profit after taxation of approximately RMB11.3 million for the year.

Three months ended 31 March 2006

The turnover and gross profit of Fulilong for the three months amounted to approximately RMB80.7 million and approximately RMB8.1 million respectively representing an increase of approximately 47.8% and an increase of approximately 37.2% as compared with those recorded for the three months ended 31 March 2005. During the three months, Fulilong continued to expand its market share in China. As the distribution network was developed to a certain extent, turnover increased. Fulilong continued to develop new products with higher price. But the proportion of the products at higher margin was not high enough and the costs on raw materials continued to increase, the gross margin decreased from 10.8% for the three months ended 31 March 2005 to 10.0% for the three months ended 31 March 2006. Fulilong recorded a profit after taxation of approximately RMB1.0 million for the three months ended 31 March 2006.

Prospects of Fulilong

According to the information obtained by the Company on the National Intelligence Report (No. 8) published by the National Intelligence Analysing Group of Chinese Academy of Sciences in 2001, it is forecasted that the population of the PRC will peak at 1.6 billion in 2030. By then, the demand for fertilizers in the PRC will increase from 46 million tonnes per annum to over 60 million tonnes per annum. In “The summary of the Ninth- Five Plan on national economic and social development and the future targets for 2010” (《國民經濟和社會發展「九五」計劃和2010年遠景目標綱要》), the National Development and Reform Commission stated that the government supports the demonstration on various techniques of producing and using technically unique and representative compound fertilizers, specialized fertilizers, biological fertilizers and organic fertilizers. At present, the consumption of compound fertilizers in the PRC represents approximately 25% of its total consumption of chemical fertilizers, which is far below the 50% to 80% level of developed countries. The Chinese Phosphorus Compound Fertilizers Association (中國磷複肥協會) forecasted in November 2004 that the consumption of compound fertilizers in the PRC will be doubled in the next 10 years and gradually reach the level of semi- developed countries. In other words, the PRC’s compound fertilizers industry still has huge growth potential.

Fulilong is a high technology venture in the Guangdong Province. Its quality control management system was granted ISO9001 certificate in July 2003. The brands of “Fulilong” and “Lvzhou” (“綠洲”) under Fulilong were granted exemption from quality inspection (國家免檢) by the National Technology Supervision Bureau (國家技術監督局) in December 2005. With its distinct advantages in production techniques such as the “Melt Spraying Granulation Method With High Tower” which is a technology currently held by only five companies in the PRC, product brand name as well as marketing network, Fulilong is expected to enter into a rapid and healthy development period.

– 15 – LETTER FROM THE BOARD

Financial resources and liquidity

As at 31 March 2006, the capital structure of Fulilong comprised equity of approximately RMB69.2 million and bank loan of RMB3.5 million. The bank loan carried an interest of 6.696% per annum and was secured by the buildings owned by Fulilong, land use rights owned by an unrelated party and personal guarantees by one of the directors of Fulilong and his associate and is repayable by 28 June 2006. As at 31 December 2005, the capital structure of Fulilong comprised equity of approximately RMB68.2 million and bank loan of RMB3.5 million. The bank loan carried an interest of 6.696% per annum and was secured by the buildings owned by Fulilong, land use rights owned by an unrelated party and personal guarantees by one of the directors of Fulilong and his associate and is repayable by 28 June 2006. As at 31 December 2004, Fulilong’s equity and bank loan amounted to approximately RMB41.5 million and RMB5 million respectively. The bank loan carried an interest of 6.372% per annum and was secured by the buildings owned by Fulilong, land use rights owned by an unrelated party and personal guarantees by one of the directors of Fulilong and his associate to the extent of RMB5,000,000 and was repayable by 6 April 2005. As at 31 December 2003, Fulilong’s equity and bank loan amounted to approximately RMB30.7 million and RMB5 million respectively. The bank loan carried an interest of 6.372% per annum and was secured by the buildings owned by Fulilong, land use rights owned by an unrelated party and personal guarantees by one of the directors of Fulilong and his associate to the extent of RMB5,000,000 and was repayable by 22 April 2004.

As at 31 December 2003, 2004, 2005 and 31 March 2006, the gearing ratio, defined as total bank borrowings over equity, was 0.16, 0.12, 0.05 and 0.05 respectively. The gearing ratios were low since Fulilong has funded its operation mainly by equity and internal resources.

For each of the three years ended 31 December 2003, 2004, 2005 and the three months ended 31 March 2006, the cash flow (used in)/generated from operating activities amounted to approximately RMB(661,000), RMB747,000, RMB(8,289,000) and RMB(3,300,000) respectively. The negative cashflows were due to the shorter credit period (approximately 30 to 60 days) granted to Fulilong by its suppliers as compared with the credit period (approximately 30 to 180 days) granted by Fulilong to its customers.

Cash and cash equivalents

As at 31 December 2003, 2004, 2005 and 31 March 2006, Fulilong had bank balances and cash of approximately RMB5.8 million, RMB4.4 million, RMB4.2 million and RMB3.3 million respectively, which were not subject to any liquidity restrictions.

Investments

In May 2004, Fulilong and Shaanxi Xing Hua jointly set up Shaanxi Xing Fu with a registered capital of RMB5 million, of which 40% was attributable to Fulilong. Shaanxi Xing Fu then puts into production highly concentrated nitro-compound fertilizers and these products have been well-received in the northern part of China. It is expected that

– 16 – LETTER FROM THE BOARD

Shaanxi Xing Fu’s turnover will have a promising growth. Save as disclosed, Fulilong had no significant investments or material acquisitions and disposals of subsidiaries and affiliated companies during the three years ended 31 December 2005 and the three months ended 31 March 2006.

Foreign currency exposure

For the three years ended 31 December 2005 and the three months ended 31 March 2006, all the sales of Fulilong and its purchases of raw materials from its suppliers were denominated in Renminbi. Accordingly, Fulilong’s exposure to foreign exchange risk is insignificant.

Number of employees and remuneration policies

Fulilong hired approximately 417 employees as at 31 March 2006. For the first three months ended 31 March 2006, total salary and bonuses amounted to approximately RMB1.3 million. For the year ended 31 December 2005, 2004 and 2003 total salary and bonuses amounted to approximately RMB3.6 million, RMB3.1 million and RMB4.1 million respectively. The remuneration (including discretionary bonus) of Fulilong is determined by reference to the performance of individual employee.

FINANCIAL EFFECTS OF THE ACQUISITION

Upon the Completion, Fulilong will become a wholly-owned subsidiary of the Group and its whole results will be consolidated in the accounts of the Company.

The Group had an unaudited amount of shareholders’ equity of approximately RMB97.2 million as at 30 June 2006. Based on the unaudited pro-forma balance sheet of the Group, the Group would have net assets of approximately RMB63.8 million after the Acquisition. The Acquisition will have active effect on the amount of shareholders’ equity of the Group as, for the three years ended 31 December 2005, Fulilong recorded positive net profits of RMB16.41 million, RMB10.78 million and RMB11.27 million respectively and the Directors believe that there is potential growth in the compound fertilizer market in the PRC. Before the Acquisition, only 51% net profits of Fulilong was consolidated to the Group. However, after the completion of the Acquisition, the entire profits of Fulilong will be consolidated to the Group.

The gearing ratio (a percentage of total bank borrowings over total assets) of the Group as at 30 June 2006 was approximately 45%. The Acquisition will have active effect on the gearing ratio of the Group as the Directors believe that after the consolidation of the entire profits of Fulilong to the Group, the need of the Group for external financing will be reduced.

The Group recorded an audited profit attributable to Shareholders of approximately RMB0.8 million for the year ended 31 December 2005. Fulilong recorded an audited profit attributable to its equity holders of approximately RMB11.3 million for the year ended 31 December 2005. Given the historical performance of Fulilong and the Directors’ belief in

– 17 – LETTER FROM THE BOARD the potential growth of compound fertilizer market in the PRC, the Acquisition is expected to enhance the earnings base of the Group in the future. The Group recorded an unaudited loss attributable to Shareholders of approximately RMB2.06 million and an unaudited profit attributable to the minority interests of approximately RMB1.8 million for the six months ended 30 June 2006.

The Directors are also of the view that the Acquisition will have a positive effect on the assets and liabilities of the Group on the basis of the historical positive financial performance of Fulilong, the consolidation of the entire profit to the Group after the completion of the Acquisition and the potential growth in the fertilizer market in the PRC all of which will help in the improvement of the amount of working capital of the Group and reduce the need of the Group for bank borrowings.

In the Directors’ opinion, the working capital available to the Group for the Acquisition is not sufficient. The Consideration for the Acquisition will be satisfied by cash and financed as to approximately RMB19 million by the Group’s internal resources and as to RMB15 million by new bank borrowings, the repayment of which shall be secured by the Group’s product stock.

As at the Latest Practical Date, the Group has cash and bank balances of approximately RMB19 million and the Group’s short-term credit facilities by local banks has been increased to RMB214,400,000, of which RMB104,400,000 were utilised at the same date. The unutilised credit facilities of RMB110 million together with the cash and bank balances of RMB19 million should be able to settle the consideration of the Acquisition of RMB33,402,972. The existing credit facilities of the Group of RMB200 million are granted for one year since 25 August 2006 whereas the remaining facilities of RMB14.4 million are granted for various periods until June 2007. Accordingly, the Directors are of the opinion that the Group will, following the completion of the Acquisition, have sufficient working capital for their present requirements, that is for at least 12 months from the date of publication of this Circular, in the absence of unforeseeable circumstances.

MAJOR AND CONNECTED TRANSACTION

Pursuant to Rule 19.07 of the GEM Listing Rules, the Acquisition will constitute a major transaction of the Company. Besides, as Mr. Gan Shi Fan and Mr. Cao Ai Xin, two of the other shareholders of Fulilong, are the director and general manager of Shandong TEDA respectively and Mr. Cao Ai Xin is the director of Fulilong, they are considered as connected persons pursuant to Rule 20.11(1) of the GEM Listing Rules. Accordingly, the Acquisition will also constitute a connected transaction of the Company and is required to be subject to the Independent Shareholders’ approval at the EGM. To the best knowledge of the Directors, none of the parties to the Equity Transfer Agreement or their associates held any Shares as at the Latest Practicable Date. On such basis, no Shareholder would be required to abstain from voting which, for the purpose of approving the Acquisition at the EGM, shall be taken by poll.

– 18 – LETTER FROM THE BOARD

EGM

A notice of the EGM convening the EGM at which an ordinary resolution will be proposed to the Shareholders to consider and, if thought fit, to approve the Acquisition is set out on pages 159 to 160 of this circular.

Whether or not you are able to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return them as soon as possible to the Company’s registered office (for holders of the Domestic Shares), or the Company’s Hong Kong share registrar (for holders of H Shares) as soon as possible and in any event not later than 48 hours before the time appointed for holding the relevant meeting. Completion and return of the forms of proxy shall not preclude you from attending and voting at the relevant meeting or any adjourned meeting thereof should you so desire.

PROCEDURES TO DEMAND A POLL

At any general meeting of Shareholders, a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded:

(1) by the chairman of the meeting;

(2) by at least two Shareholders entitled to vote present in person or by proxy; or

(3) by one or more Shareholders present in person or by proxy and representing 20% or more of all shares of the Company carrying the right to vote at the meeting.

Unless a poll be so demanded, a declaration by the chairman that a resolution has on a show of hands been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minutes of the meeting shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against such resolution. The demand for a poll may be withdrawn by the person who makes such demand.

A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. On a poll taken at a meeting, a Shareholder (including proxy) entitled to two or more votes needs not cast at his/her/its votes in the same way. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demand shall be entitled to one additional vote.

– 19 – LETTER FROM THE BOARD

RECOMMENDATION

The Directors believe that the terms of the Equity Transfer Agreement are fair and reasonable and are in the interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the ordinary resolution approving the Acquisition at the EGM.

OTHER INFORMATION

Your attention is also drawn to the additional information set out in the appendices to this circular.

Yours faithfully, By order of the Board Wang Shuxin Chairman

– 20 – LETTER FROM THE INDEPENDENT BOARD COMMITTEE

28 August 2006

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular dated 28 August 2006 issued by Tianjin TEDA Biomedical Engineering Company Limited (the “Circular”) of which this letter forms part. Terms used in this letter shall have the same meanings as they are defined in the Circular unless the context otherwise requires.

We have been appointed by the Board to constitute the Independent Board Committee to advise you in connection with the terms of the Equity Transfer Agreement and Hantec Capital Limited has been appointed as the independent financial adviser to advise us on the Acquisition.

Having considered the terms of the Equity Transfer Agreement and the advice of Hantec Capital Limited in relation thereto as set out on pages 22 to 33 of the Circular, we are of the view that the Acquisition is in the interests of the Company and the Independent Shareholders as a whole and the terms of the Equity Transfer Agreement are fair and reasonable so far as the Independent Shareholders are concerned. We therefore recommend that you vote in favour of the resolution to be proposed at the EGM to approve the Acquisition.

Yours faithfully, For and on behalf of the Independent Board Committee Professor Xian Guoming Guan Tong Independent non-executive Directors

– 21 – LETTER FROM HANTEC CAPITAL LIMITED

The following is the full text of a letter of advice from Hantec Capital Limited to the Independent Board Committee and the Independent Shareholders for the purpose of inclusion in this circular:

Hantec Capital Limited 45th Floor, COSCO Tower 183 Queen’s Road Central Hong Kong

28 August 2006

To the independent board committee and the Independent Shareholders of the Company

Dear Sirs,

MAJOR ACQUISITION AND CONNECTED TRANSACTION IN RESPECT OF THE PROPOSED ACQUISITION OF THE REMAINING 49% EQUITY INTERESTS IN FULILONG

INTRODUCTION

We refer to our engagement as the independent financial adviser to the Independent Board Committee and the Independent Shareholders on the Acquisition, details of which are contained in the Letter from the Board (“the Letter from the Board”) contained in the circular (the “Circular”) of the Company to the Shareholders dated 28 August 2006, of which this letter forms part. Terms used in this letter have the same meanings as defined in the Circular unless the context otherwise requires.

On 25 June 2006, the Company, Wan Tai (a wholly-owned subsidiary of the Group), the other shareholders of Fulilong and Fulilong entered into the Equity Transfer Agreement pursuant to which the Company and Wan Tai conditionally agreed to acquire the Sale Equity in Fulilong from the other shareholders of Fulilong. Upon the Completion, Fulilong, which is 51% owned by the Company before the Acquisition, will become a wholly-owned subsidiary of the Group.

As Mr. Gan Shi Fan and Mr. Cao Ai Xin, two of the other shareholders of Fulilong, are the director and general manager of Shandong TEDA respectively and Mr. Cao Ai Xin is the director of Fulilong, they are considered as connected persons pursuant to Rule 20.11(1) of the GEM Listing Rules. Accordingly, the Acquisition will constitute a connected transaction of the Company and is required to be subject to the Independent Shareholders’ approval at the EGM. To the best knowledge of the Directors, none of the parties to the Equity Transfer Agreement or their associates held any Shares as at the Latest Practicable Date. On such basis, no Shareholder would be required to abstain from voting.

– 22 – LETTER FROM HANTEC CAPITAL LIMITED

The Independent Board Committee has been established to advise whether the terms of the Acquisition are fair and reasonable and whether the Acquisition is in the interests of the Company and its Independent Shareholders as a whole and to advise the Independent Shareholders on how to vote. The Independent Board Committee comprising Professor Xian Guoming and Mr. Guan Tong, both being independent non-executive Directors, has been formed to advise the Independent Shareholders in this respect. We have been appointed by the Company to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the terms of the Acquisition, so far as the interests of the Independent Shareholders are concerned and whether the Acquisition is in the interests of the Company and the Independent Shareholders as a whole.

BASIS OF OUR ADVICE

In arriving at our recommendation, we have relied on the information and facts provided by the Company and have assumed that any representations made to us are true, accurate and complete. We have also relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Directors and management of the Company. We have assumed that all information, representations and opinions contained or referred to in the Circular and all information, representations and opinions which have been provided by the Directors and management of the Company for which they are solely responsible, are true and accurate at the time they were made and will continue to be accurate at the date of the despatch of the Circular.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts not contained in the Circular the omission of which would make any such statement contained in the Circular misleading. We consider that we have been provided with sufficient information on which to form a reasonable basis for our opinion. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any fact or circumstance which would render the information provided and representations and opinions made to us untrue, inaccurate or misleading. Having made all reasonable enquiries, the Directors have further confirmed that, to the best of their knowledge, they believe there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We have not, however, carried out any independent verification of the information provided by the Directors and management of the Company, nor have we conducted an independent investigation into the business and affairs of the Group.

– 23 – LETTER FROM HANTEC CAPITAL LIMITED

PRINCIPAL FACTORS TAKEN INTO ACCOUNT

The principal factors and reasons that we have taken into consideration in assessing the Acquisition and the terms thereof and arriving at our opinion are set out as follows:

1. Background of Fulilong

Fulilong was established in August 1996 and began its principal business of production and distribution of compound fertilizers in September 1996. As at 31 December 2005, Fulilong owned five production lines located at Dongguan of Guangdong Province and another one located at Xingping of Shaanxi Province, which adopts the advanced technology of “Melt Granulation Method with High Tower”. The six production lines have an annual production capacity reaching approximately 800,000 tonnes of compound fertilizers. Fulilong has also entered into a cooperation agreement with 貴州化肥廠有限公司 (Guizhou Chemical Fertilizer Factory Company Limited) (“Guizhou Chemical”) a fertilizer manufacturer in Qingzhen, Guiyang of Guizhou Province to set up a production base with an annual capacity of 200,000 tonnes of highly concentrated urea based compound fertilizers under which Guizhou Chemical is responsible for establishing the production plant while Fulilong is responsible for the technical support and design and the provision of the production equipment. The production plant will belong to Guizhou Chemical and Guizhou Chemical shall manufacture according to the production plan of Fulilong, which shall purchase all products manufactured by Guizhou Chemical. It is expected that the production base will commence trial production by October 2006. Fulilong has been approved as “New and High Technology Enterprises” by the Department of Science and Technology of Guangdong Province (廣東省科學技術廳) since June 2003 and its quality control management system was awarded ISO9001 certification in July 2003.

– 24 – LETTER FROM HANTEC CAPITAL LIMITED

Set out below is a summary of the key financial data of Fulilong, which are extracted from the accountants’ report of Fulilong contained in Appendix 1 to the Circular and a discussion on the financial performance of Fulilong, which is based on the Directors’ representation.

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Audited) (Audited) (Audited) (Unaudited) (Audited)

Turnover 195,884 223,735 207,874 54,634 80,745 Gross profit 30,881 22,085 18,710 5,877 8,065 Gross profit margin 15.8% 9.9% 9.0% 10.8% 10.0% Net profit 16,407 10,780 11,270 3,214 1,045 Net profit margin 8.4% 4.8% 5.4% 5.9% 1.3%

The turnover of Fulilong showed an annual growth of approximately 14.2% in 2004 and an annual decrease of approximately 7.1% in 2005. In 2004, Fulilong adjusted its product mix and spent more efforts on the sales of products with relatively higher gross profit margin and large market share, which increased its turnover. However, the increase in raw material prices such as ammonium phosphate and potassium fertilizers of approximately 13% dragged down the overall gross profit margin of Fulilong in 2004. In 2005, Fulilong adjusted its distribution strategies and focused not only on the southern part of the PRC but also expanded its market to the western and northern part of the PRC including Shanxi, Gansu, Beijing, Tianjin, Shijiazhuang and Taiyuan in order to increase the market share of Fulilong’s compound fertilizers throughout the PRC. Turnover decreased as it took time to develop the new distribution network. Turnover for the three months ended 31 March 2006 showed an increase of approximately 47.8% compared with that for the three months ended 31 March 2005, which was resulted from Fulilong’s success in expansion of its distribution network.

The gross profit margin of Fulilong showed a decrease from 15.8% in 2003 to 9.9% in 2004 to 9.0% in 2005. The gross margin for the three months ended 31 March 2006 also showed a drop to 10.0% compared with that for the three months ended 31 March 2005. The decreases in gross profit margins were principally resulted from the increase in raw material costs.

The net profit of Fulilong showed a general decrease trend since 2004 except that the net profit in 2005 recorded a slight increase resulted from the increase in other revenue. The Directors advised that such decreases were principally due to (i) the decreases in gross profit margin; (ii) the increases in distribution costs as a result of the expansion of its market to other parts of the PRC and (iii) the increases in administrative expenses in 2005 as a result of increase in staff costs and professional fees and the increase in administrative expenses for the three months ended 31 March 2006 as a result of increase in impairment loss for doubtful debts.

– 25 – LETTER FROM HANTEC CAPITAL LIMITED

The accounts receivable of Fulilong generally followed the trend of its turnover and accounted for approximately 19.1%, 19.6% and 16.2% of the Group’s turnover for the year ended 31 December 2003, 2004 and 2005. The accounts receivable further increased to approximately RMB56.7 million for the three months ended 31 March 2006 as a result of the increase in turnover.

Although Fulilong recorded a general decreasing trend in gross profit and net profit which was principally resulted from the increase in raw material costs, distribution costs and administrative expenses, we are of the view that the Acquisition will have positive effect on the profitability of the Group as a result of the profitable track record of Fulilong and the rationale set out in the section headed “Reasons for the Acquisition” below.

2. Reasons for the Acquisition

The Group is principally engaged in the research and development and commercialization of medical and health products and fertilizer products. The Group’s business of sale of fertilizer products was only commenced in the second half of 2004 when the joint venture enterprise, Shandong TEDA, was set up. The sales of fertilizer products for the year ended 31 December 2004 amounted to approximately RMB19.6 million and accounted for approximately 33.4% of the Group’s total turnover in 2004.

The Group’s sales recorded a substantial growth from approximately RMB58.6 million for the year ended 31 December 2004 to approximately RMB205.0 million for the year ended 31 December 2005. This was mainly due to the increase in sales of fertilizer products. Pursuant to a sole agent agreement dated 31 March 2005 entered into between Fulilong and Shandong TEDA, Shandong TEDA has become the nationwide distributor of fertilizer products under the brandname of Fulilong since April 2005, and has built a network of 250 direct product supply distributors in 19 provinces, cities and autonomous regions in the country and contributed approximately RMB156.1 million to the sales turnover of the Group, representing approximately 76.1% of the total turnover of the Group for the same period, and approximately RMB6.7 million to the sales gross profit. The gross profit from distribution of such products was 4.3%, resulting in a change in the Group’s overall gross profit margin from 36% in 2004 to 15% in 2005. With the substantial increase in sales volume, the Group successfully achieved turnaround, from loss attributable to equity holders of approximately RMB15.5 million in 2004 to profit attributable to equity holders of approximately RMB0.8 million in 2005. This marks the first profitable year of the Group (in terms of profit attributable to equity holders) since the listing of the Shares on GEM.

By the subscription of the 51% equity interests in Fulilong in December 2005, the Group obtained the interests in these production bases through Fulilong which became a subsidiary of the Group after the subscription. Since then the Group has not only been engaging in distribution of fertilizer products but also the production of such products. For the six months ended 30 June 2006, the sales turnover of

– 26 – LETTER FROM HANTEC CAPITAL LIMITED fertilizer products increased to approximately RMB129.4 million, representing approximately 87.1% of the total turnover of the Group for the same period and the gross profit margin of fertilizer products increased to approximately 9.7%, which was higher than the gross profit margin of 4.3% arised from the distribution of fertilizer products in 2005. The increase in sales turnover and the gross profit margin of fertilizer products was due to the consolidation of the results from Fulilong.

After the Acquisition, the whole results of Fulilong will be consolidated into the accounts of the Group.

As a result of its comprehensive nutrients and easy usage, compound fertilizers have gained the popularity among PRC farmers. According to 2005年中國化肥市場研究預測報告 (The Research and Forecast Report of PRC Chemical Fertilizer Market 2005) issued by 北京凱博信企業管理諮詢有限公司 (Beijing Compass Information Enterprise Management and Consulting Company Limited), a company engaged in market research of different industries, the consumption volume of compound fertilizer in the PRC was approximately 11.1 million tonnes in 2003, amounting to approximately 25% of the total consumption of chemical fertilizers in the same year while the consumption volume of that was approximately 27 thousand tonnes in 1980, amounting to approximately 2.14% of the total consumption of chemical fertilizers in the same year. This showed that the consumption of compound fertilizers in the PRC recorded a substantial growth and it accounted for an increasing proportion of the total consumption of chemical fertilizers.

At present, the consumption of compound fertilizers in the PRC represents approximately 25% of its total consumption of chemical fertilizers, which is far below the 50% to 80% level of developed countries. In other words, the PRC’s compound fertilizers industry still has huge growth potential. This provides a promising opportunity for the development of Fulilong. With its distinct advantages in production techniques such as the “Melt Spraying Granulation Method With High Tower” which is a technology currently held by only five companies in the PRC, product brand name as well as marketing network, Fulilong is expected to enter into a rapid and healthy development period.

In view of the above, we concur with the Directors that the Acquisition will have positive effect on the profitability of the Group and is in the interests of the Group and the Independent Shareholders as a whole since (i) Fulilong has a profitable track record; (ii) the sale of fertilizer products has become the major source of revenue of the Group; (iii) the Group’s loss position has been improved since engaging in the fertilizer business, in particular after the Group’s acquisition of 51% interest in Fulilong; and (iv) the potential growth in consumption of compound fertilizers in the PRC.

As announced by the Company on 5 January and 26 May 2006, one piece of collective construction land occupied by Fulilong for its production workshops (the “Collective Construction Land”) was not and, still has not been as at the Latest Practicable Date, granted with a land use right certificate (the “Land Use Right

– 27 – LETTER FROM HANTEC CAPITAL LIMITED

Certificate”) under the “Administrative Rules of Guangdong Province for Circulation of Collective Construction Land Use Rights”(廣東省集體建設用地使用權流轉管理辦法) effective from 1 October 2005 (the “Administrative Rules”) which legally allow the transfer of the right to use collective construction land situated in Guangdong Province, the PRC and therefore governs the transfer of the Collective Construction Land. The gross floor area of the production workshops on the Collective Construction Land is 6,289.50 square metres, representing approximately 58.09% of the total gross floor area of Fulilong’s production workshops in Dongguan City, the PRC. According to the Directors, Fulilong entered into a contract (the “Transfer Contract”) with 高叅鎮洗沙五坊經濟合作社 (Gaobu Town Xiansha Wufang Economic Cooperative) on 25 June 1996 in respect of the transfer of the land use right to the Collective Construction Land to Fulilong. We have reviewed a written confirmation from the Gaobu Branch of Dongguan Land and Resources Bureau on 29 April 2006 in relation to Fulilong’s application for the Land Use Right Certificate which stated that Fulilong had submitted an application for the Land Use Right Certificate and stated that such application was expected to have been processed completely by end of December 2006. We have also discussed with the legal advisers of the Company as to PRC laws (the “PRC Legal Advisers”) in respect of the Collective Construction Land and the basis of their opinion and understand that they are of the opinion that (i) the Transfer Contract did not comply with the PRC laws before the Administrative Rules became effective and accordingly the land use right to the Collective Construction Land did not pass to Fulilong; (ii) since the Administrative Rules become effective from 1 October 2005, Fulilong can apply under the Administrative Rules for the Land Use Right Certificate; (iii) the Gaobu Branch of Dongguan Land and Resources Bureau issued the Confirmation confirming that Fulilong had submitted an application for the Land Use Right Certificate and such application was expected to have been processed completely by end of December 2006, the result of Fulilong’s application is to be confirmed and there is no material legal obstacle for Fulilong to obtain the Land Use Right Certificate; and (iv) in the meantime, although the Transfer Contract was made before the Administrative Rules, Fulilong can continue to use the Collective Construction Land because the local land administrative authorities have never taken prohibitory measures in respect of the transfers of collective construction land which were common in Guangdong Province, the PRC. Based on our discussion with the PRC Legal Advisers, we are of the view that their legal opinion has been made based on the then and the current legislation in the PRC and the confirmation from the relevant authority that governs the transfer of the Collective Construction Land. Based on the written confirmation from the Guobu Branch of Dongguan Land and Resources Bureau and the legal opinion from the PRC Legal Advisers, we concur with the Directors’ view that it is only a question of time for Fulilong to obtain the Land Use Right Certificate. However, the Independent Shareholders are reminded of the risk that if the Land Use Right Certificate cannot be obtained and Fulilong is required to move its production workshops from the Collective Construction Land, the production and business operation of Fulilong will be adversely affected and in turn, the turnover and profitability of the Group may be adversely affected.

– 28 – LETTER FROM HANTEC CAPITAL LIMITED

3. The Consideration

The Consideration is RMB33,402,971.87 (equivalent to approximately HK$32,118,242.18). The Consideration has been arrived at after arm’s length negotiation among the parties to the Equity Transfer Agreement having taken into account the audited net asset value of Fulilong as at 31 December 2005 prepared in accordance with generally accepted accounting principles in the PRC and the Sale Equity in the registered capital of RMB16,326,500 of Fulilong. The Consideration equals to the audited net asset value attributable to 49% of the equity interest of Fulilong as at 31 December 2005 of approximately RMB68.17 million. Moreover, as set out in the accountants’ report on Fulilong in Appendix 1 to the Circular, the audited net asset value of Fulilong as at 31 March 2006 was approximately RMB69.2 million. The Consideration therefore represents a discount of approximately 1.5% to the audited net asset value attributable to 49% equity interest of Fulilong as at 31 March 2006.

The audited net profit of Fulilong for the year ended 31 December 2005 was approximately RMB11.3 million. Accordingly, the Consideration represents a price to earnings ratio (“PER”) of approximately 6.0 times.

On top of the net asset value, to assess the fairness and reasonableness of the Consideration, we have considered the PER of other listed companies in Hong Kong (the “Comparable Companies”) which have similar business to Fulilong, that is manufacturing and sale of fertilizers. Set out below are the PER of the Comparable Companies based on their respective closing price as at 23 June 2006, the last trading day prior to the date of the Equity Transfer Agreement, and their latest publicly available full year financial information, which is that for the year ended 31 December 2005.

Company name Principal businesses PER

Ko Yo Ecological Agrotech Manufacture and sale of 6.7 (Group) Limited chemical fertilizers and chemical products

Sungreen International Manufacture and distribution 190.8 Holdings Limited of organic potash fertilizers products

Century Sunshine Ecological Production and distribution of 18.3 Technology Holdings organic fertilizers and Limited biological pesticides

Average 71.9

The Company 133.8

– 29 – LETTER FROM HANTEC CAPITAL LIMITED

As shown above, the PER of Fulilong associated with the Consideration of approximately 6.0 times ranks the lowest compared with the PER of the Comparable Companies. It is also much lower than the PER of the Company.

The consideration for the subscription of 51% equity interests in Fulilong by the Company in December 2005 through capital injection of RMB32.5 million into Fulilong is calculated by reference to the audited net asset value of Fulilong of approximately RMB30.80 million as at 30 June 2005 prepared in accordance with accounting standards in the PRC which are consistent with those in Hong Kong. As the net asset value of Fulilong has been increased from approximately RMB30.80 million to approximately RMB68.17 million as at 31 December 2005, the Consideration for the Acquisition per interest in Fulilong is higher than the consideration per interest in the Company’s subscription for the 51% equity interests in Fulilong as described above.

Having considered the above, we are of the view that the Consideration is fair and reasonable so far as the Group and the Independent Shareholders are concerned.

4. Payment Terms

The Consideration will be satisfied by cash and financed as to approximately RMB19 million by the Group’s internal resources and as to RMB15 million by bank borrowing. 10% of the Consideration should be paid as deposit to the other shareholders of Fulilong upon signing of the Equity Transfer Agreement and the remaining 90% of the Consideration is payable to the other shareholders of Fulilong upon the fulfillment of the conditions i and iii described in the paragraph headed “Conditions” of the Letter from the Board.

As at the Latest Practicable Date, none of the conditions of the Equity Transfer Agreement has been fulfilled except the issue of an announcement by the Company in relation to the Acquisition on 30 June 2006. The Company may at its absolute discretion, waive in writing, at any time, any of the conditions of the Equity Transfer Agreement except conditions (i) to (iv) which cannot be waived by the Company. The Company shall seek prior independent Shareholders’ approval if any of the conditions (v) to (vii) is waived. In the event that any of the conditions is not fulfilled or (where applicable) waived prior to 30 September 2006 which was extended to 31 October 2006 pursuant to the supplemental agreement to the Equity Transfer Agreement dated 16 August 2006, the Equity Transfer Agreement shall lapse and the 10% deposit paid under the Equity Transfer Agreement shall be refunded to the Group.

The Directors indicated that conditions i and iii are the key conditions and the fulfillment of which is not under the control of the Company and it is likely that other conditions will be fulfilled before or well after the fulfillment of this two conditions. Accordingly, we consider that the payment schedule is reasonable since (i) the 10% deposit is refundable if the Equity Transfer Agreement is lapsed and (ii) the remaining 90% will be paid only after the key conditions of the Equity Transfer Agreement are fulfilled.

– 30 – LETTER FROM HANTEC CAPITAL LIMITED

5. Financial effect of the Acquisition on the Group

Upon completion of the Acquisition, Fulilong will become a wholly owned subsidiary of the Group and its assets and liabilities and results will be fully consolidated into the Group.

Earnings

Before the completion of the Acquisition, 51% of the results of Fulilong were consolidated to the results of the Group whereas the entire results of Fulilong will be consolidated to the results of the Group after the Acquisition. As set out in the accountants’ report on Fulilong in Appendix 1 to the Circular, Fulilong recorded a net profit of approximately RMB11.3 million for the year ended 31 December 2005 and approximately RMB1.0 million for the three months ended 31 March 2006. On the other hand, the interest expenses of the Group will show an increase after the Acquisition since a new bank loan of RMB15 million will be obtained to finance the Acquisition. Based on an annual interest rate of 7%, whereas most of the bank loans of the Group are with an annual interest rate of 6%, the annual increase in interest expenses will be around RMB1.1 million. Assuming there would be no material adverse change in the business and trading position and prospect of Fulilong, based on 49% of the net profit of Fulilong for the year ended 31 December 2005 of approximately RMB5.5 million and taking into account the additional interest expense of RMB1.1 million, the Acquisition will provide a positive effect on the net profit of the Group.

The Consideration of RMB33,402,971.87 is smaller than the audited net asset value attributable to 49% of the equity interest of Fulilong of approximately RMB33.9 million as at 31 March 2006. In case the fair value of the net asset value of Fulilong as at Completion is greater than the Consideration, a profit will arise from the Acquisition.

Net asset value

As set out in Appendix 3 to the Circular, the unaudited pro forma consolidated net asset value of the Group attributable to the Shareholders upon the completion of the Acquisition would be unchanged at approximately RMB63.0 million.

Gearing and working capital

The Consideration will be satisfied by cash and financed as to approximately RMB19 million by the Group’s internal resources and as to RMB15 million by bank borrowings.

– 31 – LETTER FROM HANTEC CAPITAL LIMITED

It is intended that a new bank loan of RMB15 million will be obtained by the Group to finance the Acquisition. As set out in Appendix 3 to the Circular, the unaudited proforma bank borrowings of the Group will be increased from RMB104.4 million to RMB119.4 million after the Acquisition. Since the shareholders’ funds will remain at approximately RMB63.0 million after the Acquisition, the proforma gearing ratio of the Group, defined as total borrowings divided by equity attributable to equity holders, will increase from approximately 165.7% before the Acquisition to approximately 189.5% after the Acquisition. Having considered the positive effect on the net profit of the Group as discussed above, we are of the view that the increase in gearing ratio of the Group due to the additional bank loan is acceptable.

As at the Latest Practicable Date, according to the Directors and the internal records of the Company and the credit facilities letters provided by the Company for our review, the Group had cash and bank balances of approximately RMB19 million and has been granted short-term credit facilities of RMB214,400,000 by local banks, of which RMB104,400,000 were utilised at the same date. The cash and bank balances and the unutilised credit facilities of RMB110 million should be able to settle the Consideration. The existing credit facilities of the Group of RMB200 million are granted for one year since 25 August 2006 whereas the remaining facilities of RMB14.4 million are granted for various period until June 2007. Accordingly, the Directors are of the opinion that the Group will, following the completion of the Acquisition, have sufficient working capital for their present requirements, that is for at least 12 months from the date of publication of the Circular, in the absence of unforeseeable circumstances. Having (i) reviewed the working capital forecast of the Group prepared by the Company, (ii) based on the existing cash and bank balances of the Group and the unutilised credit facilities and (iii) discussed with the reporting accountants of the Group who confirm that the above working capital sufficiency statement has been made by the Directors after due and careful enquiry and that persons or institutions providing finance have stated in writing that such facilities exist, we have no reason to believe that the Acquisition will have a material adverse impact on the working capital position of the Group.

– 32 – LETTER FROM HANTEC CAPITAL LIMITED

RECOMMENDATION

Having taken into account the principal factors and reasons referred to the above, in particular (i) the positive effect on the profitability of the Group as a result of the Acquisition, (ii) the Consideration and the payment schedule for the Consideration is fair and reasonable, and (iii) the Collective Construction Land has not been granted the Land Use Right Certificate but we concur with the Directors’ view that it is only a question of time for Fulilong to obtain the Land Use Right Certificate based on the written confirmation from the Gaobu Branch of Dongguan Land and Resources Bureaus and the legal opinion from the PRC Legal Advisers, we, on balance, are of the opinion that the terms of the Acquisition are fair and reasonable so far as the Independent Shareholders are concerned and the Acquisition is in the interests of the Company and the Independent Shareholders as a whole. We therefore advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Acquisition.

Yours faithfully, For and on behalf of Hantec Capital Limited Kinson Li Director

– 33 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

Horwath Hong Kong CPA Limited 2001 Central Plaza 18 Harbour Road Wanchai, Hong Kong Telephone : (852) 2526 2191 Facsimile : (852) 2810 0502 [email protected] www.horwath.com.hk

28 August 2006

The Board of Directors Tianjin TEDA Biochemical Engineering Company Limited

Dear Sirs,

We set out below our report on the financial information regarding 廣東福利龍複合肥有限公司(Guangdong Fulilong Compound Fertilizers Company Limited) (the “Company”) for the three years ended 31 December 2003, 2004 and 2005 and the three months ended 31 March 2006 (the “Relevant Periods”) for inclusion in the circular of Tianjin TEDA Biochemical Engineering Company Limited (“Tianjin TEDA”) dated 28 August 2006 (the “Circular”) in connection with the major acquisition and connected transaction in relation to the proposed acquisition of 49% interest in the registered capital of the Company.

The Company was established on 20 August 1996 as a limited liability company in the People’s Republic of China (the “PRC”) with an initial paid-up capital of RMB8,000,000. In December 2005, Tianjin TEDA completed the subscription for 51% interest in the registered capital (as enlarged by Tianjin TEDA’s subscription) of RMB16,327,000 of the Company. The Company is principally engaged in the manufacture and sale of compound fertilizers in the PRC.

The associate, 陝西興福肥業有限公司 (Shaanxi Xing Fu Fertilizer Company Limited), was established on 25 May 2004 as a limited liability company in the PRC with a paid-up capital of RMB5,000,000.

The statutory financial statements of the Company for the years ended 31 December 2003 and 2004 were audited by Peking Certified Public Accountants (中勤萬信會計師事務所) registered in the PRC. The statutory financial statements of the Company for the year ended 31 December 2005 were audited by Guangdong Yangcheng Certified Public Accountants Co. Ltd. (廣東羊城會計師事務所有限公司) registered in the PRC. These statutory financial statements were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises established in the PRC (“PRC GAAP”). For the purpose of this report, the directors of the Company have prepared the Company’s financial statements for the Relevant Periods in accordance with accounting principles generally accepted in Hong Kong and in compliance with accounting standards issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) (the “HKGAAP financial statements”). We have undertaken an independent audit of the HKGAAP financial statements of the Company for the Relevant Periods in accordance

– 34 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG with Hong Kong Standards on Auditing issued by the HKICPA. We have also carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The financial information as set out in Sections I to III below (the “Financial Information”) have been prepared based on the HKGAAP financial statements. The directors of the Company are responsible for preparing these financial statements which give a true and fair view. In preparing these financial statements, it is fundamental that appropriate accounting policies are selected and applied consistently.

The directors of the Company are responsible for the preparation of the Financial Information. The directors of Tianjin TEDA are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on our examination on the Financial Information and to report our opinion.

In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of the Company as at 31 December 2003, 2004, 2005 and 31 March 2006, and of the results and cash flows of the Company for the Relevant Periods.

The unaudited comparative financial information of the Company for the three months ended 31 March 2005 has been prepared solely for the purpose of this report. The directors of the Company are responsible for preparing this comparative financial information. It is our responsibility to form an independent conclusion, based on our review, on this comparative financial information and to report our conclusion to you. For the purpose of this report, we have performed a review of the financial information of the Company for the three months ended 31 March 2005 in accordance with Hong Kong Standard on Review Engagements 2400 “Engagements to Review Financial Statements” issued by the HKICPA. This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial information of the Company are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion on the financial information for the three months ended 31 March 2005.

On the basis of our review, for the purpose of this report, we are not aware of any material modification that should be made to the financial information of the Company for the three months ended 31 March 2005.

– 35 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

I. FINANCIAL INFORMATION

INCOME STATEMENTS

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 Note RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)

Turnover 2 195,884 223,735 207,874 54,634 80,745

Cost of sales (165,003) (201,650) (189,164) (48,757) (72,680)

Gross profit 30,881 22,085 18,710 5,877 8,065 Other revenue 3 195 248 6,843 161 158

Distribution and selling costs (3,289) (4,099) (4,029) (194) (1,936)

Administrative expenses (11,166) (6,999) (10,209) (2,644) (4,662)

Profit from operations 4 16,621 11,235 11,315 3,200 1,625

Finance costs 5 (214) (325) (310) (80) (277)

Share of results of an associate – (130) 265 94 (303)

Profit before taxation 16,407 10,780 11,270 3,214 1,045

Taxation 6 –––––

Net profit for the year/period 16,407 10,780 11,270 3,214 1,045

Dividends 7 17,108 ––––

– 36 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

BALANCE SHEETS

As at As at 31 December 31 March 2003 2004 2005 2006 Note RMB’000 RMB’000 RMB’000 RMB’000

Assets and liabilities

Non-current assets Property, plant and equipment 10 15,957 12,639 8,877 8,502 Deposits paid for property, plant and equipment –––1,294 Investment in an associate 11 – 7,664 17,216 8,867 Prepayments 685 668 652 648

16,642 20,971 26,745 19,311

Current assets Inventories 12 20,314 25,826 15,026 17,630 Trade receivables 13 – Shandong TEDA 20 – 10,716 15,520 – – Others 37,368 33,235 18,138 56,657 Trade deposits paid 13,077 3,884 3,621 2,580 Prepayments and other receivables – Shandong TEDA 20 ––3,101 – – Others 6,914 7,053 3,151 6,955 Amounts due from equity holders 19(b) 680 697 – 1,424 Bank balances and cash 5,837 4,443 4,178 3,269

84,190 85,854 62,735 88,515

Current liabilities Trade payables 14 5,248 9,144 10,803 12,879 Trade deposits received 464 3,547 55 13,166 Other payables and accruals – Shandong TEDA 20 – 8,500 – 1,124 – Others 2,931 2,008 2,357 2,644 Amount due to a director 19(b) 5,570 4,838 – 732 Amounts due to equity holders 19(b) 50,556 32,010 4,296 – Loans from Tianjin TEDA 19(c) –––4,201 Bank borrowings – secured 15 5,000 5,000 3,500 3,500 Other tax payables 136 71 300 366

69,905 65,118 21,311 38,612

Net current assets 14,285 20,736 41,424 49,903

Total assets less current liabilities carried forward 30,927 41,707 68,169 69,214

– 37 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

As at As at 31 December 31 March 2003 2004 2005 2006 Note RMB’000 RMB’000 RMB’000 RMB’000

Total assets less current liabilities brought forward 30,927 41,707 68,169 69,214

Non-current liabilities Deferred income 200 200 ––

Net assets 30,727 41,507 68,169 69,214

Capital and reserves

Paid-up capital 16(a) 8,000 8,000 16,327 16,327

Reserves 16(b) 22,727 33,507 51,842 52,887

Total equity 30,727 41,507 68,169 69,214

– 38 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

STATEMENTS OF CHANGES IN EQUITY

PRC statutory funds Statutory Statutory public Paid-up Capital surplus welfare Retained Total Total capital reserve reserve fund profits reserves equity Note 16 Note 16 (Note 16 (Note 16 (a) (a) (b)(i)) (b)(ii)) RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

At 1 January 2003 8,000 126 619 310 5,265 6,320 14,320

Net profit for the year ––––16,407 16,407 16,407

Transfer to PRC statutory funds ––1,641 820 (2,461) ––

At 31 December 2003 8,000 126 2,260 1,130 19,211 22,727 30,727 (Note) Net profit for the year ––––10,780 10,780 10,780

Transfer to PRC statutory funds ––1,078 539 (1,617) ––

At 31 December 2004 8,000 126 3,338 1,669 28,374 33,507 41,507 (Note) Issue of capital 8,327 24,173 –––24,173 32,500

Net profit for the year ––––11,270 11,270 11,270

Dividends paid (note 7) ––––(17,108) (17,108) (17,108)

Transfer to PRC statutory funds ––1,127 564 (1,691) ––

At 31 December 2005 16,327 24,299 4,465 2,233 20,845 51,842 68,169

Net profit for the period ––––1,045 1,045 1,045

Transfer to PRC statutory funds ––104 53 (157) ––

At 31 March 2006 16,327 24,299 4,569 2,286 21,733 52,887 69,214

At 31 December 2004 8,000 126 3,338 1,669 28,374 33,507 41,507

Net profit for the period ––––3,214 3,214 3,214

Transfer to PRC statutory funds ––321 161 (482) ––

At 31 March 2005 (unaudited) 8,000 126 3,659 1,830 31,106 36,721 44,721 (Note)

Note: The proposed final dividends for the year ended 31 December 2003 and balance of retained profits at 31 December 2003 and 2004 and 31 March 2005, after proposed final dividends, were approximately RMB17,108,000, RMB2,103,000, RMB11,266,000 and RMB13,998,000 respectively.

– 39 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

CASH FLOW STATEMENTS

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)

Cash flows from operating activities Profit before taxation 16,407 10,780 11,270 3,214 1,045 Adjustment for: Share of results of an associate – 130 (265) (94) 303 Depreciation 3,409 3,497 3,254 871 699 Loss on disposal of property, plant and equipment 60 – 891 151 – Impairment loss on property, plant and equipment ––121 –– Interest income (18) (38) (28) (11) (9) Interest expenses 214 325 310 80 277 Impairment loss for doubtful debts/ (write-back of impairment loss) 1,488 1,056 (881) 1,294 3,342 Provision for obsolete inventories 392 498 193 7 136

Operating profit before working capital changes 21,952 16,248 14,865 5,512 5,793 (Increase)/decrease in amount due from an associate – (5,794) (9,287) (12,188) 8,046 Decrease in prepayments 16 17 16 4 4 (Increase)/decrease in inventories (2,897) (6,010) 10,607 16,232 (2,740) Increase in trade receivables (21,358) (6,880) (6,769) (19,361) (26,202) (Note) (Increase)/decrease in trade deposits paid (7,567) 9,193 263 1,558 1,041 (Increase)/decrease in prepayments and other receivables (6,831) (898) 1,636 1,017 (842) (Decrease)/increase in trade payables (784) 3,896 1,659 2,749 2,076 (Decrease)/increase in trade deposits received (495) 3,083 (3,492) 270 13,111 Increase/(decrease) in other payables and accruals 21 7,577 14,349 (4,988) 1,411 Changes in amounts due from/to equity holders 17,223 (18,563) (27,017) 11,450 (5,720) Increase/(decrease) in amount due to a director 62 (732) (4,838) (4,838) 732 Increase/(decrease) in other tax payables 107 (65) 229 34 66 Increase/(decrease) in deferred income 200 – (200) 1,000 –

Cash (used in)/generated from operations (351) 1,072 (7,979) (1,549) (3,224) Interest paid (214) (325) (310) (80) (76) Enterprise income tax paid (96) ––––

Net cash (used in)/generated from operating activities (661) 747 (8,289) (1,629) (3,300)

– 40 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)

Cash flows from investing activities Capital contribution to an associate – (2,000) ––– Acquisition of property, plant and equipment (1,752) (179) (633) – (324) Deposits paid for property, plant and equipment ––––(1,294) Proceeds from sale of property, plant and equipment 18 – 129 –– Interest received 18 38 28 11 9

Net cash (used in)/ generated from investing activities (1,716) (2,141) (476) 11 (1,609)

Cash flows from financing activities Capital contribution from Tianjin TEDA ––10,000 –– Loans from Tianjin TEDA ––––4,000 New bank borrowings raised 5,000 5,000 3,500 –– Repayment of bank borrowings – (5,000) (5,000) ––

Net cash generated from financing activities 5,000 – 8,500 – 4,000

Net increase/(decrease) in bank balances and cash 2,623 (1,394) (265) (1,618) (909)

Bank balances and cash at beginning of year/period 3,214 5,837 4,443 4,443 4,178

Bank balances and cash at end of year/period 5,837 4,443 4,178 2,825 3,269

Note: Non-cash transaction

During the year ended 31 December 2005, dividends of RMB17,108,000 were paid in the form of trade receivables assumed by an equity holder of the same amount.

– 41 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

II. NOTES TO THE FINANCIAL INFORMATION

1. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the Financial Information are set out below:

(a) Adoption of new and revised Hong Kong Financial Reporting Standards

The Company has elected to adopt all of the new and revised Hong Kong Financial Reporting Standards (“HKFRS”) and Hong Kong Accounting Standards (“HKAS”) (collectively “HKFRSs”) issued by the HKICPA in advance of their effective dates of 1 January 2005 or 1 January 2006.

The Company has not early adopted the following new or revised standards or interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these standards or interpretations will have no material impact on the Financial Information of the Company.

HKAS 1 (Amendment) Presentation of Financial Statements: Capital Disclosures HKFRS 7 Financial Instruments: Disclosures

(b) Basis of preparation

The Financial Information has been prepared in accordance with HKFRSs issued by the HKICPA and is prepared under the historical cost convention.

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

The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhaul costs, is charged to the income statement in the year/period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalised as an additional cost of the asset.

Depreciation is provided on a straight line basis to write off the cost of property, plant and equipment after taking into account their estimated residual value over their estimated useful lives, which are reviewed and adjusted, if appropriate, at each balance sheet date. The estimated useful lives are as follows:

Buildings 20 years Plant and machinery 5 – 8 years Furniture and equipment 5 years Motor vehicles 5 years

The gain or loss arising from the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Company’s accounting policy. Depreciation of these assets, on the same basis as other fixed assets, commences when the assets are ready for their intended use. – 42 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(d) Associate

An associate is an enterprise over which the Company is in a position to exercise significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights, through participation in the financial and operating policy decisions of the investee.

The investment in the associate is accounted for by the equity method of accounting and is initially recognised at cost. The income statement includes the Company’s share of the post-acquisition results of the associate for the year/period, and the balance sheet includes the Company’s share of the net assets of the associate and goodwill, net of accumulated impairment losses.

When the Company’s share of losses in an associate equals or exceeds its interest in the associate the Company does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Company and its associate are eliminated to the extent of the Company’s interests in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the associate have been changed where necessary to ensure consistency with the policies adopted by the Company.

(e) Impairment of assets

At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash- generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

(f) Inventories

Inventories are valued at the lower of cost and net realisable value. Cost includes cost of purchase of materials computed using the weighted average costing method and, in the case of work in progress and finished goods, comprise direct materials, direct labour and an appropriate proportion of production overheads. Net realisable value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date or to management estimates based on prevailing market conditions.

– 43 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(g) Financial instruments

Financial assets and financial liabilities are recognised on the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument.

(i) Trade and other receivables

Receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowance for estimated irrecoverable amounts is recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

(ii) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments with original maturities of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

(iii) Borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowing in accordance with the Company’s accounting policy for borrowing costs.

Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(iv) Trade and other payables

Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

(v) Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

(h) Operating leases

Leases where substantially all the rewards and risks of ownership of asset remain with the lessor are accounted for as operating leases.

The Company as lessee

Rentals payable under operating leases are charged to the income statement on a straight line basis over the relevant lease term.

The Company as lessor

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.

– 44 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(i) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Company has a present legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(j) Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year/period. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in associated companies, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

(k) Translation of foreign currencies

The financial records of the Company and the financial statements are stated in Renminbi (“RMB”). The principal activities of the Company are transacted in RMB, the functional and reporting currency of the Company.

Foreign currency transactions are translated into RMB at the exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the rates of exchange ruling at the balance sheet date. Non- monetary items are not re-translated. Exchange gains and losses on settlement of monetary items, and on the retranslation of monetary items, are dealt with in the income statement.

– 45 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(l) Government subsidies

Subsidies from the PRC government are recognised at their fair value when they are received. When a subsidy relates to an expense item, it is recognised as income over the periods necessary to match the subsidy, on a systematic basis, with the costs which it is intended to compensate, or as appropriate, is initially recorded as deferred income in the balance sheet, and thereafter recognised as income when all attached conditions have been complied with.

Where a subsidy relates to an asset, the fair value of the subsidy is deducted in arriving at the carrying amount of the related asset, or as appropriate, is initially recorded as deferred income in the balance sheet, and thereafter recognised as income over the useful life of the relevant asset.

(m) Employee benefits – retirement obligations

The Company contributes on a monthly basis to the defined contribution retirement scheme organised by the relevant municipal and provincial government in the PRC. The municipal and provincial government undertake to assume the retirement benefit obligations of all existing and future retired employees payable under this plan. Contributions to this plan are expensed as incurred.

(n) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Capitalisation of such borrowing cost ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on the assets is deducted from the borrowing costs capitalised.

All other borrowing costs are charged to the income statement in the year in which they are incurred.

(o) Dividend distribution

Dividends are recognised as a liability in the year/period they are declared or approved by the shareholders.

(p) Related parties

Two parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Company where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Company or of any entity that is a related party of the Company.

(q) Revenue recognition

Revenue is recognised when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Company, on the following bases:

(i) sale of goods is recognised when the significant risks and rewards of ownership have been transferred to customers and title has passed;

– 46 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(ii) interest income is recognised on a time apportioned basis on the principal outstanding and at the applicable interest rate.

(iii) Government subsidies of a revenue nature are recognised as other income in the income statement in the year/period when all attached conditions have been complied with.

(r) Use of estimates

The preparation of the Financial Information in conformity with HKFRSs requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates.

(s) Segment

A segment is a distinguishable component of the Company that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment.

Segment capital expenditure is the total cost incurred during the year/period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one year.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, corporate and financing expenses and minority interests.

– 47 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

2. TURNOVER AND SEGMENT INFORMATION

Turnover and profit of the Company are mainly derived from the manufacture and sale of fertilizers in the PRC. The principal assets employed by the Company and its operations are located in the PRC. Accordingly, the directors of the Company and its operations consider that there are only one business segment and one geographical segment and thus no segment information is presented.

Turnover comprises the invoiced amount of goods sold to customers after allowances for returns and discounts.

3. OTHER REVENUE

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Transportation income 116 1 34 –– Bank interest income 18 38 28 11 9 Government subsidy – 200 3,503 –– Income from technology transfer ––2,000 –– Write-back of impairment loss for doubtful debts ––881 –– Others 61 9 397 150 149

195 248 6,843 161 158

4. PROFIT FROM OPERATIONS

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Profit from operations is arrived at after charging:

Auditors’ remuneration 491 26 721 –– Impairment loss for doubtful debts 1,488 1,056 – 1,294 3,342 Provision for obsolete inventories 392 498 193 7 136 Cost of inventories sold 165,003 201,650 189,164 48,757 72,680 Depreciation 3,409 3,497 3,254 871 699 Loss on disposal of property, plant and equipment 60 – 891 151 – Impairment loss on property, plant and equipment ––121 –– Staff costs (excluding directors’ emoluments): – salaries, bonus and allowance 3,943 2,947 3,348 768 1,266 – retirement benefit scheme contributions 42 43 53 12 21

– 48 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

5. FINANCE COSTS

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Interest on bank borrowings 214 325 310 80 277

6. TAXATION

The Company was exempted from enterprise income tax in the PRC as the Company was qualified as a welfare enterprise as approved by the Guangdong Local Tax Bureau during the three years ended 31 December 2003, 2004 and 2005. In the opinion of the directors, the Company has complied with the qualification requirements of a welfare enterprise during the three months ended 31 March 2006 and accordingly the Company should also be exempted from enterprise income tax for this period.

7. DIVIDENDS

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Final, proposed 17,108 ––––

At a board of directors’ meeting held on 8 April 2005, the directors proposed a final dividend of RMB17,108,000 in respect of the year ended 31 December 2003. This proposed dividend is not reflected as dividend payable as at 31 December 2003 and 2004, but is reflected as an appropriation of retained profits for the year ended 31 December 2005.

8. DIRECTORS’ AND SENIOR EXECUTIVE EMOLUMENTS

(a) Details of the emoluments paid to the directors of the Company for the Relevant Periods were as follows:

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Zhang Song Hong 52 77 76 19 – Wang Shao Yun 32 – N/A N/A N/A Cao Ai Xin 29 65 64 16 23 Wei Jing Quan – 22 55 14 N/A Huang Kun Yao ––––N/A Zhang Li Zhi ––––N/A You Huan Yu N/A N/A N/A N/A 22 Hao Zhi Hui N/A N/A N/A N/A – Wang Shu Xin N/A N/A N/A N/A –

113 164 195 49 45

Note: (N/A) Not Directors during the respective years/period.

– 49 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(b) Details of the emoluments paid to the five highest paid individuals for the Relevant Periods were as follows:

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Salaries, allowances and other benefits 187 291 303 76 96 Bonus – 3 ––– Retirement scheme contributions 2 2 2 ––

189 296 305 76 96

(c) During the Relevant Periods, no emoluments were paid by the Company to any of the directors of the Company or the five highest paid individuals of the Company as an inducement to join or upon joining the Company or as compensation for loss of office and none of the directors has waived any emoluments.

9. RETIREMENT BENEFIT SCHEME

The employees of the Company are members of a defined contribution retirement benefit scheme operated by a local Municipal Government. The Company and the employees are each required to make contributions to the retirement benefit scheme at the rates based on 10% of the employee’s basic salaries in accordance with the relevant regulations in the PRC. Such contributions are charged to the income statement as incurred. The only obligation of the Company with respect to the retirement scheme is to make the required contributions under the scheme. No forfeited contribution is available to reduce the contribution payable in future years.

– 50 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

10. PROPERTY, PLANT AND EQUIPMENT

Furniture Plant and and Motor Construction Buildings machinery equipment vehicles in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note)

Cost: At 1 January 2003 3,524 22,518 389 1,533 – 27,964 Additions 3 993 87 669 – 1,752 Disposals – (187) (35) (99) – (321)

At 31 December 2003 3,527 23,324 441 2,103 – 29,395 Additions – 153 26 ––179

At 31 December 2004 3,527 23,477 467 2,103 – 29,574 Additions – 210 49 152 222 633 Disposals – (5,798) (106) (243) – (6,147)

At 31 December 2005 3,527 17,889 410 2,012 222 24,060 Additions – 9 7 308 – 324

At 31 March 2006 3,527 17,898 417 2,320 222 24,384

Accumulated depreciation and impairment: At 1 January 2003 1,087 8,072 144 969 – 10,272 Charge for the year 171 2,918 75 245 – 3,409 Written back on disposal – (163) (30) (50) – (243)

At 31 December 2003 1,258 10,827 189 1,164 – 13,438 Charge for the year 171 3,005 74 247 – 3,497

At 31 December 2004 1,429 13,832 263 1,411 – 16,935 Charge for the year 171 2,803 57 223 – 3,254 Impairment loss – 18 70 33 – 121 Written back on disposal – (4,797) (99) (231) – (5,127)

At 31 December 2005 1,600 11,856 291 1,436 – 15,183 Charge for the period 42 595 8 54 – 699

At 31 March 2006 1,642 12,451 299 1,490 – 15,882

Net book value: At 31 March 2006 1,885 5,447 118 830 222 8,502

At 31 December 2005 1,927 6,033 119 576 222 8,877

At 31 December 2004 2,098 9,645 204 692 – 12,639

At 31 December 2003 2,269 12,497 252 939 – 15,957

Note: The Company is in the process of applying for the land use right certificate of buildings.

– 51 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

11. INTEREST IN AN ASSOCIATE

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Share of net assets – 1,870 2,135 1,832 Amount due from an associate – 5,794 15,081 7,035

– 7,664 17,216 8,867

Particulars of the associate are as follows:

Place of Percentage of equity establishment attributable to the Company and operations Company Principal activities

Shaanxi Xing Fu Fertilizer The PRC 40% Manufacture and sale of Company Limited highly concentrated (陝西興福肥業有限責任公司) nitro-compound (“Shaanxi Xing Fu”) fertilizers

On 25 May 2004, the Company contributed cash of RMB2,000,000 for the establishment of a limited liability company, namely Shaanxi Xing Fu Fertilizer Company Limited, representing 40% equity interest in Shaanxi Xing Fu. The other 60% equity interest is held by Shaanxi Xinghua Chemistry Company Limited (陝西興化化學股份有限公司), a company established in the PRC with limited liability. Shaanxi Xing Fu is principally engaged in the manufacture and sale of highly concentrated nitro-compound fertilizers. Prior to 1 April 2006, primarily all the products of Shaanxi Xing Fu were sold to the Company.

The Company ceased to purchase products from Shaanxi Xing Fu since 1 April 2006.

The amount due from the associate is unsecured, interest free and not repayable within the next twelve months from the balance sheet date.

– 52 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

12. INVENTORIES

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Raw materials – at cost 13,305 20,294 9,462 10,708 – at net realisable value 13 114 149 250

13,318 20,408 9,611 10,958

Packing materials – at cost 1,426 972 1,475 1,823 – at net realisable value 1,305 1,607 1,774 1,842

2,731 2,579 3,249 3,665

Finished goods – at cost 4,150 2,834 2,156 2,997 – at net realisable value 1 4 ––

4,151 2,838 2,156 2,997

Low value consumable items, at cost 114 1 10 10

As at year/period end 20,314 25,826 15,026 17,630

– at cost 18,995 24,101 13,103 15,538

– at net realisable value 1,319 1,725 1,923 2,092

13. TRADE RECEIVABLES

The normal credit period granted to its trade customers by the Company ranged from 30 to 180 days.

An aging analysis of trade receivables net of impairment loss as at the balance sheet date is as follows:

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Within 1 month 4,109 14,738 15,520 14,013 2 – 3 months 9,261 9,915 – 14,189 4 – 6 months 12,294 5,732 – 14,744 7 – 12 months 10,605 8,151 11,975 9,733 1 – 2 years 1,099 4,769 5,919 3,978 2 – 3 years – 646 244 –

37,368 43,951 33,658 56,657

– 53 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

14. TRADE PAYABLES

Details of the aging analysis of trade payables are as follows:

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Within 1 month 3,628 1,815 7,722 2,491 2 – 3 months 728 6,005 404 2,010 4 – 6 months 668 1,156 1,402 7,038 7 – 12 months 224 47 1,275 65 1 – 2 years – 121 – 1,275

5,248 9,144 10,803 12,879

15. BANK BORROWINGS – SECURED

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Bank loans, short term 5,000 5,000 3,500 3,500

Interest rate per annum 6.372% 6.372% 6.696% 6.696%

The bank loans are secured by the buildings owned by the Company, land use rights owned by an unrelated party and personal guarantees by one of the directors of the Company and his associate. The repayment term of the bank loan at 31 March 2006 was extended for another year on 22 May 2006.

16. PAID-UP CAPITAL AND RESERVES

(a) Paid-up capital

Upon the establishment of the Company on 20 August 1996, RMB8,000,000 were contributed as paid-up capital by equity holders of the Company in the form of cash. On 28 December 2005, the registered capital of the Company was increased by RMB8,326,500 (the “Subscription Capital”).

The consideration paid by Tianjin TEDA for the Subscription Capital, which represented 51% of the enlarged capital of RMB16,326,500 of the Company, was RMB32,500,000 (the “Consideration”), of which RMB10,000,000 was paid in cash by Tianjin TEDA on 28 December 2005, and the remaining RMB22,500,000 was settled by Shandong TEDA Bio-engineering Co., Ltd., a 51% subsidiary of Tianjin TEDA, waiving its entitlement to guarantee deposits paid to the Company pursuant to distribution agreements (note 20) of the same amount. The excess of the Consideration over the Subscription Capital of RMB24,173,500 was credited to capital reserve on 28 December 2005.

– 54 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(b) Reserves

(i) Statutory surplus reserve

In accordance with the Company Law of the PRC and the Company’s articles of association, the Company shall appropriate 10% of its annual statutory net profit (after offsetting any prior years’ losses) to the statutory surplus reserve. When the balance of such reserve reaches 50% of the Company’s registered capital, any further appropriation is optional. The statutory surplus reserve can be utilised to offset prior years’ losses or to issue bonus capital. Except for the reduction of losses incurred, other usage should not result in such statutory surplus reserve falling below 25% of the registered capital.

(ii) Statutory public welfare fund

According to the relevant PRC regulations and the Company’s articles of association, the Company is also required to appropriate 5% of its annual statutory net profit (after offsetting any prior years’ losses) to a statutory public welfare fund, which is a non-distributable reserve other than in the event of liquidation of the Company. The fund must be used for capital expenditure on staff welfare facilities and cannot be used to pay for staff welfare expenses. Titles of these capital items will remain with the Company.

17. COMMITMENTS

(i) Capital commitments

The Company had the following significant capital commitments in respect of acquisition of plant and machinery primarily for the new production base in Guizhou Province, the PRC:

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Authorised and contracted for –––2,490

(ii) Operating lease arrangements

(a) As lessee

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Minimum lease payments paid under operating leases 1,606 1,607 833 397 88

– 55 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

The Company had outstanding minimum commitments under operating leases, which fall due as follows:

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Within one year 1,590 1,590 222 222 In the second year to fifth year inclusive 6,324 5,094 890 892 Over five years 1,391 1,030 3,080 3,022

9,305 7,714 4,192 4,136

Operating lease payments represent rentals payable by the Company on its factory and warehouse premises. These leases are negotiated for a term of 5 to 20 years.

(b) As lessor

As at the balance sheet dates, the Company had future minimum lease receivables under non-cancellable operating leases in respect of some of its plant and machinery as follows:

As at As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Within one year ––240 120

18. ASSETS PLEDGED

At 31 March 2006, 31 December 2005, 2004 and 2003 buildings with carrying value of approximately RMB1,885,000, RMB1,927,000, RMB2,098,000 and RMB2,269,000 respectively were pledged to a bank to secure the Company’s bank borrowings (note 15).

– 56 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

19. RELATED PARTY TRANSACTIONS

(a) Set out below are the material related party transactions entered into by the Company during the Relevant Periods:

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Purchase of raw materials from an associate – Shaanxi Xing Fu Fertilizer Company Limited (Note) – 10,415 66,924 7,812 38,869

Interest paid and payable to Tianjin TEDA ––––218

Trade receivables transferred from an equity holder – Shenzhen Wenjian Investment Development Company Limited 20,647 ––––

Note: The directors consider that the purchases of raw materials were made at a price and on conditions similar to those offered by other independent suppliers of the Company.

(b) The balances due from/(to) equity holders and a director are unsecured, interest-free and have no fixed terms of repayment.

(c) Pursuant to a loan agreement dated 1 January 2006, loans from Tianjin TEDA are unsecured, interest bearing at 14.4% per annum and repayable within one year.

(d) Members of key management comprise the directors only whose remuneration during the year/period is disclosed in note 8 to the Financial Information.

– 57 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

20. TRANSACTIONS WITH SHANDONG TEDA

Starting from 1 April 2005, 山東泰達生物工程有限公司 (Shandong TEDA Bio-engineering Co., Ltd.) (“Shandong TEDA”), a company established in the PRC and a 51% subsidiary of Tianjin TEDA, became the authorised sole distributor of the Company. The distribution agreement was terminated on 31 December 2005. Since then, the Company sells its products directly to customers. The Company entered the following transactions with Shandong TEDA during the Relevant Periods:–

Three months Year ended 31 December ended 31 March 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)

Income statement: Sales to Shandong TEDA – 18,608 150,906 11,840 –

At as As at 31 December 31 March 2003 2004 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000

Balance sheet: Trade receivables – 10,716 15,520 – Prepayments and other receivables – Collection of the Company’s trade receivables by Shandong TEDA on its behalf ––3,101 –

Other payables and accruals – Guarantee deposits received from Shandong TEDA pursuant to distribution agreements – 8,500 –– – Others –––1,124

21. FINANCIAL INSTRUMENTS

(a) Financial risk factors

The Company’s principal financial instruments comprise cash and bank balances.

The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk and credit risk. The directors of the Company meet periodically to analyse and formulate measures to manage the Company’s exposure to these risks. Generally, the Company introduces conservative strategies on its risk management. As the Company’s exposure to these risks is kept to minimum, the Company has not used any derivatives and other instruments for hedging purposes. The directors review and agree policies for managing each of these risks and they are summarised as follows:

(i) Interest rate risk

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s interest-bearing bank borrowings. As at 31 December 2003, 2004 and 2005 and 31 March 2006, all borrowings were at fixed rates and revised annually. The Company does not hedge its exposure to interest rate fluctuations.

– 58 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

(ii) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed banking facilities. The management aims to maintain flexibility in funding by keeping committed banking facilities available.

(iii) Credit risk

The Company’s principal financial assets are bank balances and cash, and trade and other receivables.

The Company’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of provisions for doubtful receivables. A provision for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows.

During the years ended 31 December 2003 and 2004, and the three months ended 31 March 2006, the Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers.

From 1 April 2005 to 31 December 2005, Shandong TEDA was the authorised sole distributor of the Company (Note 20). All sales of the Company were primarily made to Shandong TEDA during this period.

(iv) Fair value and cash flow interest rate risk

Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company’s exposure to fair value and cash flow interest risks is minimal as the Company does not have any long term financial assets and liabilities.

(b) Fair value estimation

The fair values of bank balances and cash, trade and other receivables, trade and other payables are not materially different from their carrying accounts.

The carrying values of short term interest-bearing bank borrowings are estimated to approximate their fair values based on the nature or short term maturity of these instruments.

Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

22. ACCOUNTING ESTIMATES AND JUDGEMENTS

The Company’s financial position and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the Financial Information. The Company bases the assumptions and estimates on historical experience and on various other assumptions that the Company believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

– 59 – APPENDIX 1 ACCOUNTANTS’ REPORT ON FULILONG

The selection of significant accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the Financial Information. The significant accounting policies are set forth in Note 1. The Company believes the following significant accounting policies involve the most significant judgements and estimates used in the preparation of the Financial Information.

Impairment losses for bad and doubtful debts

The Company estimates impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. The Company bases the estimates on the aging of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of the customers were to deteriorate, actual write-offs might be higher than expected and could significantly affect the results of future periods.

Impairment losses for obsolete inventories

The Company estimates impairment losses for obsolete inventories. The Company bases the estimates on the aging and physical condition of the inventory items, the market condition, and historical write-off experience. If the marketability of the inventory items were to deteriorate, actual write-offs might be higher than expected and could significantly affect the results of future periods.

23. POST BALANCE SHEET EVENTS

On 25 June 2006, the Company, Tianjin TEDA and one of its subsidiaries and the existing equity holders of the Company entered into a conditional agreement whereby Tianjin TEDA and one of its subsidiaries acquire the remaining 49% equity interests in Fulilong from the existing equity holders of Fulilong for a consideration of RMB33,402,972.

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared for the Company in respect of any period subsequent to 31 March 2006.

Yours faithfully, For and on behalf of Horwath Hong Kong CPA Limited Certified Public Accountants Hong Kong

Chan Kam Wing, Clement Director Practising Certificate number P02038

– 60 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

A. FINANCIAL SUMMARY

The following is a summary of the results and financial position of the Group (as defined in Note 1 below) for the three years ended 31 December 2005 extracted from the annual report of the Company (as defined in Note 1 below) for the year ended 31 December 2005.

For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000

Results Turnover 205,032 58,646 47,305

Gross profit 31,331 20,961 22,413

Gross margin 15.28% 35.7% 47.4%

Profit/(Loss) attributable to shareholders 773 (15,546) (24,842)

Profit/(Loss) per share 0.15 cents (3.89) cents (6.21) cents

For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 (Restated) (Restated)

Assets & Liabilities Total assets 208,266 123,656 107,999

Total liabilities 110,393 90,352 55,948

Shareholders’ equity 65,374 30,543 46,089

– 61 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

B. AUDITED FINANCIAL STATEMENTS

Set out below are the audited income statement of the Group for each of the two years ended 31 December 2004 and 2005, the audited consolidated balance sheet of the Group as 31 December 2004 and 2005, the audited consolidated statement of changes in equity of the Group for each of the two years ended 31 December 2004 and 2005 and the audited consolidated cash flow statement of the Group for each of the two years ended 31 December 2004 and 2005 together with the notes as extracted from the audited financial statements of the Group for the two years ended 31 December 2005 which are prepared in accordance with accounting principles generally accepted in Hong Kong.

Consolidated Profit and Loss Account For the year ended 31 December 2005

2005 2004 Note RMB RMB (Restated)

Turnover 4(a) 205,031,866 58,645,974

Cost of sales (173,701,093) (37,685,256)

Gross profit 31,330,773 20,960,718 Other revenue 4(a) 7,784,038 11,209,349

Distribution and selling expenses (19,532,334) (17,769,213) Administrative expenses 4(a)(ii) (18,319,829) (26,463,398) Research and development expenses (1,286,831) (3,616,494)

Operating loss (24,183) (15,679,038) Finance costs 5 (4,116,835) (3,013,371) Amortisation of goodwill on consolidation 14 – (303,419) Negative goodwill on acquisition of a subsidiary 29 2,046,605 – Gain on disposal of a subsidiary 30 663,161 –

Loss before taxation 6 (1,431,252) (18,995,828)

Taxation 7(a) (244,496) (82,496)

Loss for the year (1,675,748) (19,078,324)

Attributable to:

Equity holders of the Company 8 772,746 (15,546,137)

Minority interests (2,448,494) (3,532,187)

(1,675,748) (19,078,324)

Profit/(loss) per share 10 0.15 cents (3.89) cents

– 62 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Consolidated Balance Sheet At 31 December 2005

2005 2004 Note RMB RMB (Restated)

Assets and liabilities

Non-current assets Property, plant and equipment 12 41,487,154 19,162,176 Proprietary technologies 13 1,408,290 3,739,956 Goodwill on consolidation 14 3,367,001 3,367,001 Investment in associate 16 24,810,805 – Trade receivables 18(c) 4,794,540 5,861,951 Other receivables 19(a) 867,488 1,431,488

76,735,278 33,562,572

Current assets Inventories 17 31,147,537 18,042,311 Trade receivables 18 63,189,887 28,145,683 Prepayments and other receivables 19(b) 17,577,591 11,107,177 Amounts due from related parties 20 2,848,008 1,759,306 Restricted bank deposit 22 – 25,043,950 Cash and bank balances 16,767,411 5,994,744

131,530,434 90,093,171

Current liabilities Trade payables 23 20,907,603 13,803,980 Other payables and accruals 29,152,253 13,070,678 Government grants received in advance 1,402,008 1,402,008 Amounts due to related parties 20 5,792,949 1,637,234 Short-term bank borrowings 24 51,500,000 58,800,000 Current portion of finance lease payable 25 346,816 346,816

109,101,629 89,060,716

Net current assets 22,428,805 1,032,455

Total assets less current liabilities carried forward 99,164,083 34,595,027

– 63 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

2005 2004 Note RMB RMB (Restated)

Total assets less current liabilities brought forward 99,164,083 34,595,027

Non-current liabilities Finance lease payable 25 (1,290,878) (1,290,878)

Net assets 97,873,205 33,304,149

Equity

Capital and reserves Share capital 26 61,000,000 40,000,000 Share premium 75,089,571 62,031,951 Capital reserve 2,541,404 2,541,404 Accumulated losses (73,257,471) (74,030,217)

Equity attributable to equity holders 65,373,504 30,543,138 Minority interests 32,499,701 2,761,011

Total equity 97,873,205 33,304,149

– 64 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Balance Sheet As at 31 December 2005

2005 2004 Note RMB RMB

Assets and liabilities

Non-current assets Property, plant and equipment 12 7,770,566 8,747,303 Interests in subsidiaries 15 100,817,687 55,176,549 Other receivables 19(a) 867,488 1,431,488

109,455,741 65,355,340

Current assets Inventories 17 2,535,676 3,738,674 Trade receivables 18 – 294,852 Prepayments and other receivables 19(b) 6,923,554 3,921,074 Amounts due from related parties 20 2,995,502 2,055,928 Restricted bank deposits 22 – 25,043,950 Cash and bank balances 9,393,959 1,667,318

21,848,691 36,721,796

Current liabilities Trade payables 23 605,022 141,042 Other payables and accruals 6,832,503 6,099,822 Amounts due to related parties 20 1,197,234 1,487,234 Short-term bank borrowings 24 47,000,000 54,000,000 Current portion of finance lease payable 25 346,816 346,816

55,981,575 62,074,914

Net current liabilities (34,132,884) (25,353,118)

Total assets less current liabilities 75,322,857 40,002,222

Non-current liabilities Finance lease payable 25 (1,290,878) (1,290,878)

Net assets 74,031,979 38,711,344

Equity

Capital and reserves Share capital 26 61,000,000 40,000,000 Share premium 27 75,089,571 62,031,951 Capital reserve 27 (2,312,483) (2,312,483) Accumulated losses 27 (59,745,109) (61,008,124)

Total equity 74,031,979 38,711,344

– 65 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Consolidated Statement of Changes in Equity For the year ended 31 December 2005

Attributable to equity holders Share Share Capital Accumulated of the Minority capital premium reserve losses Company interests Total (Note 26) (Notes 29 & 30) RMB RMB RMB RMB RMB RMB RMB

Balance as at 31 December 2003 40,000,000 62,031,951 2,541,404 (58,484,080) 46,089,275 6,293,198 52,382,473

Loss for the year –––(15,546,137) (15,546,137) (3,532,187) (19,078,324)

Balance as at 31 December 2004 40,000,000 62,031,951 2,541,404 (74,030,217) 30,543,138 2,761,011 33,304,149

Placing of new H shares 21,000,000 13,057,620 ––34,057,620 – 34,057,620

Acquisition of a subsidiary –––––33,402,971 33,402,971

Disposal of a subsidiary –––––(1,215,787) (1,215,787)

Profit/(loss) for the year –––772,746 772,746 (2,448,494) (1,675,748)

Balance as at 31 December 2005 61,000,000 75,089,571 2,541,404 (73,257,471) 65,373,504 32,499,701 97,873,205

– 66 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Consolidated Cash Flow Statement For the year ended 31 December 2005

2005 2004 Note RMB RMB

Operating activities Cash generated from/(used in) operations 28(a) 13,143,791 (22,420,805) Income tax paid (244,496) (82,496) Interest paid (4,116,835) (3,003,724) Interest received 754,993 771,606

Net cash generated from/(used in) operating activities 9,537,453 (24,735,419)

Investing activities Acquisition of a subsidiary, net of cash acquired 29 (28,541,800) – Disposal of a subsidiary 30 (958,347) – Purchase of property, plant and equipment (17,834,430) (5,223,055) Purchase of proprietary technologies (24,000) (1,216,660) Proceeds from disposal of property, plant and equipment 292,222 840,894 Decrease in restricted bank deposit 25,043,950 –

Net cash used in investing activities (22,022,405) (5,598,821)

Financing activities Issue of share capital 34,057,620 – Additions of short-term bank borrowings 48,000,000 54,800,000 Repayments of short-term bank borrowings (58,800,000) (32,700,000) Capital injection by minority shareholders – 1,325,875

Net cash generated from financing activities 23,257,620 23,425,875

Net increase/(decrease) in cash and cash equivalents 10,772,668 (6,908,365)

Cash and cash equivalents at beginning of year 5,994,744 12,912,756 Effect of foreign exchange rate changes – (9,647)

Cash and cash equivalents at end of year 16,767,412 5,994,744

Analysis of the balances of cash and cash equivalents Cash and bank balances 16,767,412 5,994,744

– 67 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Notes to the Financial Statements (Expressed in Renminbi Dollars)

1. Group information and principal activities

Tianjin TEDA Biomedical Engineering Company Limited (the “Company”) was established on 8 September 2000 in the People’s Republic of China (“PRC”) as a joint stock company with limited liability. On 18 June 2002, the Company’s H shares were listed on the Hong Kong Growth Enterprise Market (the “GEM”). Consequently on 24 March 2003, the Company’s legal status became that of a Sino- foreign joint stock company with limited liability. The Company and its subsidiaries are collectively referred to as the “Group”.

The principal activities of the Company are investment holding, research, development and commercialization of medical and diabetic health food products and fertilizer products. The activities of the subsidiaries are set out in Note 15 below.

2. Adoption of new and revised Hong Kong Financial Reporting Standards

In the current year, the Group has adopted all of the new and revised Hong Kong Financial Reporting Standards (“HKFRS”) and Hong Kong Accounting Standards (“HKAS”) (collectively “HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants which are relevant to its operations and effective for accounting periods beginning on or after 1 January 2005. The applicable HKFRSs are set out below and the 2004 comparatives have been restated, as required, in accordance with the relevant requirements.

HKAS 1 Presentation of Financial Statements HKAS 2 Inventories HKAS 7 Cash Flow Statements HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events after the Balance Sheet Date HKAS 12 Income Taxes HKAS 14 Segment Reporting HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 18 Revenues HKAS 19 Employee Benefits HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance HKAS 21 The Effects of Changes in Foreign Exchange Rates HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 31 Investments in Joint Ventures HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 33 Earnings per Share HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 38 Intangible assets HKAS 39 Financial Instruments: Recognition and Measurement HKFRS 2 Share-based Payment HKFRS 3 Business Combinations HKAS-Int 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

– 68 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

The adoption of new or revised HKASs 1, 2, 7, 8, 10, 12, 14, 16, 17, 18, 19, 21, 23, 24, 27, 28, 33, 37 and HKAS Int 27 did not result in substantial changes to the Group’s accounting policies. In summary:

– HKAS 1 has affected the presentation of minority interest and other disclosures.

– HKASs 2, 7, 8, 10, 12, 14, 16, 17, 18, 19, 23, 27, 28, 33, 37 and HKAS Int 27 had no material effect on the Group’s policies.

– HKAS 21 had no material effect on the Group’s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency as the presentation currency for respective entity financial statements.

– HKAS 24 has affected the identification of related parties and some other related party disclosures as detailed in notes 20 and 33.

– HKAS 38 had no material effect on the Group’s policy. The Group has reassessed the useful lives of its intangible assets in accordance with the provisions of HKAS 38. No adjustment resulted from this reassessment.

The major effects on adoption of the other HKFRSs are summarised as follows:

(a) Amortisation of positive and negative goodwill (HKFRS 3 – Business combinations and HKAS 36 – Impairment of assets)

In prior periods:

– positive or negative goodwill which arose prior to 1 January 2001 was taken directly to reserves at the time it arose, and was not recognised in the profit and loss account until disposal or impairment of the acquired business;

– positive goodwill which arose on or after 1 January 2001 was amortised on a straight-line basis over its useful life and was subject to impairment testing when there were indications of impairment; and

– negative goodwill which arose on or after 1 January 2001 was amortised over the weighted average useful life of the depreciable/amortisable non-monetary assets acquired, except to the extent it related to identified expected future losses as at the date of acquisition. In such cases it was recognised in the profit and loss account as those expected losses were incurred.

With effect from 1 January 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed its accounting policies relating to goodwill. Under the new policy, the Group no longer amortises positive goodwill. Such goodwill is tested annually for impairment, including in the year of its initial recognition, as well as when there are indications of impairment. Impairment losses are recognised when the carrying amount of the cash generating unit to which the goodwill had been allocated exceeds its recoverable amount. Also with effect from 1 January 2005 and in accordance with HKFRS 3, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill under the previous accounting policy), the excess is recognised immediately on the profit and loss account as it arises. Further details of these new policies are set out in note 3(d) to the financial statements.

The new policy in respect of the amortisation of positive goodwill has been applied prospectively after 1 January 2005 in accordance with the transitional arrangements under HKFRS3. The accumulated amortisation of goodwill as at 1 January 2005 has been eliminated against the cost of goodwill as at that date. The adoption of this new policy also reduced the amortisation of goodwill of RMB303,419 during current year as compared with last year.

– 69 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Also in accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before 1 January 2001) will not be recognised in the profit and loss account on disposal or impairment of the acquired business, or under any other circumstances.

The change in policy relating to negative goodwill had no effect on these consolidated financial statements as there was no negative goodwill deferred as at 31 December 2004.

(b) Financial instruments (HKAS 32 – Financial Instruments: Disclosure and Presentation and HKAS 39 – Financial Instruments: Recognition and Measurement)

In the current year, the Group has applied HKAS 32 and HKAS 39. HKAS 32 requires retrospective application. The application of HKAS 32 has had no material effect on the presentation of financial instruments in the financial statements of the Group. HKAS 39, which is effective for annual periods beginning on or after 1 January 2005, generally does not permit the recognition, derecognition or measurement of financial assets and liabilities on a retrospective basis.

From 1 January 2005 onwards, the Group classifies and measures its financial assets and financial liabilities in accordance with HKAS 39. Under HKAS 39, financial assets are classified as “financial assets at fair value through profit or loss”, “available-for-sale”, “loans and receivables” or “held-to-maturity financial assets”. “Financial assets at fair value through profit or loss” and “available-for-sale” are carried at fair value, with changes in fair values recognised in profit or loss and equity respectively. Unquoted equity investments for which fair value cannot be measured reliably are stated at cost less impairment. “Loans and receivables” and “held-to-maturity financial assets” are measured at amortised cost using the effective interest method. Financial liabilities are generally classified as “financial liabilities at fair value through profit or loss” or “other financial liabilities”. “Other financial liabilities” are carried at amortised cost using the effective interest method.

The application of HKAS 39 has had no material effect on the recognition and measurement of financial assets and financial liabilities of the Group.

The Group has not early adopted the following new standards or interpretations that have been issued but are not yet effective, to these financial statements. The group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these HKFRSs would have a significant impact on its result of operation and financial position.

Effective for accounting periods on or after

HKAS 1 Presentation of Financial Statements: 1 January 2007 (Amendment) Capital Disclosures

HKFRS 7 Financial Instruments: Disclosures 1 January 2006

HK (IFRIC) – Int 4 Determining Whether an Arrangement 1 January 2007 Contains a Lease

– 70 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

3. Principal accounting policies

The financial statements have been prepared under the historical cost convention and in accordance with HKFRSs, accounting principles generally accepted in Hong Kong, the disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on the GEM of the Stock Exchange (the “GEM Listing Rules”). The principal accounting policies adopted in the preparation of these financial statements are set out below:

(a) Basis of preparation

The financial statements have been prepared on a going concern basis, assuming that the Group will continue to operate as a going concern, notwithstanding the fact that the Group suffered accumulated losses of RMB73,257,471 as at 31 December 2005. The validity of the Group’s ability to continue as a going concern depends on the success of the Group’s future operations and the ability of the Group to renew or replace the banking facilities as they fall due. The Group’s principal banker has confirmed its intention to extend and commit banking facility of up to RMB100 million to the Company. Drawdowns from this facility will be subject to the bank’s normal approval procedures. As at 31 December 2005, about RMB53 million of these facilities still remain unused. Subsequent to year end, the Company received RMB30 million of new loan against this facility in January 2006. Consequently, the directors have prepared the 2005 financial statements on the going concern basis.

(b) Group accounting

(i) Consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year.

A subsidiary is a company in which the Group, directly or indirectly, controls more than one half of the voting power, has the power to govern the financial and operating polices; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors.

The Group’s investments in foreign investment enterprises in the PRC are in the form of a sino-foreign equity joint venture. The profit sharing ratios and share of net assets are in proportion to their equity interests as set out in the foreign investment contracts. Investments in these foreign investment enterprises are accounted for as subsidiaries as the Group controls their boards of directors and is in a position to exercise control over the financial and operating policies of the enterprises.

The results of subsidiaries acquired and disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

– 71 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and statement of changes in equity within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the loss for the year between minority interests and the equity shareholders of the Company.

Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the Group’s interest until the minority’s share of losses previously absorbed by the Group has been recovered.

In the Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(ii) Associated companies

An associated company is a company, not being a subsidiary, in which an equity interest is held for the long term and significant influence is exercised in its management.

The consolidated profit and loss account includes the Group’s share of the results of associated companies for the year, and the consolidated balance sheet includes the Group’s share of the net assets of the associated companies and goodwill (net of accumulated amortisation) on acquisition.

In the Company’s balance sheet, the investments in associated companies are stated at cost less provision for impairment losses. The results of associated companies are accounted for by the Company on the basis of dividends received and receivable.

Equity accounting is discontinued when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated company.

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under HKFRS 3 are recognised at their values at the acquisition date.

Goodwill arising on acquisition is recognised as an asset and initially measured at costs, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

– 72 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(d) Goodwill

Goodwill arising on the acquisition of a subsidiary or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

(e) Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhead costs, is charged to profit and loss account in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalised as an additional cost of the asset.

Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method. The useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The principal annual rates are as follows:

Buildings 5% – 14% Plant and machinery 7% – 33% Motor vehicles 20% Furniture, fixtures and equipment 20%

Renovations and improvements are capitalised and depreciated over their expected useful lives.

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the profit or loss account.

Construction in progress represents buildings, plant and machinery and other property, plant and equipment under construction and is stated at costs. Cost comprises direct costs of construction as well as interest charges during the period of construction, installation and testing and certain exchange differences on any related borrowed funds. Capitalisation of interest charges ceases when substantially all the activities necessary to prepare the asset for its intended use are complete. Construction in progress is transferred to fixed assets when it is completed and ready for its intended use.

– 73 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(f) Proprietary technologies

Expenditures for acquisition of proprietary technologies, either separately or as part of a business combination, are recognised as assets only if it is probable that the future economic benefits that are attributable to the assets will flow to the Group and the costs of the assets can be measured reliably; otherwise, they are charged to the profit and loss account in the period in which they are incurred.

Proprietary technologies acquired as part of business combination are stated at their fair values at the date of acquisition less accumulated amortisation and any impairment losses. Proprietary technologies acquired separately are stated at cost less accumulated amortisation and any impairment losses.

Proprietary technologies are amortised using the straight-line method over their estimated useful lives of 5 years.

(g) Research and development costs

Research costs are expensed as incurred. Costs incurred on development projects relating to the design and testing of new or improved products are recognised as intangible assets where the technical feasibility and intention of completing the product under development has been demonstrated and the resources are available to do so, costs are identifiable and there is an ability to sell or use the assets that will generate probable future economic benefits. Development costs that do not meet the above criteria are expensed as incurred. Development costs previously recognised as expenses are not recognised as assets in a subsequent period.

(h) Impairment of assets excluding goodwill

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(i) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost includes cost of purchase of materials computed using the weighted average method and, in the case of work in progress and finished goods, direct labour and an appropriate proportion of production overheads. Net realisable value is determined by reference to the anticipated sales proceeds of items sold in the ordinary course of business less estimated selling expenses after the balance sheet date or to management estimates based on prevailing market conditions.

– 74 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(j) Financial instruments

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

(i) Trade receivables

Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

(ii) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a know amount of cash and are subject to an insignificant risk of changes in value.

(iii) Bank borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised in the profit and loss account over the term of the borrowings using the effective interest rate method.

(iv) Trade and other payables

Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

(k) Leases

(i) Finance leases

Leases that substantially transfer all the risks and rewards of ownership of assets to the Group are accounted for as finance leases. Finance leases are capitalised at the inception of the leases at the lower of the fair value of the leased assets or the present value of the minimum lease payments. Each lease payment is allocated between the capital and finance charges so as to achieve a constant rate on the capital balances outstanding. The corresponding rental obligations, net of finance charges, are included in non-current liabilities. The finance charges are charged to the profit and loss account over the lease period.

Assets held under finance leases are depreciated over the shorter of their estimated useful lives or the lease periods.

(ii) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Rentals under operating leases are charged to the profit and loss account on a straight-line basis over the lease term.

– 75 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(l) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence of non-occurrence of one or more future events are only disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(m) Deferred taxation

Deferred taxation 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. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries and associated companies, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

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.

(n) Translation of foreign currencies

The consolidated financial statements are presented in Renminbi (“RMB”), which is the Company’s functional and presentation currency.

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

(o) Government subsidy

Government subsidy is recognised when received and when there is a reasonable assurance that the Group will comply with the conditions attached with it, if any.

In relevant instances, grants relating to income may be deferred and recognised in the profit and loss account over the period necessary to match them with the costs they are intended to compensate.

(p) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

– 76 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(ii) Bonus plans

The expected costs of bonus payments are recognised as liabilities when the Group has present legal or constructive obligations as a result of services rendered by employees and reliable estimates of the obligations can be made.

Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

(iii) Pension costs

The Group has various defined contribution plans in accordance with the local conditions and practices in the provinces in which they operate. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior periods. The Group’s contributions to the defined contribution plans are expensed as incurred.

(q) Borrowing costs

(r) Revenue recognition

Revenue from the sale of goods is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. For sales under which the sales consideration is receivable in instalments (“instalment sale receivable”), the sales price is the present value for the consideration, determined by discounting the instalments receivable at an imputed rate of interest. The interest element is recognised as revenue as it is earned, on a time proportion basis that takes into account the imputed rate of interest.

Service income is recognised as services are rendered.

Other revenue from sale of intangible assets is recognised on the transfer of risk and rewards of the title to the asset, and it is probable that the economic benefit associated with the transaction will flow to the Group.

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

(s) Segment reporting

In accordance with the Group’s internal financial reporting, the Group has determined that business segmentation is the primary reporting format and geographical segmentation is the secondary reporting format.

Unallocated costs represent corporate expenses. Segment assets consist primarily of intangible assets, property, plant and equipment, operating assets and bank balances. Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to intangible assets and property, plant and equipment, including additions resulting from acquisitions through purchases of subsidiaries.

(t) Use of estimate

The preparation of these financial statements in conformity with HKFRSs requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

– 77 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

4. Turnover, revenue and segment information

(a) Revenue recognised during the year is as follows:

2005 2004 RMB RMB

Sale of goods – Medical and health products 48,916,107 39,044,649 – Fertilizer products (Note (i)) 156,115,759 19,601,325

Total turnover 205,031,866 58,645,974

Other revenue – Proceed from sale of right to use Group’s proprietary technology (Note (ii)) – 7,752,813 – Consultancy fee on distribution of certain of the Group’s products (Note (iii)) – 1,691,550 – Bad debts recovery 1,000,000 – – Over provision written back Rent 3,075,120 – Social welfare 2,227,533 – – Interest income 754,993 771,606 – Others 726,392 993,380

7,784,038 11,209,349

Total revenues 212,815,904 69,855,323

Notes:

(i) Revenue from sale of fertilizer products include one major sale of raw materials of about RMB nil (2004: RMB15.7 million) to Xinyang Jindi Compound Fertilizer Co. Ltd. (“Xinyang”) (Note 18(b)).

(ii) On 2 December 2004, the Group sold the right to use certain of its proprietary technology restricted within the Southeast Asia region to Brilliant Rise Development Limited (“BRDL”). The related fee of approximately RMB7.8 million, net of business tax, had been recognised as other revenue in 2004. However, BRDL has defaulted on its promised repayment schedule and in light of the uncertainty of the recovery of the debt, full provision has been made and charged to administrative expenses.

(iii) During 2004, the Group allowed an enterprise to distribute certain of its products for two years ending 30 June 2006. In connection with this distribution, the Group provided certain consultancy services. The related fees of RMB nil and RMB1,691,550, net of business tax, were recognised as other revenue for the years ended 31 December 2005 and 2004 respectively.

(iv) In respect of transactions described in (i) to (iii) above, the Directors confirm that they have been transacted with independent unrelated third parties.

– 78 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(b) Primary reporting format – business segments

The Group’s main business segments are analysed below. There is no sale or other transaction between the business segments.

(i) 2005 segment analysis:

Medical Distribution and health of fertilizer products products Total RMB RMB RMB

Segment revenue 48,916,107 156,115,759 205,031,866

Segment profit 1,053,132 4,665,078 5,718,210

Unallocated income 4,618,849 Unallocated costs (10,361,242)

Operating loss (24,183) Finance costs (4,116,835) Negative goodwill on acquisition of a subsidiary (Note 29) – 2,046,605 2,046,605 Gain on disposal of a subsidiary (Note 30) 663,161 – 663,161

Loss before taxation (1,431,252) Taxation (244,496)

Loss for the year (1,675,748)

Segment assets 74,681,649 130,736,055 205,417,704

Unallocated assets 2,848,008

Total assets 208,265,712

Segment liabilities 13,306,780 42,773,144 56,079,924

Unallocated liabilities 54,312,583

Total liabilities 110,392,507

Amortisation of proprietary technologies (Note 13) 981,600 1,666 983,266 Provision for doubtful debts (Note 6) 803,046 – 803,046 Capital expenditure (Note 12) 2,017,987 15,816,443 17,834,430 Depreciation (Note 6) 3,078,284 172,607 3,250,891 Loss on disposal of property, plant and equipment (Note 6) 181,936 – 181,936 Inventory obsolescence and write-off (Note 6) 85,543 – 85,543 Proprietary technology expenditure (Note 13) 24,000 – 24,000

– 79 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(ii) 2004 segment analysis:

Medical Distribution and health of fertilizer products products Total RMB RMB RMB

Segment revenue 49,482,392 19,601,325 69,083,717

Segment loss (12,538,238) (49,235) (12,587,493)

Unallocated income 771,606 Unallocated costs (3,863,151)

Operating loss (15,679,038) Finance costs (3,013,371) Amortisation of goodwill in acquisition (Note 14) (303,419) (303,419)

Loss before taxation (18,995,828) Taxation (82,496)

Loss for the year (19,078,324)

Segment assets 98,911,780 23,082,769 121,994,549 Unallocated assets 1,724,194

Total assets 123,718,743

Segment liabilities (23,013,085) (11,699,943) (34,713,028) Unallocated liabilities (55,638,566)

Total liabilities (90,351,594)

Amortisation of proprietary technologies (Note 13) 930,140 – 930,140 Provision for doubtful debts (Note 6) 7,962,440 – 7,962,440 Capital expenditure (Note 12) 4,764,747 2,226,136 6,990,883 Depreciation (Note 6) 2,518,074 13,960 2,532,034 Loss on disposal of property, plant equipment (Note 6) 30,065 – 30,065 Inventory obsolescence and write-off (Note 6) 1,167,101 – 1,167,101 Proprietary technology expenditure (Note 13) 1,516,660 – 1,516,660

No geographical segment information is presented because all the sales activities of the Group are conducted in the PRC.

– 80 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

5. Finance costs

2005 2004 RMB RMB

Interest expense on short-term bank borrowings 4,116,835 3,013,371

6. Loss before taxation

Loss before taxation is stated after crediting and charging the following:

2005 2004 RMB RMB

Crediting Negative goodwill on acquisition of a subsidiary 2,046,605 – Exchange gain, net – 9,647

Charging Amortisation of goodwill (Note 14) – 303,419 Amortisation of proprietary technologies (Note 13) 983,266 930,140 Auditors’ remuneration 976,000 1,102,677 Provision for doubtful debts – Other receivables (Note 4(a)(ii)) 540,000 7,800,000 – Trade receivables 263,046 162,440 Cost of inventories sold 173,701,093 37,685,256 Depreciation: Leased property, plant and equipment 232,058 232,058 Owned property, plant and equipment 3,018,833 2,299,976 Inventory obsolescence and write-off 85,543 1,167,101 Legal and professional consulting service fees 1,363,424 996,734 Loss on disposal of property, plant and equipment, net 181,936 30,065 Operating lease rentals – land and buildings 1,649,292 1,440,052 Pension costs 759,963 801,989 Staff costs other than pension costs (including emoluments of Directors and Supervisors) 7,315,189 12,726,890

7. Taxation

(a) Enterprises income tax (“EIT”)

Company:

In 2003, the Company changed its tax status to that of a Foreign Investment Enterprise (“FIE”). In accordance with the relevant tax regulations, as a production FIE located in TEDA, the Company is eligible to enjoy the concessionary EIT of 15%. It is further entitled to exemption from EIT for two years commencing from the first profit-making year after offsetting prior years’ losses, followed by a 50% reduction for the next three years thereafter. In addition, the Company shall enjoy exemption from 3% local income tax during its actual operational period in TEDA. The Company has not provided for any EIT (2004: nil) since the tax loss brought forward exceeds the taxable income for the year.

Subsidiaries:

Alpha, being a production FIE located in TEDA, is also eligible for all the benefits enjoyed by the Company as described above. Year 2005 is Alpha’s fourth profit-making year, consequently EIT has been provided at 7.5% (2004: nil) of taxable income for the year.

– 81 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Wantai and Yisheng, being limited companies incorporated in the PRC, are subject to the statutory 30% EIT and 3% local income tax. Both Wantai and Yisheng have not provided for any EIT since neither has any taxable income for the year (2004: nil).

TEDAX2 and Xinxing, being limited liability companies in Beijing High and New Technology Development Provisional Zone, are entitled to a concessing EIT rate of 15% and shall also be entitled to exemption from income tax for three years commencing from the first operating year followed by a 50% reduction for the next three years thereafter. TEDAX2 has been operating for more than 6 years. Therefore it is subject to EIT and local income tax at a rate of 15% (2004: 15%). Year 2005 is the fourth operating year for Xinxing. Therefore it is subject to EIT and local income tax at a rate of 7.5% (2004: nil). TEDAX2 and Xinxing have not provided for any EIT since they have no taxable income for the year (2004: nil).

STEDA, being a non-production FIE incorporated in PRC, is subjected to the statutory 30% EIT and 3% local income tax. STEDA has not provided for any EIT since it has no taxable income for the year (2004: nil).

Fulilong was exempted from EIT in the PRC as the company was qualified as a welfare enterprise as approved by the Guangdong Local Tax Bureau during the three years ended 31 December 2004. In the opinion of the directors, Fulilong has complied with the qualification requirements of a welfare enterprise during the year ended 31 December 2005 and accordingly Fulilong should also be exempted from EIT for the year.

The taxation charge on the Group’s loss before taxation differs from the theoretical amount that would arise using the statutory taxation rate in the PRC as follow:

2005 2004 RMB RMB

Loss before taxation (1,431,252) (18,995,828)

Calculated at statutory rate of 33% (2004: 33%) (472,313) (6,268,623) Income not subject to tax (935,095) – Expenses not deductible for taxation purposes – 2,410,888 Effect of tax exemption (416,795) (163,686) Tax rate differential (300,547) 2,328,220 Tax losses not recognised 2,369,246 1,610,705

Taxation charge 244,496 82,496

– 82 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(b) Deferred taxation

At 31 December 2005, the Group had the following respective estimated unused tax losses, which will expire as follows:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Year of expiry 2006 7,621,000 7,666,000 7,621,000 7,666,000 2007 7,899,000 6,364,000 7,899,000 6,364,000 2008 22,698,000 18,544,000 22,698,000 18,544,000 2009 16,052,000 13,427,000 16,052,000 13,427,000 2010 8,809,000 –––

63,079,000 46,001,000 54,270,000 46,001,000

No deferred tax assets has been recognised (2004: nil) due to the unpredictability of future profit streams.

8. Profit/(loss) attributable to equity holders of the Company

The profit/(loss) attributable to equity holders of the Company is dealt with in the financial statements of the Company to the extent of RMB1,263,015 (2004: loss of RMB13,967,988).

9. Dividend

No dividend has been paid or declared by the Company since its establishment.

10. Profit/(loss) per share

The calculation of profit/(loss) per share is based on the Group’s profit attributable to equity holders of RMB772,746 (2004: loss of RMB15,546,137), divided by the weighted average number of shares issued during the year of 517,945,205 (2004: 400,000,000) shares.

Diluted loss per share is not presented as there are no (2004: no) dilutive potential shares.

– 83 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

11. Emoluments of Directors, Supervisors and employees

(a) Directors’ and Supervisors’ emoluments

The aggregate amounts of emoluments payable to Directors and Supervisors of the Company during the year are as follows:

2005 2004 RMB RMB

Fees 196,170 290,000 Salaries, housing and other allowances 1,145,715 1,463,849 Discretionary performance bonuses 81,600 – Pension 90,639 62,130

1,514,124 1,815,979

The number of Directors and Supervisors whose emoluments fell within the following bands:

2005 2004

Nil – RMB1,040,000 (equivalent to Nil – HK$1,000,000) 13 14

Details of emoluments of individual Directors and Supervisors are set out as below:

2005 2004 RMB RMB

Executive Directors: Mr Wang Shuxin 637,294 634,342 Ms Zheng Dan 234,084 348,184 Mr Xie Kehua 225,995 224,708 Mr Gu Hanqing N/A 137,000

Non-executive directors: Mr Feng Enqing 34,000 30,000 Mr Liu Zhunyu 30,000 30,000 Mr Xie Guangbei 30,000 30,000

Independent non-executive directors: Professor Xian Guoming 30,000 30,000 Mr Chan Yip Kai Philip 31,170 N/A Mr Guan Tong 5,000 N/A Professor Xiao Zhuoji N/A 100,000 Ms Zhao Xiuying N/A 30,000

1,257,543 1,594,234

Supervisors: Mr Hao Zhihui 177,444 146,568 Mr Yuan Wei 39,137 35,177 Mr Chang Zheng 20,000 20,000 Mr Zhu Gang 20,000 20,000

256,581 221,745

1,514,124 1,815,979

Note: (N/A) Not Directors during the respective years.

– 84 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include three (2004: three) Directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two (2004: two) individuals during the year are as follows:

2005 2004 RMB RMB

Salaries, housing and other allowances 1,097,124 1,277,429

The emoluments fell within the following bands:

Number of individuals 2005 2004

Nil – RMB1,040,000 (equivalent to Nil – HK$1,000,000) 2 2

(c) During the year, no emoluments were paid by the Group to the Directors, Supervisors or any of the five highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of office (2004: nil).

None of the Directors and Supervisors waived any emoluments during the year (2004: nil).

– 85 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

12. Property, plant and equipment

Group

Furniture, Plant and Motor fixtures & Construction Buildings machinery vehicles equipment in progress Total RMB RMB RMB RMB RMB RMB

Cost At 31 December 2003 5,237,823 9,481,007 4,014,492 2,865,699 62,057 21,661,078 Additions 1,271,545 2,296,267 971,050 671,238 1,780,783 6,990,883 Transfer – 75,012 ––(75,012) – Disposals (279,439) (181,301) (710,274) (55,105) – (1,226,119) Reclassification (3) 59,183 132,284 (191,464) ––

At 31 December 2004 6,229,926 11,730,168 4,407,552 3,290,368 1,767,828 27,425,842 Additions – 528,229 1,165,786 647,755 15,492,660 17,834,430 Disposals – (633,931) (319,036) (52,890) – (1,005,857) Acquisition of a subsidiary 3,553,720 17,888,416 2,012,123 383,864 221,543 24,059,666 Disposal of a subsidiary – (18,550) (273,577) (521,380) – (813,507)

At 31 December 2005 9,783,646 29,494,332 6,992,848 3,747,717 17,482,031 67,500,574

Accumulated depreciation At 31 December 2003 1,543,735 2,153,004 1,324,309 1,065,743 – 6,086,791 Charge for the year 676,467 799,691 515,091 540,785 – 2,532,034 Disposals (47,970) (21,404) (272,404) (13,381) – (355,159) Reclassification 247,167 5,145 (226,193) (16,389) ––

At 31 December 2004 2,419,399 2,936,706 1,330,803 1,576,758 – 8,263,666 Charge for the year 518,753 1,513,756 743,317 475,065 – 3,250,891 Write back on disposal – (335,074) (145,650) (50,975) – (531,699) Acquisition of subsidiary 1,600,537 11,957,894 1,403,851 220,775 – 15,183,057 Disposal of subsidiary – (6,756) (56,311) (89,428) – (152,495)

At 31 December 2005 4,538,689 16,066,526 3,276,010 2,132,195 – 26,013,420

Net book value At 31 December 2005 5,244,957 13,427,806 3,716,838 1,615,522 17,482,031 41,487,154

At 31 December 2004 3,810,527 8,793,462 3,076,749 1,713,610 1,767,828 19,162,176

Note:

(1) The Group’s buildings are held in the PRC under medium-term leases. A subsidiary of the Group is in the process of applying for the land use right certificate of buildings with a net book value of approximately RMB2 million (2004: nil).

(2) At 31 December 2005, the net book value of property, plant and equipment pledged as security for certain of the Group’s banking facilities amounted to RMB2 million (2004: RMB2.4 million).

(3) At 31 December 2005, the net book value of property, plant and equipment held by the Group under a finance lease amounted to RMB1.6 million (2004: RMB1.8 million).

– 86 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Company

Furniture, Plant and Motor fixtures & Construction Buildings machinery vehicles equipment in progress Total RMB RMB RMB RMB RMB RMB

Cost At 31 December 2003 2,048,637 4,849,481 1,487,742 1,308,334 62,057 9,756,251 Additions 247,711 2,249,267 288,868 111,338 12,955 2,910,139 Transfer – 75,012 ––(75,012) – Disposals (279,439) (100,100) (556,273) ––(935,812)

At 31 December 2004 2,016,909 7,073,660 1,220,337 1,419,672 – 11,730,578 Additions – 32,916 717,617 24,482 – 775,015 Disposals – (604,080) (188,997) ––(793,077)

As at 31 December 2005 2,016,909 6,502,496 1,748,957 1,444,154 – 11,712,516

Accumulated depreciation At 31 December 2003 591,125 673,138 541,987 530,668 – 2,336,918 Charge for the year 159,587 389,971 228,968 208,649 – 987,175 Disposals (47,970) (20,444) (272,404) ––(340,818)

At 31 December 2004 702,742 1,042,665 498,551 739,317 – 2,983,275 Charge for the year 19,284 982,449 279,348 96,291 – 1,377,372 Written back on disposal – (308,209) (110,488) ––(418,697)

As at 31 December 2005 722,026 1,716,905 667,411 835,608 – 3,941,950

Net book value At 31 December 2005 1,294,883 4,785,591 1,081,546 608,546 – 7,770,566

At 31 December 2004 1,314,167 6,030,995 721,786 680,355 – 8,747,303

Note:

(1) The Company’s buildings are held in the PRC under a medium-term lease.

(2) At 31 December 2005, the net book value of property, plant and equipment of the Company pledged as security for certain of the Group’s banking facilities amounted to RMB nil (2004: RMB2.4 million).

(3) At 31 December 2005, the net book value of property, plant and equipment held by the Company under a finance lease amounted to RMB1.6 million (2004: RMB1.8 million).

– 87 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

13. Proprietary technologies

Group 2005 2004 RMB RMB

Cost At 1 January 5,916,660 4,400,000 Addition 24,000 1,516,660 Disposal of a subsidiary (1,524,000) –

At 31 December 4,416,660 5,916,660

Accumulated amortisation At 1 January 2,176,704 1,246,564 Charge for the year 983,266 930,140 Disposal of a subsidiary (151,600) –

At 31 December 3,008,370 2,176,704

Carrying value At 31 December 1,408,290 3,739,956

14. Goodwill on consolidation

Details of movements in goodwill on consolidation of the Group during the year are as follows:

Group 2005 2004 RMB RMB

Cost At 1 January 4,938,247 5,933,104 Arising from acquisition of additional equity interest in a subsidiary (Note 28(b)) – (994,857) Opening balance adjustment to eliminate accumulated amortisation (1,571,246) –

At 31 December 3,367,001 4,938,247

Accumulated amortisation At 1 January 1,571,246 1,267,827 Charge for the year – 303,419 Opening balance adjustment to eliminate against cost (1,571,246) –

At 31 December – 1,571,246

Carrying value at 31 December 3,367,001 3,367,001

In 2004, goodwill was amortised on a straight line basis over 20 years. As explained further in Note 2(a), with effect from 1 January 2005 the Group no longer amortises goodwill. In accordance with the transitional provisional set out in HKFRS3, the accumulated amortisation of goodwill on 1 January 2005 has been eliminated against the cost of goodwill as at that date.

– 88 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

15. Interests in subsidiaries

Company 2005 2004 RMB RMB

Unlisted investments, at cost 54,958,195 17,912,172 Amounts due from subsidiaries 45,859,492 37,491,115 Amount due to a subsidiary – (226,738)

100,817,687 55,176,549

The amounts due from/(to) subsidiaries are unsecured, non-interest bearing and have no fixed repayment terms.

The following is a list of the Group’s subsidiaries at 31 December 2005 all of which are incorporated and operating in the PRC:

Date of Attributable incorporation and Registered equity legal entity status Principal activities capital interest held (RMB’000) 2005 2004

Tianjin Alpha HealthCare 15 August 1994, Manufacture and distribution 3,600 75% 75% Products Co., Ltd. joint-venture of diabetic health food and (“Alpha”) enterprise related products

Tianjin Wan Tai 3 September 2001, Trading in biomedical equipment 5,000 100% 97% Bio-Development limited liability and biomaterials (Note (i)) (Note (i)) Co., Ltd. (“Wantai”) company

Beijing TEDAX2 Medical 17 December 2001, Investment holding and holder 1,400 100% 99.7% Engineering Co., Ltd. limited liability of proprietary technologies (Note (ii)) (Note (ii)) (“TEDAX2”) company

Beijing Xinxing Bio-medical 23 June 1995, Manufacture and distribution of 1,000 100% 99.7% Engineering Research and limited liability biomedical equipment (Note (iii)) (Note (iii)) Development Institute company (“Xinxing”)

Shandong TEDA 18 September 2004, Engaging in the research & 18,000 51% 51% Bio-Engineering joint-venture development, production and Co., Ltd. (“STEDA”) enterprise sale of biological fertilizer, combined fertilizer, mixed fertilizer and plant fertilizer including the application of related technology

Guangdong Fulilong 20 August 1996, Manufacture and sale of 16,327 51% – Compound Fertilizers limited liability compound fertilizers (Note (iv)) Company Limited company (“Fulilong”)

Tianjin Yisheng 17 February 2003, Manufacture and distribution 5,000 – 70% Bioengineering Co Ltd. limited liability of diabetic health food (Note (v)) (“Yisheng”) company products, biomedical equipment and biomaterials and rendering of related consultation services

None of the subsidiaries has issued any debt securities during the year.

– 89 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Note:

(i) 10% (2004: 7%) equity interest held indirectly by the Company.

(ii) 10% (2004: 9.7%) equity interest held indirectly by the Company.

(iii) Held indirectly by the Company.

(iv) Fulilong becomes a subsidiary of the Company since 30 December 2005 (Note 29).

(v) Yisheng ceased to be a subsidiary of the Company on 15 September 2005 (Note 30).

16. Interests in an associate

Group 2005 2004 RMB RMB

Share of net assets 2,135,704 – Amount due from an associate 22,675,101 –

24,810,805 –

Particulars of the associate are as follows:

Date of Equity interest incorporation and Registered attributable to legal entity status Principal activities capital the Group (RMB’000) 2005 2004

Shaanxi Xing Fu Fertilizer 25 May 2004, Manufacture and sale 5,000 20.4% – Company Limited limited liability of highly concentrated (“Shaanxi Xing Fu”) company nitro-compound fertilizers

On 25 May 2004, Fulilong contributed cash of RMB2,000,000 for the establishment of Shaanxi Xing Fu, representing 40% equity interest in Shaanxi Xing Fu. The other 60% equity interest is held by Shaanxi Xinghua Chemistry Company Limited, a company established in the PRC with limited liability. Primarily, all the products of Shaanxi Xing Fu were sold to Fulilong.

– 90 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

17. Inventories

2005 2004 Group Company Group Company RMB RMB RMB RMB

Raw materials 13,308,804 255,651 4,985,880 1,190,037 Work-in-progress 4,089,115 1,045,687 3,513,546 715,992 Finished goods 12,251,742 1,320,222 9,324,634 1,888,589 Packaging materials 4,655,740 25,148 1,267,563 25,148

34,305,401 2,646,708 19,091,623 3,819,766 Less: Provision for inventory obsolescence (3,157,864) (111,032) (1,049,312) (81,092)

31,147,537 2,535,676 18,042,311 3,738,674

At 31 December 2005 and 2004, all obsolete inventories of the Group and the Company have been fully provided for. Other inventories were stated at net realisable value.

18. Trade receivables 2005 2004 Group Company Group Company RMB RMB RMB RMB

Trade receivables 76,575,241 4,848,297 37,765,047 2,051,658 Less: Receivable after one year, classified as non-current assets (Note (c)) (4,794,540) – (5,861,951) –

Trade receivables, current assets 71,780,701 4,848,297 31,903,096 2,051,658

Less: Provision for doubtful debts (8,590,814) (4,848,297) (3,757,413) (1,756,806)

63,189,887 – 28,145,683 294,852

Note:

(a) Except for TEDAX2 and Xinxing where credit terms are subject to individual agreements, the other group companies and the Company generally grant credit terms of 120 days to major customers and 90 days to others. TEDAX2 and Xinxing usually grant credit terms ranging from 90 days to 1 year based on individual contract terms.

(b) An ageing analysis of year end current trade receivables is as follows:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Within 3 months 32,542,825 – 23,093,371 255,116 Between 3 to 6 months 9,306,977 – 2,342,608 70,682 Between 6 to 12 months 17,192,257 2,376,649 1,752,883 – Over 1 year 12,738,642 2,471,648 4,381,059 1,725,860

71,780,701 4,848,297 31,569,921 2,051,658

Trade receivables at 31 December 2004 due within 3 months included about RMB15.7 million due from Xinyang which was received on 8 April 2005 (Note 4(a)(i)).

– 91 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Group 2005 2004 RMB RMB

Instalment sale receivable 6,237,361 6,823,831 Less: Current portion (1,442,821) (961,880)

Non-current portion 4,794,540 5,861,951

The instalment sale receivable is related to a sale of a set of equipment to a hospital during 2003. The repayment schedule of the instalment sale receivable is as follows:

Group 2005 2004 RMB RMB

Within one year 1,500,000 1,000,000 In the second year to fifth year, inclusive 5,600,000 7,100,000

7,100,000 8,100,000 Future finance income on instalment sale receivable, including its respective output VAT portion of RMB240,340 (862,639) (1,276,169)

Present value of instalment sale receivable 6,237,361 6,823,831

The present value of the instalment sale receivable is analysed as follows:

Group 2005 2004 RMB RMB

Within one year 1,442,821 961,880 In the second year to the fifth year, inclusive 4,794,540 5,861,951

6,237,361 6,823,831

19. Prepayments and other receivables

Prepayments and other receivables include the following balances:

(a) In December 2002, the Company entered into an agreement with BCT Global Development Limited (“BCT”) to market Alpha’s diabetic health products in Southeast Asia. The fee for this service of Hong Kong Dollars (HK$) 3 million was paid to another third party (“PAL”) which itself is related to BCT. Any expenditure incurred by BCT for the Company’s marketing activities would be reimbursed by PAL accordingly on behalf of the Company.

During 2003, the related marketing plan was terminated. The prepaid fee is being refunded to the Company in installments. During 2005, RMB nil (2004: RMB700,000) was recovered leaving a balance of about RMB2.1 million (2004: RMB2.1 million) at 31 December 2005. Subsequent to the year end, RMB0.6 million has been collected. The Directors are of the opinion that the remaining balance will be collected without significant loss to the Group and that another RMB0.6 million will be collected by the end of 2006. On this basis, RMB1.2 million (2004: RMB0.6 million) has been grouped under current assets and the remaining RMB0.9 million (2004: RMB1.4 million) as non-current receivables.

The Directors confirmed that both BCT and PAL are independent unrelated third parties.

– 92 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(b) In December 2002, living allowances of RMB300,000 were paid to Ms. Zheng Dan, a Director of the Company, for a three-year period ended 2005 following her relocation from Tianjin to Beijing. At 31 December 2005, the unamortised balance of the living allowances is RMB nil (2004: RMB100,000).

(c) On 15 September 2005, the Company entered into an equity transfer agreement, pursuant to which the Company agreed to dispose of its entire 70% of the equity interests in Yisheng to Mr. Lei Yu Hua, an independent third party, at a consideration of RMB3.5 million. The amount remained outstanding at 31 December 2005. Subsequent to year end the amount was fully settled.

20. Balances with related parties

2005 2004 Group Company Group Company Note RMB RMB RMB RMB

Due from Ultimate holding company 2,846,002 2,995,502 1,724,194 1,723,694 Minority shareholders of subsidiaries ––– 299,128 Directors 21 2,006 – 35,112 33,106

2,848,008 2,995,502 1,759,306 2,055,928

Due to Sole investor of ultimate holding company 852,948 852,948 852,948 852,948 Ultimate holding company 494,286 344,286 494,286 344,286 A minority shareholder of a subsidiary 4,295,715 ––– Directors and Supervisors 21 150,000 – 290,000 290,000

5,792,949 1,197,234 1,637,234 1,487,234

All balances due from/to related parties are unsecured, non-interest bearing and have no fixed repayment terms.

– 93 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

21. Due from/to Directors and Supervisors

Details of the amounts due from Directors of the Group and the Company as at 31 December 2005 and 2004 are set out below:

2005

Group Company Maximum Maximum amount amount outstanding outstanding Amount during the Amount during the outstanding at year ended outstanding at year ended 31 December 31 December 31 December 31 December RMB RMB RMB RMB

Mr. Wang Shuxin –––– Professor Gu Hanqing –––– Mr. Xie Kehua –––– Ms. Zheng Dan 2,006 2,006 ––

2,006 –

2004

Mr. Wang Shuxin 16,291 23,662 16,291 23,662 Professor Gu Hanqing 16,815 16,815 16,815 16,815 Mr. Xie Kehua – 5,000 –– Ms. Zheng Dan 2,006 2,414 ––

35,112 33,106

– 94 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Details of the amounts due to Directors and Supervisors of the Group and the Company as at 31 December 2005 and 2004 are set out below:

Group and Company 2005 2004 RMB RMB

Professor Xiao Zhuoji – 100,000 Mr. Feng Enqing – 30,000 Mr. Liu Zhenyu – 30,000 Mr. Xie Guangbei – 30,000 Professor Xian Guoming – 30,000 Professor Zhao Xiuying – 30,000 Mr. Zhu Gang – 20,000 Mr. Chang Zheng – 20,000 Ms. Zheng Dan 150,000 –

150,000 290,000

The amounts due from Directors mainly represent travelling advances. The amounts due to Directors and Supervisors mainly represent payables in relation to Directors’ fees and salaries. The balances with them are unsecured, non-interest bearing and have no fixed repayment terms.

22. Restricted bank deposit

The restricted bank deposit is a fixed bank deposit pledged to secure a short-term bank borrowing of RMB nil (2004: RMB22,000,000) described in Note 24 below and for the letter of credit facilities granted by the same bank.

23. Trade payables

Generally, the credit terms received from suppliers of the Group and the Company is 90 days. An ageing analysis of year end trade payables is as follows:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Within 3 months 18,043,023 4,555 13,064,271 24,822 Between 3 to 6 months 1,767,156 51,112 341,058 4,000 6 months to one year 92,791 1,535 288,125 1,694 Over one year 1,004,633 547,820 110,526 110,526

20,907,603 605,022 13,803,980 141,042

Trade payables at 31 December 2004 due within 3 months include RMB15 million due to Fulilong, in relation to the Group’s sales to Xinyang (Note 4(a)(i)) before netting off other advance payments of RMB9 million paid to Fulilong. On 4 April 2005, the RMB15 million due to Fulilong was settled.

The Directors confirm that Xinyang is an independent unrelated third party and that Fulilong and Xinyang are also independent of each other and not related.

– 95 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

24. Short-term bank borrowings

2005 2004 Group Company Group Company RMB RMB RMB RMB

Short term bank borrowings: – secured against bank balances (Note 22) ––22,000,000 22,000,000 – secured against fixed assets (Note (i)) 3,500,000 – 1,000,000 – – unsecured (Note (ii)) 48,000,000 47,000,000 35,800,000 32,000,000

51,500,000 47,000,000 58,800,000 54,000,000

Note:

(i) Secured against property, plant and equipment with net book value of about RMB2 million (2004: RMB2.4 million) (Note 12).

(ii) Unsecured loans are guaranteed as follows:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Guarantees were provided by: – the Company (Note 35) 1,000,000 – 3,800,000 N/A – Tianjin TEDA Guarantee Co. Ltd. 47,000,000 47,000,000 32,000,000 32,000,000

48,000,000 47,000,000 35,800,000 32,000,000

(iii) All short-term bank borrowings bore annual interest ranging from 5.6% to 7.3% (2004: from 5.3% to 7.3%)

– 96 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

25. Finance lease payable

At 31 December 2005 the Group’s and the Company’s finance lease liability is repayable as follows:–

Group and Company 2005 2004 RMB RMB

Within one year 346,816 346,816 In the second year 187,686 187,686 In the third year to the fifth year inclusive 626,585 626,585 After the fifth year 476,607 476,607

Obligation under finance lease not wholly repayable within five years 1,637,694 1,637,694 Current portion of finance lease payable (346,816) (346,816)

Non-current portion of finance lease payable 1,290,878 1,290,878

Obligations under finance lease are payable by instalments from July 2003 to July 2011.

The reconciliation between the total minimum lease payments and the present value of finance lease obligation is as follows:

Group and Company 2005 2004 RMB RMB

Total minimum lease payments Within one year 489,230 489,230 In the second year 244,615 244,615 In the third year to fifth year inclusive 733,844 733,844 After the fifth year 489,230 489,230

1,956,919 1,956,919 Less: Interest portion of finance lease (319,225) (319,225)

Present value of finance lease obligation 1,637,694 1,637,694

26. Share capital

(a) The Company’s issued and fully paid up capital comprise:

2005 2004 Number RMB Number RMB (million) (million) (million) (million)

Ordinary shares of RMB0.1 each: – Domestic shares 279 28 300 30 – “H” shares 331 33 100 10

610 61 400 40

– 97 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Domestic shares represent unlisted shares held by corporations in the PRC.

In June 2002, the Company issued 100 million “H” shares in the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited.

In June 2005, 231,000,000 new H shares were allotted at a price of HK$0.161 per share (the “Placing”). Following the Placing, the share capital structure of the Company comprises 331,000,000 H shares and 279,000,000 domestic shares. The 331,000,000 H shares comprise the original 100,000,000 H shares in issue before the Placing, 210,000,000 new H shares issued under the Placing and 21,000,000 H shares converted from equal number of domestic shares held by ultimate holding company pursuant to the State-owned Shares Reduction Regulations.

All domestic and “H” shares rank pari passu in all major aspects.

(b) No share options had been granted by the Company under its share option scheme (the “Scheme”) since its adoption (2004: nil). At 31 December 2005, none of the Directors or Supervisors or employees or other participants of the Scheme had any rights to acquire the H Shares in the Company (2004: nil).

27. Reserves

Share Capital Accumulated premium reserve losses Total RMB RMB RMB RMB

The Company At 1 January 2004 62,031,951 (2,312,483) (47,040,136) 12,679,332 Net loss for the year ––(13,967,988) (13,967,988)

At 31 December 2004 62,031,951 (2,312,483) (61,008,124) (1,288,656) Placing of new H shares 13,057,620 ––13,057,620 Net profit for the year ––1,263,015 1,263,015

At 31 December 2005 75,089,571 (2,312,483) (59,745,109) 13,031,979

– 98 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

28. Consolidated cash flow statement

(a) Reconciliation of loss before taxation to net cash generated from/(used in) operations:

2005 2004 RMB RMB

Loss before taxation (1,431,252) (18,995,828) Provision for doubtful debts 803,046 7,962,440 Provision for inventory obsolescence 85,543 501,704 Depreciation 3,250,891 2,532,034 Loss on disposal of property, plant and equipment 181,936 30,065 Negative goodwill released to income (2,046,605) – Gain on disposal of a subsidiary (663,161) – Interest expense 4,116,835 3,013,371 Interest income (754,993) (771,606) Amortisation of proprietary technologies 983,266 930,140 Amortisation of goodwill on consolidation – 303,419

Operating profit/(loss) before working capital changes 4,525,506 (4,494,261)

Increase in inventories (3,255,580) (3,151,548) Increase in trade receivables (790,357) (18,123,225) Decrease/(increase) in prepayments and other receivables 4,788,666 (10,457,506) (Increase)/decrease in amounts due from related parties (1,088,702) 1,802,092 (Decrease)/increase in trade payables (8,359,248) 11,603,109 Increase/(decrease) in other payables and accruals 17,463,506 (20,404) Decrease/(increase) in amounts due to related parties (140,000) 420,938

Gain generated from/(used in) operations 13,143,791 (22,420,805)

(b) Acquisition of additional equity interest in a subsidiary:

2005 2004 RMB RMB (Note (i))

Share of net assets acquired/(liabilities assumed) – 994,857 Negative goodwill (Note 14) – (994,857)

Net cash outflow ––

Satisfied by cash ––

Note:

(i) Effective from 1 June 2004, the Group increased its interest in a subsidiary TEDA by 60% to 99.7%. The additional interest was acquired from the subsidiary’s minority shareholders at zero consideration.

The value of assets acquired and liabilities assumed were based on book value of TEDA and its wholly owned subsidiary Xinxing together with necessary adjustments made by the Directors of the Company to reflect the fair value of the assets acquired, resulting in a negative goodwill of RMB994,857.

– 99 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

There were no other major non-cash transactions other than the additional equity interest in a subsidiary described in Note 28(b).

29. Acquisition of a subsidiary

On 30 December 2005, the Company acquired 51% interest in Guangdong Fulilong compound Fertilizers Company Limited, which is principally engaged in the manufacture and sale of compound fertilizers in the PRC. The acquired business did not contribute any turnover or profit to the Group for the year ended 31 December 2005.

Details of fair value of identifiable assets/(liabilities) acquired are as follows:

2005 RMB

Property, plant and equipment 8,876,609 Investment in associate 24,810,805 Inventories 15,026,370 Trade receivables, prepayments and other receivables 44,183,444 Cash and bank balances 4,177,953 Trade payables, other payables and accruals (21,110,137) Amount due to a related party (4,295,715) Short-term bank borrowings (3,500,000)

68,169,329 Minority interest (49%) (33,402,971)

Net assets acquired 34,766,358 Negative goodwill (2,046,605)

Total consideration settled in cash 32,719,753

Cash flow on acquisition, net of cash acquired:

Cash and bank balances acquired 4,177,953 Cash consideration (32,500,000) Cost on acquisition of Fulilong (219,753)

(28,541,800)

– 100 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

30. Disposal of a subsidiary

On 15 September 2005, the Company entered into an equity transfer agreement, pursuant to which the Company agreed to dispose of its entire 70% equity interests in Tianjin Yisheng Bioengineering Co. Ltd. to Mr. Lei Yu Hua, an independent third party, at a cash consideration of RMB3.5 million.

Detail of net assets/(liabilities) disposed of are as follows:

2005 RMB

Property, plant and equipment 661,012 Proprietary technologies 1,372,400 Inventories 5,091,180 Trade receivables, prepayments and other receivables 2,998,885 Cash and bank balances 958,347 Trade payables, other payables and accruals (7,029,198)

4,052,626 Minority interest (30%) (1,215,787)

2,836,839 Gain on disposal of a subsidiary 663,161

Satisfied by consideration receivable 3,500,000

Analysis of the net outflow of cash and cash equivalents in respect of the disposal of a subsidiary:

Cash and bank balances disposed of with the subsidiary (958,347)

The subsidiary disposed of contributed approximately RMB7,885,000 to the Group’s turnover and approximately RMB479,000 to the Group’s loss for the year ended 31 December 2005.

31. Commitments

(a) Capital commitments

At 31 December 2005, the Group and the Company had the following significant capital commitments:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Authorised and contracted for – Acquisition of plant and machinery 18,671,292 ––– – Acquisition of land use right ––1,320,000 –

18,671,292 – 1,320,000 –

– 101 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

(b) Operating lease commitments

At 31 December 2005, the Group and the Company had the following operating lease commitments:

(i) Non-cancellable operating lease agreements with independent third parties for rental of office premises or apartment as follows:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Not later than one year 585,971 – 513,000 179,000 Later than one year and not later than five years 1,921,403 – 19,000 – Over five years 3,080,303 –––

Total future lease payments 5,587,677 – 532,000 179,000

(ii) Non-cancellable operating lease agreements, with related parties for the rental of office or production premises as follows:

2005 2004 Group Company Group Company RMB RMB RMB RMB

Not later than one year 1,142,000 542,000 1,142,000 542,000 Later than one year and not later than five year 4,471,000 2,121,000 4,566,000 2,166,000 More than five year ––1,047,000 497,000

Total future lease payments 5,613,000 2,663,000 6,755,000 3,205,000

(iii) In respect of one of the leases included in the above analysis, the Group enjoys rent-free period up to 31 December 2004. Thereafter, the monthly rental will be determined based on prevailing market price. The above analysis of future minimum lease payments in respect of this lease is estimated with reference to the most comparable prevailing market rates on that basis. Such rent fee concession enjoyed by the Group amounted to about RMB380,000 in 2004.

– 102 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

32. Financial instruments

(a) Financial risk factors

The Group’s principal financial instruments comprise cash and bank balances.

The main risks arising from the Group’s financial instruments are credit risk, foreign currency risk, liquidity risk and interest rate risk. The directors of the Company meet periodically to analyse and formulate measures to manage the Group’s exposure to these risks. Generally, the Group introduces conservative strategies on its risk management. As the Group’s exposure to these risks is kept to minimum, the Group has not used any derivatives and other instruments for hedging purposes. The directors review and agree policies for managing each of these risks and they are summarised as follows:

(i) Credit risk

The Group has no significant concentration of credit risk. The carrying amounts of trade receivables included in the balance sheet represent the Group’s maximum exposure to credit risk in relation to its financial assets. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. No other financial assets carry a significant exposure to credit risk.

(ii) Foreign exchange risk

The Group’s main operations are in the PRC and has no significant exposure to any specific foreign currency.

(iii) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash, other liquid assets and the ability to close out market positions. The Group maintains sufficient bank balances and cash at the balance sheet date.

(iv) Fair value and cash flow interest rate risk

The Group has no significant interest-bearing assets, as such its income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk from its short-term bank borrowings is minimal.

(b) Fair value estimation

The fair values of bank balances and cash, trade and other receivables, trade and other payables are not materially different from their carrying accounts.

The carrying values of short term interest-bearing bank borrowings are estimated to approximate their fair values based on the nature or short term maturity of these instruments.

33. Related party disclosures

(a) Transactions with related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or entities.

– 103 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Other than as disclosed elsewhere in the financial statements, during the year the Group and the Company had the following material transactions with related parties. In the opinion of the Directors, they were conducted in the ordinary course of the Group’s business.

2005 2004 RMB RMB

Purchases from Fulilong (Note 29) 150,905,884 18,608,250 Operating lease rental charged by TTII and its sole investor – 894,744 Waiver of operating lease rental charged by TTII and its sole investor 3,075,120 – Purchases of proprietary technologies/finished goods from a minority shareholder of a subsidiary – 1,500,000

(b) Compensation of key management personnel of the Group

2005 2004 RMB RMB

Short term employee benefits 1,423,484 1,753,849 Post-employment benefits 90,640 62,130

Total compensation paid to key management personnel 1,514,124 1,815,979

34. Ultimate holding company

The Directors regard Tianjin TEDA International Incubator (“TTII”), a state-owned enterprise established in the PRC and solely owned by TEDA State-owned Asset Administration Operation Company, as being the ultimate holding company.

35. Contingent liabilities

The Company guaranteed the banking facilities granted to certain of its subsidiaries amounting to RMB1 million (2004: RMB3.8 million).

36. Comparative figures

As further explained in note 2 to the financial statements, due to the adoption of new and revised HKFRSs during the current year, the accounting treatment and presentation of certain items and balances in the financial statements have revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified/restated to conform with the current year’s presentation and accounting treatment.

37. Approval of the financial statements

The financial statements were approved and authorised for issue by the board of directors on 15 March 2006.

– 104 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

C. UNAUDITED INTERIM RESULTS

Set out below is the unaudited consolidated results of the Group for the three and six months ended 30 June 2006 together with the accompanying notes as extracted from the interim report of the Company dated 10 August 2006.

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT

For the six months For the three months ended 30 June ended 30 June 2006 2005 2006 2005 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Notes RMB RMB RMB RMB

Turnover 3 148,680,245 80,186,370 55,213,011 63,076,593 Less: sales tax (10,878) (71,232) (9,627) (23,198) Cost of sales (127,893,541) (64,244,412) (48,317,162) (54,102,342)

Gross profit 20,775,826 15,870,726 6,886,222 8,951,053 Other revenue 988,316 (411,717) 686,331 (408,339)

Distribution and selling expense (11,456,959) (11,054,970) (5,895,730) (5,265,613) R&D and administrative expenses (7,626,539) (7,611,090) (3,072,027) (3,253,908)

Operating Profit/(loss) 2,680,644 (3,207,051) (1,395,204) 23,193 Finance costs 4 (2,814,481) (1,920,816) (1,529,357) (1,095,743) Amortization of goodwill on consolidation (151,710) (151,710) (151,710) (88,646)

Loss before taxation 5 (285,547) (5,279,577) (3,076,271) (1,161,196)

Taxation 6 – (84,707) – (72,301)

Loss for the period (285,547) (5,364,284) (3,076,271) (1,233,497)

Attributable to:

Equity holders of the Company (2,061,774) (5,220,054) (2,163,135) (1,257,036) Minority interests 1,776,227 (144,230) (913,136) 23,539

(285,547) (5,364,284) (3,076,271) (1,233,497)

Loss per share 7 (0.3) cents (1.23) cents (0.3) cents (0.28) cents

– 105 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

CONDENSED CONSOLIDATED BALANCE SHEET

30 June 31 December 2006 2005 (Unaudited) (Audited) Notes RMB RMB

Non-current assets Property, plant and equipment, net 8 70,260,688 41,487,154 Proprietary technologies 978,326 1,408,290 Goodwill on consolidation 3,215,291 3,367,001 Investment in associate 16,314,305 24,810,805 Trade receivable 4,794,540 4,794,540 Other receivable 867,488 867,488

96,430,638 76,735,278

Current assets Inventories 29,940,420 31,147,537 Trade receivable 9 65,129,914 63,189,887 Prepayment and other receivables 10,600,206 17,577,591 Amounts due from related parties 2,848,008 2,848,008 Cash and bank balances 27,506,587 16,767,411

136,025,135 131,530,434

Current liabilities Trade payable 10 18,986,270 20,907,603 Government grants received in advance 672,008 1,402,008 Other payables and accruals 8,209,242 29,152,253 Amounts due to related parties 1,347,234 5,792,949 Short-term bank borrowings 104,400,000 51,500,000 Current portion of finance lease payable 346,816 346,816

133,961,570 109,101,629

Net current assets 2,063,565 22,428,805

Total assets less current liabilities carried forward 98,494,203 99,164,083

Non-current liabilities Finance lease payable (1,290,878) (1,290,878)

Net assets 97,203,325 97,873,205

– 106 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

30 June 31 December 2006 2005 (Unaudited) (Audited) Notes RMB RMB

Equity

Capital and reserves Share capital 11 61,000,000 61,000,000 Share premium 75,089,571 75,089,571 Capital reserve 2,253,154 2,541,404 Accumulated losses (75,319,245) (73,257,471)

Equity attributable to equity holders 63,023,480 65,373,504 Minority interests 34,179,845 32,499,701

Total equity 97,203,325 97,873,205

– 107 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) For the six months ended 30 June 2006

Share capital Share premium Accumulated losses Capital reserve Total 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB

Balance as at 1 January 61,000,000 40,000,000 75,089,571 62,031,951 (73,257,471 ) (74,030,217 ) 2,541,404 2,541,404 65,373,504 30,543,138 Net profit/(loss) attributable to equity holders of the Company for the three months ended 31 March ––––101,361 (3,963,018 ) ––101,361 (3,963,018 )

Balance as at 31 March 61,000,000 40,000,000 75,089,571 62,031,951 (73,156,110 ) (77,993,235 ) 2,541,404 2,541,404 65,474,865 26,580,120 Net loss attributable to equity holders of the Company for the three months ended 30 June ––––(2,163,135 ) (1,257,036 ) ––(2,163,135 ) (1,257,036 ) Transfer from reserves ––––––(288,250 ) – (288,250 ) –

Balance as at 30 June 61,000,000 40,000,000 75,089,571 62,031,951 (75,319,245 ) (79,250,271 ) 2,253,154 2,541,404 63,023,480 25,323,084

– 108 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

CONDENSED CONSOLIDATED CASH STATEMENT (UNAUDITED) For the six months ended 30 June 2006

For the six months ended 30 June 2006 2005 RMB RMB

Cash flows from operating activities Cash used in operation (12,221,074) (16,665,615) Interests received 92,552 57,076 Interests paid (2,413,458) (1,993,467)

Net cash used in operating activities (14,541,980) (18,602,006)

Cash flows from investing activities Purchases of property, plant and equipment (27,180,204) (1,628,784) Purchase of property technology – (324,000) Sales of property, plant and equipment 11,360 183,900

Net cash used in investing activities (27,168,844) (1,768,884)

CASH FLOWS FINANCING ACTIVITIES Proceeds from short-term bank borrowing 104,400,000 70,290,000 Repayment of short-term bank borrowings (51,500,000) (46,800,000) Payment of guarantee fee on bank borrowings (450,000) (359,000) Proceeds from placing of new H shares – 38,556,803

Net cash generated from financing activities 52,450,000 61,687,803

NET INCREASE IN CASH AND BANK BALANCES 10,739,176 41,316,913 CASH AND BANK BALANCES AT THE BEGINNING OF THE PERIOD 16,767,412 5,994,744

CASH AND BANK BALANCES AT THE END OF THE PERIOD 27,506,587 47,311,657

– 109 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Notes:

1. Group information and principal activities

Tianjin TEDA Biomedical Engineering Company Limited (the “Company”) was established on 8 September 2000 in the People’s Republic of China (“PRC”) as a joint stock company with limited liability. On 18 June 2002, the Company’s H shares were listed on the Hong Kong Growth Enterprise Market (the “GEM”). Consequently on 24 March 2003, the Company’s legal status became that of a Sino-foreign joint stock company with limited liability. The Company and its subsidiaries are collectively referred to as the “Group”.

The Company is an investment holding company. The principal activities of the Group are research, development and commercialization of medical and diabetic health food products and fertilizer products.

2. Basis of presentation

The condensed unaudited consolidated financial statements have been prepared under the historical cost convention and in accordance with Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financial Reporting” issued by Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong, the disclosure requirements of Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on the GEM of the Stock Exchange (the “GEM Listing Rules”).

The accounting policies and methods of computation used in the preparation of this financial statements are the same as those adopted in preparing the annual audited financial statements for the year ended 31 December, 2005 except that the Group has changed certain of its accounting policies following its adoption of the new/revised Hong Kong Financial Reporting Standards (“HKFRSs”), Hong Kong Accounting Standards (“HKASs”) and Interpretations (hereafter collectively referred to as the “new HKFRSs”) which are effective for accounting periods on or after 1 January 2005. The adoption of the new HKFRSs had no material impact on the Company’s results of operations and financial position except certain presentation and disclosure of financial statements would be changed.

The financial statements have been prepared on a going concern basis, assuming that the Group will continue to operate as a going concern, notwithstanding the fact that the Group suffered accumulated losses of RMB75,319,245 as at 30 June 2006. The validity of the Group’s liability to continue as a going concern depends on the success of the Group’s future operations and the ability of the Group to renew or replace the banking facilities as they fall due. The Group’s principal banker extended and committed banking facility of up to RMB100 million to the Company. Drawdowns from this facility will be subject to the bank’s normal approval procedures. In January and April 2006, the Company received RMB53 million of new loan against this facility . Consequently, the Directors have prepared the unaudited half- yearly report for the six months ended 30 June 2006 on the going concern basis.

– 110 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

3. Turnover

The Group’s turnover is derived principally from the sales of fertilizer products and medical and health products.

An analysis of the Group’s turnover by segments is as follows:

For the six months For the three months ended 30 June ended 30 June 2006 2005 2006 2005 RMB RMB RMB RMB

Turnover Fertilizer products 129,441,050 55,417,708 48,695,954 51,678,113 Medical & health products 19,239,195 24,768,662 6,517,057 11,398,480

148,680,245 80,186,370 55,213,011 63,076,593

4. Finance costs

For the six months For the three months ended 30 June ended 30 June 2006 2005 2006 2005 RMB RMB RMB RMB

Interest expense on bank loans and bank changes 2,814,481 1,920,816 1,529,357 1,095,743

2,814,481 1,920,816 1,529,357 1,095,743

5. Loss before taxation

For the six months ended 30 June 2006 2005 RMB RMB

Depreciation of property, plant and equipment 1,807,745 1,384,460 Amortization of intangible asset 137,560 491,800 Amortization of goodwill 151,710 151,710

6. Taxation

(a) Enterprise income tax (“EIT”)

In 2003, the Company changed its tax status to that of a Foreign Investment Enterprise (“FIE”). In accordance with the relevant tax regulations, as a production FIE located in TEDA, Tianjin, the Peoples’ Republic of China (the “PRC”), the Company is eligible to enjoy the concessionary EIT of 15%. It is further entitled to exemption from EIT for two years commencing from its first profit-making year after its offsetting prior years’ losses, followed by a 50% reduction of EIT for the next three years thereafter. In addition, the Company shall enjoy exemption from 3% local EIT during its actual operational period in TEDA, Tianjin, the PRC. The Company has not provided for any EIT since the tax loss brought forward exceeds the taxable income for the period.

– 111 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Tianjin Alpha HealthCare Products Co., Ltd. (“Alpha”), being a Sinoforeign joint-venture enterprise located in TEDA, Tianjin, the PRC is eligible for state EIT at a reduced rate of 15%. It is also entitled to exemption from state EIT for two years commencing from its first profit- making year after offsetting its prior years’ losses, followed by a 50% reduction of state EIT for the next three years thereafter. In addition, Alpha is also entitled to exemption from 3% local EIT during its actual operational period in TEDA. The state EIT exemption period of Alpha ended in 2003 and the state EIT 50% reduction period of Alpha started on 1 January 2004 until 31 December 2006.

Tianjin Wan Tai Bio-Development Company Limited (“Wantai”), being limited company in the PRC, is subject to the statutory 30% EIT and 3% local EIT. Wantai has not provided for any EIT since it has no taxable income for the period under review.

Beijing TEDAX2 Medical Engineering Company Limited (“TEDAX2”) and Beijing Xinxing Bio-medical Engineering Research and Development Institute (“Xinxing”), being limited liability companies established in Beijing High and New Technology Development Provisional Zone, Beijing, the PRC are entitled to a concessing EIT rate of 15% and shall also be entitled to exemption from EIT for three years commencing from the their operating year followed by a 50% reduction of EIT for the next three years thereafter. TEDAX2 has been operating for more than 6 years. Therefore, it is subject to EIT and local EIT at a rate of 15%. Year 2006 is the fifth operating year for Xingxing. Therefore, it is subject to EIT and local income tax at a rate of 7.5%. TEDAX2 and Xinxing have not provided for any EIT since they have no taxable income for the period under review.

Shandong TEDA Bioengineering Co., Ltd (“STEDA”), being a non-production FIE incorporated in the PRC, is subject to the statutory 30% EIT and 3% local EIT. STEDA has not provided for any EIT since it has no taxable income for the period under review.

Fulilong was exempted from EIT as it was qualified as a welfare enterprise as approved by the Guangdong Local Tax Bureau during the three years ended 31 December 2004. In the opinion of the Directors, Fulilong has complied with the qualification requirements of a welfare enterprise at the half-yearly 2006 and accordingly Fulilong should also be exempted from EIT for the half-yearly.

(b) Income tax expense

For the six months ended 30 June 2006 2005 RMB’000 RMB’000

Current Tax Hong Kong Nil Nil Other Jurisdictions Nil 12

The income tax charge in Hong Kong is Nil for the six months ended 30 June 2006 (June 2005: Nil) as the Company did not carry on any business in Hong Kong during the period. The income tax charge in the PRC is Nil for the six months ended 30 June 2006 (June 2005: RMB12,406).

– 112 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

The charge for the period can be reconciled to the loss per the income statement as follows:

For the six months ended 30 June 2006 2005 RMB’000 RMB’000

Loss before tax (286) (5,128) Tax calculated at the EIT rate of 33% (94) (1,692) Tax rate differential (1,657) 1,208 Effect of tax holiday exemption –– Effect of the tax losses on consolidation 1,751 569 Tax effect of expenses that are not deductible in determining taxable profit ––

Tax expense for the period – 85

7. Loss per share

For the six months ended 30 June 2006, the calculation of the loss per share is based on the Group’s unaudited loss attributable to equity holders of RMB2,061,774 (June 2005: loss of RMB5,220,054), divided by the total number of shares issued by the Company of 610,000,000 shares (2005: 424,364,641 shares). Diluted profit per share is not presented as there is no dilutive potential shares during the half- yearly period of 2006.

8. Additions to property, plant and equipment

During the half-yearly period of 2006, the Group spent approximately RMB28,770,841 (2005: RMB625,107) on the acquisition of property, plant and equipment.

9. Trade receivable, current assets

The Group’s trade receivable relates to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivable.

30 June 31 December 2006 2005 (Unaudited) (Audited) RMB RMB

Trade receivable, current assets 79,571,904 71,780,701 Provision for doubtful accounts (14,441,990) (8,590,814)

Trade receivable, net 65,129,914 63,189,887

– 113 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

The aging analysis of trade receivable, current assets is as follows:

30 June 31 December 2006 2005 (Unaudited) (Audited) RMB RMB

Within 3 months 36,419,892 32,542,825 Over 3 months but within 6 months 22,524,328 9,306,977 Over 6 months 20,627,684 29,930,899

79,571,904 71,780,701

10. Trade payable

The aging analysis of trade payable is as follows:

30 June 31 December 2006 2005 (Unaudited) (Audited) RMB RMB

Within 3 months 7,472,167 18,043,023 Over 3 months but within 6 months 6,551,690 1,767,156 Over 6 months 4,962,413 1,097,424

18,986,270 20,907,603

11. Share capital

30 June 2006 31 December 2005 Number of Nominal Number of Nominal shares value shares value RMB’000 RMB’000

Registered 610,000,000 61,000 610,000,000 61,000

Issued and fully paid: Domestic shares of RMB0.1 each 279,000,000 27,900 279,000,000 27,900 H shares of RMB0.1 each 331,000,000 33,100 331,000,000 33,100

610,000,000 61,000 610,000,000 61,000

12. Capital commitments

As at 30 June 2006, the Group had no significant capital commitments which were not provided for in the condensed consolidated financial statements of the Group.

– 114 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

D. MANAGEMENT DISCUSSION AND ANALYSIS OF THE OPERATING RESULT OF THE GROUP

For the year ended 31 December 2003

Business review

By the end of 2003, TEDA Biomedical has set up the marketing and sales team throughout the PRC. The mode of business has been differentiated into two areas namely, direct sales and distributor sales. The Group set up distributor network throughout the provinces of Shanxi, Hubei, Henan, Sichuan, Jiangsu, Inner Mongolia and the cities of Chongqing and Shanghai for the sale of medical equipment and accessories. For direct sales, the Group has set up the Beijing sales centre for promotion of fungi health products as well as other personal care products. In the past year, TEDA Biomedical developed itself as a market-oriented corporation which engaged in the production and sale of heath food products, natural fungi products and biomedical equipment.

Operating environment

In 2003, most parts of the PRC were affected by the outbreak of Severe Acute Respiratory Syndrome (“SARS”) and the business environment was difficult. However, the PRC’s economy continued to demonstrate a strong growth momentum after the effective control of the spreading of SARS in the second half of 2003. The sales of the Group’s respiratory equipment and relevant medical monitoring equipment were increased in the SARS period. However, the sales of the Group’s fungi product of “Jiang Tang Fu Li Kang Fen” were suffered from SARS when it was first launched to the market in the first half of 2003. Coupled with the failure of its product positioning and the after-sales service in keeping pace with this product introduction, the initial launching of such fungi product was not successful. The Group will re-launch this product under new packaging in the coming year. The management of TEDA Biomedical is confident that the Group is able to convert R&D results into commercialized products, hence promoting its products nationwide through its established marketing and sales team. Taking the medical monitors as an example, the Group is planning to increase their sales by introducing new model and continue to promote the existing model in 2004. The two main streams of medical monitors were Sleeping Status monitors and SRM multi-parameter medical monitors. It is expected that the sales amount of such medical monitors would reach RMB20 million in 2004.

If the trial production certificates for the surface modified intraocular lens (“IOL”) for cataract patients are granted in early April 2004, the Group is planning to sell the various kinds of IOL from mid-April 2004. The Group expects to derive a total sales of approximately RMB1.8 million for IOL in 2004.

– 115 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

The Group’s diabetic health products were experiencing a steady growth period, despite the adverse effect of SARS. These products are well received by the market due to “Alpha” brand name and the Group forecasts to achieve the sales target of RMB32 million in 2004.

Apart from the above, the direct sales sector shall capture total sales of approximately RMB20 million in 2004 through the professional sales team in Beijing sales centre. The sales personnel of medical equipment will also put greater effort to increase their contribution to the Group despite the fierce competition of medical equipment business in the PRC in the years to come.

Following the implementation of the sales strategies mentioned above and the achievable cost control measures, the management of the Group expects that there will be significant increase in sales and decrease in expenses in 2004.

Result analysis

In 2003, the Group showed an improvement in sales. Turnover was approximately RMB47.3 million, representing an increase of 55% as compared to the same recorded in 2002, and the overall gross profit margin was slightly less than last year. However, the Group still recorded a total of approximately RMB24.8 million in loss attributable to shareholders, as a result of its investments to enhance R&D and to expand sales and marketing network for a better foundation of its profitability and a long-term development.

The Group will continue to launch medical equipment and biomaterials under the “TEDA” brand name. In February 2003, the Group invested RMB3.5 million to establish the subsidiary – Yisheng which is principally engaged in the manufacture of fungi health products. Subsequently, the Group has also successfully developed a new healthcare product – “Yisheng Coprinus Ovatus Chewing Tablets” (“Chewing Tablet”). This product has been registered with the Health Bureau of Tianjin and the Quality and Technology Supervision Bureau of TEDA of the PRC. The Chewing Tablet helps in strengthening the immune system of human body and has recently been launched in the PRC market. Since Yisheng is newly established, it is still in the preliminary stage of making contribution to the profit of the Group.

Alpha continued to be the Group’s steady source of income and recorded approximately RMB25.7 million in turnover, or 4.4% higher than that of 2002, representing 54.4% of the total turnover in 2003. Due to the effect of SARS, the growth of Alpha’s sales could not be directly compared to the previous year, but the overall situation could be maintained mainly attributable to its brand recognition. The new product of milk powder for diabetic patients was successfully launched in March 2003. The average gross profit margin of Alpha maintained at about 51%. Apart from the steady sales of “Alpha” products, the Group also witnessed a promising development for its business of sleeping status analysis monitors. All of the above brought forth a steady revenue stream for the Group.

– 116 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

R&D capabilities

Apart from the R&D core team which comprises 15 scientists under the leadership of Professor Gu Hanqing and Mr Xie Kehua, the Group also employs 14 professional consultants to advise the Group on its R&D projects. The management also works closely together with prominent universities and research institutes, including The Chinese Academy of Medical Science (Research Institute of Pharmaceuticals), Nankai University (Research Institute of Organic Chemicals), Tianjin University, etc.

In 2003, the Group has invested a total sum of RMB3.35 million, net of government grants of RMB1.15 million in research and development activities. The unique scientific research team allows the Group to surpass its peers in biomedical engineering and thus, fortifies the competitive edge of the Group.

Sales highlights

Alpha’s brand name has proved to be successful in the sugar-reducing foods market. It continued to launch new product such as milk powder for diabetic patients to the market in 2003. Not only has the Group expanded its marketing and sales network in the PRC, the Group had also started to take necessary steps for introducing “Alpha” products to Hong Kong. Currently, several “Alpha” products including nutritious noodles, sugar reducing biscuits, oatmeal and sweetener have been classified by the Department of Health of Hong Kong as non-pharmaceutical products not required to be registered under the Hong Kong Pharmacy and Poisons Regulations before they are allowed to be imported into Hong Kong.

After the set up of Yisheng in February 2003, the Group desired to launch the “Yisheng” brand by actively developing the over the counter (“OTC”) channel and to position “Yisheng” as the sugar-reducing health foods in the high end market. Unfortunately, the sugar-reducing powder of “Jiang Tang Fu Li Kang Fen” launched by Yisheng was unsuccessful and the Group therefore changed the sales model from the original OTC channel to the existing distribution sale through engaged distributors. Coupled with the establishment of the Beijing sales centre, the launch of Yisheng products will be guided by professional sales operating team. To accommodate its future growth, Yisheng will commit to research and development of other fungi series.

Through the Group’s subsidiary, TEDAX2, the Group will develop a series of new products, including sleeping monitor and cardio sleeping status equipment etc. The ultimate goal is to place suitable products in the market that could be recognized by customers. The Group is also committed to participate in large-scale exhibitions and professional academic conferences for promoting products, collecting information and generating buying interest.

– 117 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

In 2003, the Group adopted an aggressive approach of selling medical equipment to PRC hospitals by cooperation with financial institutions in the PRC. As the hospital wished to repay the sales proceed to the Group by instalments over a time period of more than one year, the Group entered into an agreement with a PRC financial institution for factoring of such accounts receivable. A lump sum will be financed by the PRC financial institution for immediate settlement of the accounts receivable while the subsequent instalments would be paid by the hospital to the PRC financial institution direct while the interest will be charged by the PRC financial institution to the Group.

Financial status and assets structure

Several products were launched in the past year, including milk powder for diabetic patients and “Jiang Tang Fu Li Kang Fun”. Throughout the year, the Group witnessed product competition with its “Alpha” and “TEDA” products in the PRC. In addition, cost of sales and distribution and selling expenses increased from approximately RMB27,684,000 in 2002 to RMB42,130,000 in 2003. Among these costs, distribution and selling expenses climbed to RMB17,238,000, due to the increasing efforts in building the sales teams and expanding the sales network. In the coming year, the Group will adopt a more extensive and effective sales strategy, by customizing effective sales strategies to propel significant revenue growth. The Group will also try to enhance its logistics management and lower the cost for further profitability.

Administration and financial expenses of the Group increased 69% to approximately RMB28 million. The above expenses included bad debts and provision of bad debts of RMB4.0 million and inventory obsolescence and written off of RMB1.2 million charged in 2003. The Group will continue to abide by its stringent cost control measures and adopt the most cost-effective methods for daily operations.

Outlook

With the support of the government of TEDA, the Company aims to be the leader for the development and production of high quality and innovative medical and health products.

As a result of the outbreak of SARS, the increasing concern and awareness for personal hygiene and healthcare will enable the Group’s research and development team to explore in the direction of developing new products for human body. This can be achieved by cooperation with universities and research institutions. The Group will seek appropriate partners to assist in the commercialization of medical and health products whenever necessary and will further expand its sales and marketing network. Apart from that, the Group will also actively develop the market of diabetic health products as well as non-diabetic sugar-free health products since there will be a great opportunity available in such market.

– 118 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Major investment

The Group invested RMB3.5 million in February 2003 to establish a subsidiary named Tianjin Yisheng Bioengineering Co., Ltd. (“Yisheng”) and owns a 70% stake. The core business of Yisheng is to manufacture fungi health products.

Segmental information

The Group principally operates in two business segments: diabetic health products and other medical and health products. The results of the Group segregated by segments during the year ended 31 December 2003 and the year ended 31 December 2002 are disclosed in Note 3 to the accompanying accounts.

Liquidity, financial resources and gearing ratio

During the year under review, the Group financed its operations by internally generated cashflow, banking facilities and a portion of the listing proceeds. As at 31 December 2003, the Group’s consolidated shareholders’ funds, current assets and net current assets were about RMB46.1 million (2002: RMB70.9 million), RMB75.7 million (2002: RMB93.7 million) and RMB21.2 million (2002: RMB53.1 million) respectively. The Group’s current assets as at 31 December 2003 comprised mainly cash and bank balances of RMB12.9 million (2002: RMB40.5 million) and restricted deposit of RMB25.0 million (2002: RMB24.9 million) and inventories of RMB15.4 million (2002: RMB8.2 million).

As at 31 December 2003, the total bank borrowings for the Group amounted to RMB36.7 million (2002: RMB27.6 million). The bank borrowings are denominated in Renminbi and provided by various PRC licensed banks and bear fixed interest rates within the range from 5.31% to 6.903% (2002: 5.31% to 6.903%) per annum. The major portion of the bank borrowings which represents RMB32 million were secured by corporate guarantees provided by Tianjin TEDA Guarantee Co Ltd, an independent third party and the pledging of a fixed deposit of HK$23.5 million by the Company. The remaining bank borrowings which represents RMB4.7 million were granted to the subsidiaries of the Company under corporate guarantees provided by the Company.

As at 31 December 2003, the Group’s gearing ratio, defined as the ratio between total bank borrowings and shareholders’ equity, was 0.79 (2002: 0.39). The liquidity ratio of the Group, represented by a ratio between current assets over current liabilities, was 1.40 (2002: 2.31).

Charges on the Group’s assets and contingent liabilities

As at 31 December 2003, restricted deposit of HK$23.5 million was pledged as security for granting of loans of RMB5 million to the Company and for the letter of credit facilities by a PRC licensed bank.

– 119 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

The Group had contingent liability of RMB3.74 million in connection with the factoring of accounts receivable to a financial institution in the PRC.

Investment held and material acquisition and disposals

For the year ended 31 December 2003, the Group did not have any substantial investment except the investment of RMB3.5 million in Yisheng. For the year ended 31 December 2003, the Group did not make any major acquisition and disposal of subsidiaries and affiliated companies (2002: The Group acquired 60% equity interest

in TEDAX2 and its wholly owned subsidiary, Beijing Xinxing for a consideration of RMB8.4 million). Except as stated in the statement of business objectives in the section headed “Business objectives” of the prospectus of the Company dated 10 June 2002, there is no plan for major investment or acquisition of capital assets as at 31 December 2003.

Employees and remuneration policies

As at 31 December 2003, the Group had 370 employees (2002: 344 employees). Remuneration is determined in accordance with government policies and by referenc to market terms and the performance, qualifications and experience of individual employee. Discretionary bonuses on individual performance will be paid to employees as recognition of and reward for their contribution. Pursuant to the PRC laws and regulations, the Group’s local staff are entitled to join the social insurance schemes which include retirement scheme, medical scheme, unemployment insurance scheme and housing fund. Contributions are made by the Group to a government agency on a monthly basis. The government agency is responsible for the pension liabilities relating to such staff on their retirements and the Group has no other obligations in connection with the above disclosed. For the year ended 31 December 2003, the salary expenses of the Group (including emoluments of Directors and Supervisors) and pension costs were approximately RMB14.5 million (2002: RMB8.6 million) and RMB1.6 million (2002: RMB1 million) respectively. The increase in such expenses was mainly due to increase in number of employees and adjustment of salaries amounts.

Exposure to foreign currency risk

The Group has no significant foreign currency risk since all the sales of the Group are domestic sales denominated in Renminbi and majority of the payables to suppliers are also denominated in Renminbi. Minority of the payables to suppliers are denominated either in Hong Kong Dollar or United States Dollar, the exchange rates of which remained quite stable with Renminbi during the year.

– 120 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

For the year ended 31 December 2004

Business review

During the year ended 31 December 2004, TEDA Biomedical was engaged in health business in two major areas: (1) personal health products such as diabetic health food under the brandname of “Alpha” and fungi health products under the brandname of “Yisheng”; and (2) medical equipment and biomaterials such as sleeping status monitoring equipment, multi-parameters monitoring equipment and intraocular lens (“IOL”). The sales of such products were made either directly to the Group’s customers or through the Group’s distribution network. In 2004, the Group expanded the distributor network for the Alpha’s products throughout the PRC and set up its own sales offices in Zhengzhou, Chengdu, Shijiazhong and Shenyang for its medical equipment and accessories. For direct sales, the Group’s sales teams worked successfully in the promotion and sales of the Group’s fungi health products as well as other personal care products.

In the second half of 2004, TEDA Biomedical launched a new product of IOL to the market after obtaining the production registration certificate of IOL in June 2004. This also paved the way of obtaining registration certificates for surface modified IOL in future. On the other hand, the Group also introduced the new products of skin care products and functional cotton to the market through its direct sales teams.

After the set up of Shandong TEDA in September 2004, the Group commenced a new business of the research and development, production and sale of ecoagricultural products including biological fertilizer, compound fertilizer, mixed fertilizer and plant fertilizer.

Operating environment

In 2004, the PRC’s economy continued to demonstrate a strong growth momentum after the effective control of the spreading of SARS in the second half year of 2003. However, the business environment in every aspects of the PRC market was highly competitive, particular in the field of medical equipment and accessories. On the other hand, the sales market of the fungi health products had turned hot in the second half year of 2004. One of the reasons is that the general public in the PRC mostly become aware of the importance of the maintenance of health. Another reason is that the Group adopted a new marketing approach of using direct sales network. After the introduction of laws and regulations on the direct sales by the PRC central government which is expected to be announced in 2005, the Group expects that the operating environment in this field will become more disciplined. Having obtained the production registration certificate for IOL for cataract patients at the end of June 2004, the Group was successful in launching the new product to the market and proved to be widely acceptable by the hospitals and the doctors who perform the operation. The Group believes that there will be a bright future for the production and sale of IOL in the years to come, when the Group is able to introduce more new

– 121 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

products to the market such as surface modified IOL. The Group’s diabetic health food continued its steady growth in sales in the past year. These products are well received by the market due to Alpha brand name. Apart from diabetic health food, Alpha was aggressively tapping the market of sugar-free products by introducing sugar-free biscuits, sugar-free almond juice and sugar-free mooncakes. More and more people in the PRC have recognized the importance of the consumption of sugar-free health food for the purpose of maintaining the healthy condition of human body.

Financial highlights

During the year ended 31 December 2004, sale of other medical and health products was decreased whilst growth of sales income derived from Alpha’s diabetic health remained steady. With sales of eco-agricultural products which belongs to a new business line, the Group’s total turnover was approximately RMB58.6 million, (excluding other revenues) representing an increase of 24% as compared with the turnover in 2003.

In September 2004, the Company formed a Sino-foreign equity joint venture enterprise, Shandong TEDA, in which the Company held 51% equity interest. From 18 September 2004 (the date of its incorporation) until the end of 2004, STEDA contributed approximately RMB19.6 million to the Group’s sales turnover, about 80% of which relates to a major sale of raw materials of RMB15.7 million resulting in a gross profit of RMB0.7 million.

The Group reduced the loss attributable to shareholders by approximately 37% from RMB24.8 million in 2003 to RMB15.5 million in 2004 mainly due to cost savings.

R&D capabilities

The Group through its subsidiary, TEDAX2 developed new models of medical equipment including sleeping monitors and multi-parameters monitoring

equipments. During the year 2004, TEDAX2 successfully obtained four trial production certificates for SRM-8100 respiratory equipment, TDM-1200 multiparameters monitor, TDM-6000 sleeping status monitoring equipment without electrodes and TDM-7000 biological feedback monitoring equipment. Also in 2004, the production registration certificates of SRM-9600, SRM9601, SRM9602 sleeping status analysis monitor and TDAXX-2000 central monitoring system were obtained. The Company’s milestone of the commercialization of R&D results was set up when the production registration certificate of IOL was issued by State Food and Drug Administration of the PRC on 30 June 2004. This laid out the concrete foundation of the further development of surface modified IOL, the technology of which surpasses its peers in biomedical engineering discipline and thus increases the competitive edge of the Group.

– 122 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Sales highlights

The major contribution to the Group’s sales turnover was derived from the sales of Alpha’s diabetic health food, in particular, its sugar-free products such as sugar-free biscuits and sugar-free almond juice which received a great demand from diabetic patients and the general public throughout the PRC. The total sales amount of Alpha’s health food in 2004 arrived at approximately RMB28.6 million. Another contribution to the Group’s sales turnover was derived from the sales of compound fertilizer. Since the set up of Shandong TEDA, the total sales for the last three months of 2004 arrived at approximately RMB19.6 million. The sales of RMB19.6 million included one major sale of approximately RMB15.7 million of raw materials (which accounts for 80% of total revenue of Shandong TEDA) and RMB3.9 million of finished products.

Another fast growing sector in respect of the Group’s total sales turnover was the Group’s fungi health products. The Group established a marketing centre in Beijing, designed a new package of Yisheng products and changed the sales strategy for such products. To accommodate its future growth, Yisheng will commit to research and develop other fungi series. At the same time, the Group will also make use of the established Yisheng sales network for the promotion and sale of other products such as skin care products and TEDA functional cotton.

Through the Group’s subsidiary, TEDAX2, the Group continued to sell a series of new models of sleeping status monitoring equipment and multi-parameters monitoring equipment etc. The total sales turnover generated from the sales of such equipment arrived at approximately RMB6.4 million in 2004.

Financial status and assets structure

In 2004, the Company witnessed profitability through the sales of its “Alpha” and “TEDA” products in the PRC. The Group will continue to enhance its logistics management and lower the average sales cost for further profitability. Operating loss of the Group decreased by approximately 37% to RMB15.5 million as compared with the same in 2003. Except for finance expense which increased due to the increase in bank loan, the general and administration expense (including research and development expense) decreased by approximately 31% as compared with the same in 2003, disregarding the provision for doubtful debts of the sales proceed derived from the sale of right to use the Group’s proprietary technology. This showed that the Group was successful in implementing the cost control measures to minimize the operating expense. The Group will continue to implement stringent cost control measures and adopt the most cost-effective methods for daily operations.

Future outlook

It is the Group’s long term aim of launching medical equipment and materials under the “TEDA” brand name. Together with the steady sales of “Alpha”, all of the above brought forth a steady revenue stream for the Group.

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In summary, the Group has arrived at its business turnaround point and through the mutual efforts of its management, the performance of the Group has improved to a bigger extent. This can be evidenced by the fact that the net loss attributable to shareholders for the year ended 31 December 2004 was decreased by 37% as compared with the same of 2003.

Major investment

The Company will contribute cash of RMB9,180,000 for the set up of Shandong TEDA of which the Company holds 51% equity interest. Until the end of 2004, the Company has contributed cash of approximately RMB1,377,000, which represents 15% of the registered capital that needs to be contributed. The core business of Shandong TEDA is engaged in the research & development, production and sale of biological fertilizer, combined fertilizer, mixed fertilizer and plant fertilizer including the application of related technology.

Segmental information

The Group principally operates in three business segments: diabetic health products, other medical and health products and fertilizer products. The results of the Group segregated by segments during the year ended 31 December 2004 and the year ended 31 December 2003 are disclosed in Note 3 to the accompanying accounts.

Liquidity, financial resources and gearing ratio

During the year under review, the Group financed its operations mainly by internally generated cash and banking facilities.

As at 31 December 2004, the Group’s consolidated shareholders’ funds, current assets and net current assets were about RMB30.5 million (2003: RMB46.1 million), RMB91.5 million (2003: RMB75.7 million) and RMB2.5 million (2003: RMB21.2 million) respectively. The Group’s current assets as at 31 December 2004 comprised mainly cash and bank balances of RMB6.0 million (31 December 2003: RMB12.9 million), pledged bank deposit of RMB25 million (31 December 2003: RMB25 million), trade receivable of RMB27.8 million (31 December 2003: RMB9.2 million) and inventories of RMB18.0 million (31 December 2003: RMB15.4 million).

As at 31 December 2004, the total bank borrowings for the Group amounted to RMB58.8 million (31 December 2003: RMB36.7 million). The bank borrowings are denominated in Renminbi and provided by various licensed banks in the PRC with fixed interest rates within the range from 5.3% to 7.3% (31 December 2003: 5% to 6.9%) per annum. The major portion of the bank borrowings in the total sum of RMB54 million were secured by corporate guarantees provided by Tianjin TEDA Guarantee Co Ltd, an independent third party and the pledging of a fixed deposit of HK$23.5 million by the Company. The remaining bank borrowings which represents RMB4.8 million were granted to the subsidiaries of the Company under corporate guarantees provided by the Company.

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As at 31 December 2004, the Group’s gearing ratio, defined as the ratio between total bank borrowings and total assets, was 0.48 (31 December 2003: 0.34). The liquidity ratio of the Group, represented by a ratio between current assets over current liabilities, was 1.03 (31 December 2003: 1.39).

Charges on the Group’s assets and contingent liabilities

As at 31 December 2004, time deposit of HK$23,400,000 was pledged as security for granting of loans of RMB22,000,000 to the Company by a PRC licensed bank. As at 31 December 2004, the Company had contingent liabilities amounting to RMB4.8 million in connection with the provision of guarantee as security for bank loans granted to it subsidiaries (31 December 2003: RMB4.7 million).

Material acquisition and disposals

In the second quarter of 2004, the Company and Tianjin Wan Tai Bio- Development Company Limited (“Wan Tai”) acquired the remaining 40% of the

equity share capital of TEDAX2 from the minority shareholders and as a result, the

Group’s effective control of TEDAX2 was increased to 99.7% of its registered capital (2003: no major acquisition/disposal). Except as stated in the statement of business objectives in the section headed “Business objectives” of the prospectus of the Company dated 10 June 2002, there is no plan for major investment or acquisition of capital assets as at 31 December 2004.

Employees and remuneration policies

As at 31 December 2004, the Group had 377 employees (2003: 370 employees). Remuneration of the Group’s employees was determined in accordance with government policies and by reference to market terms and the individual employee’s performance, qualifications and experience. Discretionary bonuses on individual performance will be paid to employees as recognition of and reward for their contribution. Other benefits include contributions to retirement scheme, medical scheme, unemployment insurance scheme and housing fund. For the year ended 31 December 2004, the staff costs of the Group were approximately RMB12.7 million (2003: RMB14.5 million). The decrease in staff costs was mainly due to decrease in fringe benefits of the staff.

Exposure to foreign currency risk

The Group has no foreign currency risk since all the sales of the Group were domestic sales in the PRC denominated in Renminbi and all the payables to suppliers were also denominated in Renminbi.

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Treasury policy

Since there is no foreign exchange risk, the Group’s bank borrowings are denominated in Renminbi and usually renew for one year when they become matured. The cash derived from the placing of H shares of the Company in June 2002 will be utilised according to the schedule of use of proceeds set out in the paragraph headed “Use of proceeds” under the section headed “Business objectives” of the prospectus of the Company dated 10 June 2002 and the half-yearly report 2004 of the Company dated 10 August 2004. In the meantime, any surplus cash is placed as time deposit with licensed banks in the PRC.

For the year ended 31 December 2005

Business Review

During the year ended 31 December 2005, Tianjin TEDA Biomedical Engineering Company Limited (“TEDA Biomedical” or the “Company”, together with its subsidiaries, the “Group”) was principally engaged in biological fertilizer products such as biological organic compound fertilizer products and nitro-compound fertilizer products under the brandname of “Fulilong”; and medical and health products such as diabetic health products under the brandname of “Alpha”; fungi health products under the brandname of “Yisheng”; and intraocular lens, sleeping and respiratory diagnosis and monitoring products under the brandname of “Teda”. The sales of such products were made either through the Group’s own distribution network or directly to its customers. In 2005, the Group continued to gradually expand the distributor networks and sales offices for the Alpha’s health and medical products throughout the PRC while through becoming the authorized distributor of Guangdong Fulilong Compound Fertilizers Company Limited (“Fulilong”), was committed to establish and develop the distribution network and point-of-sale terminal network for its biological fertilizer products in regions such as Shandong, Shaanxi, Shanxi, Guangdong, Guangxi, Hunan and Yunnan and has already achieved very significant results. Sales income recognized for the year amounted to RMB205,000,000, representing an increase of 250% from last year.

On 7 June 2005, all conditions of the Placing Agreement entered into between the Company and Sun Hung Kai International Limited (“SHK”), as the placing agent, for the placing of new placing H shares at a price of HK$0.161 per new placing H shares (the “Placing”) had been satisfied, and thus the Placing had been completed. According to the announcement dated 8 June 2005 published pursuant to the requirements of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”), 231,000,000 new placing H shares have been placed to a total of 15 placees. After the Placing, the Company’s share capital structure comprises 331,000,000 H shares and 279,000,000 domestic shares. Those 331,000,000 H shares include the original 100,000,000 H shares in issue before the Placing, 210,000,000 new H shares issued under the Placing and 21,000,000 sale H shares converted from the equivalent number of domestic shares held by Tianjin TEDA International Incubator pursuant

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to the requirements under the Provisional Administrative Measures for the Reduction of State-owned Shares and the Raising of the Social Security Fund promulgated by the State Council of the PRC on 12 June 2001. New placing H shares commenced trading at 9:00 a.m. on 10 June 2005.

The Company has completed the acquisition of 51% equity interests in Fulilong and is now interested in a sizeable fertilizer manufacturer, well set to capture the business opportunities in the PRC fertilizer market. Fulilong was established in August 1996 and began its principal business of production and distribution of compound fertilizers in September 1996. As at 31 December 2005, Fulilong owns five production lines located at Dongguan of Guangdong Province and another one located at Xingping of Shaanxi Province, which all adopts the advanced technology of “Melt Granulation Method with High Tower” with an annual production capacity reaches approximately 800,000 tonnes of compound fertilizers.

Fulilong has been approved as “New and High Technology Enterprises” by the Department of Science and Technology of Guangdong Province (廣東省科學技術廳) since June 2003 and its quality control management system was awarded ISO9001 certification in July 2003.

The Group’s intraocular lens (“IOLs”) products had been awarded The Third Categories Medical Equipment Product Quality System Assessment Certificate (三類醫療器械產品質量體系考核證書) (Certificate no.: TDAQ 2005-021) by the Tianjin Food and Drug Administration in June 2005. Zhun Zi no. production registration certificate (准字號產品註冊證) was approved by the State Food and Drug Administration of the PRC (SFDA) on 25 January 2006. IOLs products are sold throughout 19 provinces, cities and autonomous regions. The Group is currently applying for ISO 13485: 2003 and ISO 9001: 2000 Medical Equipment Quality System (醫療器材質量體系) certification for that product and is expected to be completed in the first half of 2006.

Operating Environment

The PRC has a population of approximately 1.3 billion and cultivable land of 132,000,000 hectare (1.98 billion acre) and 1.5 acre per capita, that is 7% of the cultivable land of the world to feed 22% of the world population. According to forecasts by the Population Division, Department of Economic and Social Affairs of the United Nations, the PRC population will be more than 1.45 billion by 2030 and the demand of fertilizer products of the PRC will increase from 46,000,000 tonnes in 2005 to 60,000,000 tonnes in 2030. The State suggested in “the Summary of the Ninth-Five Plan on national economic and social development and the future targets for 2010 (國民經濟和社會發展“九五”計劃和2010年遠景目標綱要)” to “support the production technology demonstration and fertilizer technology demonstration of compound fertilizers, specialized fertilizers, biological fertilizers and organic fertilizers with technological characteristics and features”. Currently, the ratio of the usage of compound fertilizers to the usage of chemical fertilizers is less than 25% in the PRC, while that of developed countries accounts for about 50% to 80%, therefore, there are still tremendous potentials for compound fertilizers in the PRC

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market. Food supply and quality are crucial to the political and economic stability of the PRC, and fertilizer products affect the supply and quality of food and crop to a great extent. The promulgation of “No. 1 Central Document” (“一號中央文件”) in 2004 clearly manifested the State’s strategic intention to place solving food problems in agriculture as its utmost priority. In 2005, the PRC continued to increase its support to agriculturerelated areas, and the aggressiveness in the development of agriculture-related areas continued to grow, establishing a good development trend for the industry. The Company grasped market opportunities by penetrating its operating business to biological fertilizers which present brighter market prospects, and dedicated itself to focusing on the development of fertilizer products business and so far has achieved fruitful results.

In light of the increasing morbidity of illnesses such as cardiovascular disease, diabetes and hyperlipidemia, sugarfree food is becoming more and more popular, presenting substantial rooms for development in products varieties, target customer groups and market regions. The Company focuses on the development trend of diabetic health product market according to the current development of the PRC health product market, and together with the ever-changing factors of the domestic operating environment, the operating strategy of products in 2005 focused on the promotion of sugar-free health products, which are suitable to a wider range of target customers. The Company enriched its product varieties of sugar-free food and sugar-free beverages, and chose bargain markets and chain supermarkets as its sales channels.

In the PRC, with an aging population and improving living standard, people are becoming more health-conscious and are willing to “purchase health”, pushing the consumption of medical and health products of hospitals and different clinics to domestic home to rise substantially. Currently, the structure of medical and health products is gradually transforming from solely diagnosis, treatment and laboratory testing towards multi-functional, such as diagnosis, treatment, examination, analysis, rehabilitation, physiotherapy and health care, and the market continues to expand. The Company responds closely to market changes, in addition to proactively engaged in the research and development, production and sales of IOL and monitoring equipment, it also introduced new products such as biological feedback rehabilitation products, so as to increase its market share as well as profits from sales of products.

Financial Highlights

During the year ended 31 December 2005, the sales income of medical and health products maintained stable growth. In light of the substantial increase in sales of the Company’s fertilizer products, the Group’s total turnover amounted to approximately RMB205,032,000 (excluding other revenues), representing an increase of 250% as compared with RMB58,646,000 recorded in 2004. As from April 2005, Shandong TEDA Bio-engineering Co., Ltd. (“Shandong TEDA”), a subsidiary of the Company, has become the nationwide distributor of fertilizer products under the brandname of Fulilong, and has built a network of 250 direct product supply distributors in 19 provinces, cities and autonomous regions in the country and contributed approximately RMB156,116,000 to the sales turnover of the Group and

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approximately RMB6,741,000 to the sales gross profit. The gross profit of licensed distribution of such products was 4.3%, resulting in a change in the Group’s overall gross profit margin from 36% in 2004 to 15% in 2005. The Group obtained several production bases through acquisition, and received profits from such manufacturing segments, enhancing the gross profit margin of sales of biological fertilizers. The Group successfully achieved turnaround, from loss attributable to equity holders of approximately RMB15,546,000 in 2004 to profit attributable to equity holders of approximately RMB773,000 in 2005. This was mainly due to the substantial increase in sales volume and gross profit, the enhancement of cost control of production processes and effective control of overall costs. Moreover, the Group recorded an operating gain of RMB432,000 for the three months ended 30 June 2005, and continued to record an operating gain of RMB137,000 for the three months ended 30 September 2005, and once again approximately RMB2,634,000 for the three months ended 31 December 2005, bringing us to the third consecutive quarter with an operating gain, evidencing the sustained improvement in the Group’s operating results.

Research and development

As at December 2005, the Group had completed the preliminary allocation of its biological fertilizer product production bases in the PRC. It has five production lines in Dongguan of Guangdong Province and can produce 400,000 tonnes of biological compound fertilizers per year. The products are distributed to eight provinces, cities and autonomous regions in Southern China. The Group has established a production line which adopts the melts granulation method with high tower with an annual production capacity of 400,000 tonnes of high concentrated nitro-compound fertilizers. Such products have been introduced to the market, mainly supplied to eleven provinces, cities and autonomous regions in Western China, Eastern China, Northern China and Northeast region. Furthermore, the Group has begun the construction of an advanced production line with an annual production capacity of 400,000 tonnes of high concentrated biological compound fertilizers in Weifang of Shandong Province and a high tower production line with an annual production capacity of 200,000 tonnes of high concentrated biological compound fertilizers in Guizhou of Guizhou Province in 2005, which are expected to complete and commence trial production in the second half of 2006.

The biological fertilizer products from Fulilong have passed the assessment by a team of specialists, the results being “it posses unique characteristics and reaches international advanced level among the same kinds of products”. In 2005, Fulilong has been listed as Guangdong Provincial Enterprise Technology Centre by Guangdong Province Economic and Trade Commission, Finance Bureau and General Administration of Customs. The brandname of “Fulilong” and “Lvzhou” (綠洲) have been granted “exemption from quality inspection (國家免檢產品)” by The National Technology Supervision Bureau (國家技術監督局) in December 2005.

As regards the medical and health products, the Group’s technicians continue to improve and enhance the technology standard and to modify the effectiveness of products such as IOLs, sleeping and respiratory equipments and monitors. At the same time, the Group follows the research and development processes including

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“new product market research, risk analysis, solution planning, sample trial production, product standard formulation, third party examination and testing, effectiveness testing, product registration and product design”. On the medical products front, the Group has introduced biological feedback rehabilitation product series and has already completed feasibility study on market research, raw materials selection and technology justification. On the health food front, the launching of new “Alpha” products such as sugar-free wholewheat biscuits and orange-flavour sugar-free beverages added energy to the market, and has fuelled the steady growth of sales volume in various regions.

Sales Highlights

The major contribution to the Group’s sales turnover was derived from biological fertilizer products. “Fulilong” brand series products promptly captured market share in various regions of the country leveraging on its edges in technology, variety and quality, coupled with the Group’s reasonable and aggressive sales policy. In 2005, total sales of biological fertilizer products in the country reached approximately RMB156,116,000.

Another contribution to the sales of the Group was “Alpha” diabetic health food products. As the sales of sugarfree food increase, the total sales of Alpha health products reached approximately RMB30,794,000 in 2005.

Through the Group’s subsidiary, Beijing TEDAX2 Medical Engineering Company Limited, the Group continued to sell a series of new models of sleeping status monitoring equipment and multi-parameter monitoring equipment products as well as through the Group’s subsidiary, Tianjin Wan Tai Bio-Development Company Limited, continued to sell medical equipment product such as IOLs. Sales of these products contributed turnover of approximately RMB10,237,000 in 2005.

Remaining contribution to the sales of the Group came from “Yisheng” fungi health products. The total sale of “Yisheng” fungi products reached approximately RMB7,885,000 in 2005.

Financial Status and Assets Structure

In 2005, the Company witnessed operating profits for the third consecutive quarter through the sales of its “Alpha”, “TEDA” and “Fulilong” products in the PRC. The Group will continue to extend its scope of sales and adopt a more stringent cost management and cost control so as to further enhance profitability and achieve profit for the year.

Operating loss of the Group for the year ended 31 December 2005 decreased by approximately 100% to RMB24,000 as compared with the same in 2004. Excluding the provision for doubtful debts and the sales proceed derived from the sale of right to use the Group’s proprietary technology, save as the finance expenses which increased due to the increase in bank loans, the general and administration expenses (including research and development expenses) decreased by approximately 35%

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compared to the corresponding period in 2004, manifesting the Group’s success in implementing cost control measures to minimize operating expenses. The Group will continue to implement stringent cost control measures and adopt the most cost- effective methods for daily operations.

Structure of assets of the Group as at 31 December 2005 is as follows:

Total assets was RMB208,266,000. Current assets, fixed assets, investment and other non-current assets accounted for 63%, 20%, 12% and 5% of the total assets respectively.

Future Outlook

In the future development process, the Group will penetrate its biological engineering technologies into the furthest frontier of the market, providing high quality products and services to most consumers in the PRC. The PRC is the largest chemical fertilizer-production and chemical fertilizer-consumption country. Consumption of compound fertilizers accounts for approximately 25% of country’s total chemical fertilizer consumption, which is far lower than the 50% to 80% consumption level of developed countries. Hence, there is huge room for development in the market. The Group has successfully tapped into the fertilizer product market and is dedicated to build up a brandname of high quality compound fertilizers with the application of high technology. It is expected that its production bases will form an ideal composition in the PRC including Dongguan, Guangdong Province (covering Southern China), Xing Ping, Shaanxi Province (covering Northwest China), Weifang, Shandong Province (covering Eastern China, Western China, Northwest China) and Guiyang, Guizhou Province (covering Southwest China). Leveraging on the abundant resources from the production bases throughout the country, we have an extensive product variety with biological organic compound fertilizers, nitryl compound fertilizers and urine compound fertilizers as its core products. Adopting the advanced high tower technology, the Group intends to secure a considerable number of direct distributors in the PRC market, as well as to increase the training, construction, management and service of the terminal sales network, and to build up an extensive sales network in three years, with an aim to become one of the top biological fertilizer product suppliers. In the meantime, medical equipment products under the “Teda” brand and “Alpha” sugar reducing and sugar-free health products continue to be a source of turnover and revenue to ensure stable growth.

Segmental information

The Group principally operates in two business segments: (1) biological fertilizers; (2) medical and health products. The results of the Group by segments for the year ended 31 December 2005 and the year ended 31 December 2004 are disclosed in Note 4 to the accompanying accounts.

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Liquidity, financial resources and gearing ratio

During the year under review, the Group financed its operations mainly by internally generated cash and banking facilities.

As at 31 December 2005, the Group’s consolidated shareholders’ funds, current assets and net current assets were about RMB65.4 million (2004: RMB30.5 million), RMB131.5 million (2004: RMB90.1 million) and RMB22.4 million (2004: RMB1 million) respectively. The Group’s current assets as at 31 December 2005 comprised mainly cash and bank balances of RMB16.8 million (31 December 2004: RMB6 million), pledged bank deposits of RMB nil (31 December 2004: RMB25 million), trade receivables of RMB63.2 million (31 December 2004: RMB28.1 million) and inventories of RMB31.1 million (31 December 2004: RMB18 million).

As at 31 December 2005, the total bank borrowings of the Group amounted to RMB51.5 million (31 December 2004: RMB58.8 million). The bank borrowings are denominated in Renminbi and provided by various licensed banks in the PRC with fixed interest rates from 5.6% to 7.3% (31 December 2004: 5.3% to 7.3%) per annum. Of the bank borrowings, a total amount of RMB25,000,000 and RMB26,500,000 will mature in March 2006 and June 2006 respectively.

As at 31 December 2005, the Group’s gearing ratio, defined as the ratio of total bank borrowings to total assets, was 0.25 (31 December 2004: 0.48). The liquidity ratio of the Group, represented by the ratio of current assets over current liabilities, was 1.21 (31 December 2004: 1.02).

Charges on the Group’s assets and contingent liabilities

As at 31 December 2005, the Company had contingent liabilities amounting to RMB1 million in connection with the provision of guarantee as security for bank loans granted to it subsidiaries (31 December 2004: RMB3.8 million).

Material acquisitions and disposals

The Board of Directors of the Company announced on 3 October 2005 that the Company, the existing shareholders of Fulilong and Fulilong entered into the Subscription Agreement, pursuant to which the Company conditionally agreed to subscribe for the 51% equity interest in Fulilong as enlarged by the subscription (the “Subscription Capital”) by way of cash injection. Pursuant to the GEM Listing Rules, the subscription constituted a very substantial acquisition on the part of the Company. The Subscription Capital amounts to RMB8,326,500 represents (a) approximately 104% of the registered capital of Fulilong as at 3 October 2005 of RMB8,000,000; and (b) 51% of the enlarged registered capital of Fulilong upon completion of the subscription of RMB16,326,500. The consideration for the Subscription Capital is RMB32.5 million, and has been arrived at after arm’s length negotiation among the parties to the Subscription Agreement having taken into account the audited net asset value of Fulilong as at 30 June 2005 prepared in accordance with the generally accepted accounting principles in the PRC and the intention of the Company to obtain a 51% interest in Fulilong. The Company has completed the subscription in December 2005.

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Fulilong entered into a cooperation agreement in July 2005 with a fertilizer manufacturer in Qingzhen, Guiyang of Guizhou Province, the PRC to set up a production base with an annual capacity of 200,000 tonnes of highly concentrated urea based compound fertilizers (尿基複合肥) under which the cooperation partner is responsible for establishing the production plant while Fulilong is responsible for the technical support and design and the provision of the production equipment. The production plant will belong to the cooperation partner and the cooperation partner shall manufacture according to the production plan of Fulilong, which shall purchase all products manufactured by the cooperation partner. It is expected that the production base will commence trial production in the second half of 2006.

The Board of Directors of the Company also announced on 15 September 2005 that the Company entered into the Equity Transfer Agreement on the same day, pursuant to which the Company has agreed to dispose of 70% of the equity interests in Tianjin Yisheng Bioengineering Company Limited#, “Tianjin Yisheng” (天津益生生物工程有限公司) to Lei Yu Hua, an independent third party, at a cash consideration of RMB3,500,000. The consideration of the Equity Transfer Agreement has been determined on an arm’s length basis between the parties to the Equity Transfer Agreement and with reference to the audited net asset value of Tianjin Yisheng of RMB4,052,621, 70% of which represented RMB2,836,839, as at 31 August 2005. Accordingly, the consideration exceeded the audited net asset value of Tianjin Yisheng as at 31 August 2005 by RMB663,161, thus the equity interests in Tianjin Yisheng had been disposed of at a premium of 23.4%. Based on the audited net asset value of Tianjin Yisheng as at 31 December 2004, the equity interests in Tianjin Yisheng had been disposed of at a premium of approximately 9.1%. The consideration is payable by an one-off payment to the Company in cash within six months from the date on which the Equity Transfer Agreement was signed, and was paid in March 2006. Due to the fact that Tianjin Yisheng has been loss-making since establishment, coupled with the uncertainties in relation to the application for the requisite approvals, the Company sold all of its interests in Tianjin Yisheng.

Employees and remuneration policies

As at 31 December 2005, the Group had 293 employees (2004: 377 employees). Remuneration of the Group’s employees are determined in accordance with government policies and by reference to market terms and the performance, qualifications and experience of individual employees. Discretionary bonuses are paid to employees depending on individual performance as recognition of and reward for their contribution. Other benefits include contributions to retirement schemes, medical schemes, unemployment insurance schemes and housing allowances. For the year ended 31 December 2005, the staff costs of the Group were approximately RMB7.32 million (2004: RMB12.7 million). The decrease in staff costs was mainly due to decrease in staff fringe benefits.

Exposure to foreign currency risk

The Group has no foreign currency risk since all sales of the Group are domestic sales in the PRC denominated in Renminbi and all payables to suppliers are also denominated in Renminbi.

# for identification purpose only

– 133 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Treasury Policy

Since there is no foreign exchange risk, the Group’s bank borrowings are denominated in Renminbi and are usually renewed for one year upon maturity. The cash proceeds from the placing of H shares of the Company in June 2002 has been utilized according to the schedule of use of proceeds set out in the paragraph headed “Use of proceeds” under the section headed “Business objectives” of the prospectus of the Company dated 10 June 2002 and the interim report 2004 of the Company dated 10 August 2004. In the meantime, any surplus cash is placed as time deposits with licensed banks in the PRC.

Use of proceeds

The Company has raised net proceeds of RMB74.5 million from the issue of new H shares of the Company upon the listing of the Company on GEM in June 2002 and net proceeds of RMB33.5 million from the new placing of H shares in June 2005. As at 31 December 2005, the Group has utilized the net proceeds as follows:

Use of proceeds as stated in the circular in relation to the proposed placing of new H shares and proposal Use of to obtain proceeds further specific Actual amount as stated mandate Sub-total utilized up to in the of November of use 31 December (RMB million) prospectus 2004 of proceeds 2005

Research and development 2.5 0.0 2.5 2.1 Expansion of production facilities 16.3 0.0 16.3 4.1 Expansion of marketing and distribution network 5.5 5.2 10.7 6.8 Accelerating the commercialisation of products 35.2 6.3 41.5 14.7 Establishment of treatment centres 5.0 0.0 5.0 0.0 Investment in suitable projects 0.0 22.0 22.0 32.5 Working Capital 10.0 0.0 10.0 38.6

Total 74.5 33.5 108.0 98.8

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For details, please refer to the 2002 annual report and 2003 and 2004 quarterly reports of the Company.

During the year 2005, the funding for the expansion of marketing and distribution network and working capital was sourced from bank borrowings from licensed PRC banks. The Board determines to adopt this policy in the future operation of the Group so as to enhance the Group’s profitability and the efficiency for the use of fund through effective leveraging.

For the six months ended 30 June 2006

Segmental information

The Group is organized into 2 main business segments: (1) biological fertilizers; (2) medical and health products.

The results of the Group segregated by segments for the six months ended 30 June 2006 and for the three months ended 30 June 2006 as compared with the same recorded in the corresponding periods in 2005 are analysed as follows:

For the six months For the three months ended 30 June ended 30 June 2006 2005 2006 2005 RMB RMB RMB RMB

Segment revenues Fertilizer products 129,441,050 55,417,708 48,695,954 51,678,113 Medical & health products 19,239,195 24,768,662 6,517,057 11,398,480

Segment results Fertilizer products 1,403,437 (358,561) (3,962,844) (70,592) Medical & health products (3,465,211) (4,854,016) 1,799,709 (1,074,262)

Foreign currency risk

The Group has no significant foreign exchange risk since all of the sales of the Group are domestic sales denominated in Renminbi and majority of the payables to suppliers are also denominated in Renminbi. Minority of the payables to suppliers are denominated either in Hong Kong Dollar or United States Dollar, the exchange rates of which remained quite stable during the period under review.

– 135 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Liquidity, financial resources and capital structure

During the period under review, the Group’s primary source of fund was cash proceeds derived from banking facilities granted by PRC banks and the placing of the Company’s new H shares in June 2005. As at 30 June 2006, the Group had bank and cash balances amounted to approximately RMB27,507,000 (31 December 2005: RMB16,767,000), short term bank borrowings of RMB104,400,000 (31 December 2005: RMB51,500,000). The bank borrowings are denominated in Renminbi and provided by various PRC banks in fixed interest rates within the range from 5.68% to 7.02% per annum (31 December 2005: 5.6% to 7.3%). The major portions of the bank borrowings in the sum of RMB30,000,000 and RMB25,000,000 will be matured on 19 January 2007 and 29 March 2007 respectively. The sum of RMB23,000,000 and RMB22,000,000 will be matured on 29 April 2007 and 20 June 2007, remaining portion of total bank borrowings will be matured on variable dates from 9 January 2007 to 22 May 2007.

As at 30 June 2006, the Group had total assets of approximately RMB232,456,000 (31 December 2005: RMB208,266,000) which were financed by current liabilities of approximately RMB133,962,000 (31 December 2005: RMB109,102,000), shareholders’ equity of RMB63,023,000 (31 December 2005: RMB65,374,000) and minority interests of approximately RMB34,180,000 (31 December 2005: RMB32,500,000).

As at 30 June 2006 the Group’s gearing ratio, defined as the ratio between the total bank borrowings and the total assets, was 0.45 (31 December 2005: 0.25). The liquidity ratio of the Group, represented by a ratio of the current assets over the current liabilities, was 1.02 (31 December 2005: 1.21).

Charges on the Group’s assets and contingent liabilities

As at 30 June 2006, the building and the land use rights of the Company’s subsidiaries of RMB2.5 million was pledged as security for granting of loans to the Company’s subsidiaries by a PRC licensed bank.

The Company guaranteed the banking facilities granted to certain of its subsidiaries amounting RMB0.9 million (2005: RMB1.0 million).

Major acquisition and disposal

Major acquisition

In the half-yearly period of 2006, the Group did not make any major acquisition (2005: after the completion of the subscription of the enlarged 51% equity interests in Fulilong, Fulilong become a subsidiary of the Company).

– 136 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

Disposal

In the half-yearly period of 2006, the Group did not disposal of subsidiaries or affiliated companies (2005: the disposal of Tianjin Yisheng Bioengineering Company Limited (“Tianjin Yisheng”) was completed on 15 September 2005).

Staff cost information

For the six months ended 30 June 2006, the salary cost of the Group was approximately RMB6,109,000 (2005: RMB4,922,000). The total employees of the Group were increased from 396 (as at 30 June 2005) to 691 (as at 30 June 2006). The increase was due to the inclusion of the staff of Fulilong after the subscription. Salary of the employees was determined on the basis of their performance and the market trend.

Each of the executive directors and supervisors of the Company has entered into a service agreement with the Company. According to the service agreement, each director and each supervisor are entitled to receive an annual salary payable as specified in their service agreements respectively.

Treasury policy

Since there is no foreign exchange risk, the Group’s bank borrowings are denominated in Renminbi and usually renew for one year when they become matured. The cash derived from the placing of new H shares of the Company in June 2005 will be utilized according to the schedule of use of proceeds set out in the paragraph headed “Use of proceeds” pursuant to an announcement issued by the Company dated 8 June 2005. In the meantime, any surplus cash is placed with PRC licensed bank.

Business review

The Group is continually engaged in the research and development and Commercialization of fertilizer products and medical and health products.

For the six months ended 30 June 2006, turnover of the Group amounted to approximately RMB148,680,000, representing an increase of 85% from that of recorded in the corresponding period of last year. The increase is mainly due to the consolidation of the results from Guangdong Fulilong Compound Fertilizers Company Limited (“Fulilong”), a subsidiary of the Group since December 2005.

As the low gross profit margin of the fertilizer products from sale by Fulilong, the overall gross profit margin of the Group was decreased to approximately 14% which is much lower than that of 19.8% recorded in the corresponding period of last year. However, due to increase in sales turnover, the gross profit was increased to approximately RMB20,776,000, representing an increase of approximately 30.9% from that achieved in the corresponding period in 2005.

– 137 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

The Group has successfully achieved turnaround since third quarter of 2005. Loss attributable to equity holders was thus decreased by 60.4% to approximately RMB2,062,000 when compared with the same recorded in the corresponding period of last year.

As at 30 June 2006, major approximately 87% of the Group’s total turnover were derived from the sales of fertilizer products produced and distributed by Fulilong.

The Group’s medical and health products include diabetic health food, medical equipments and intraocular lens products (“IOLs”).

The diabetic health food and medical equipments under the brand name of “ALPHA” and “TEDA” contributed to remaining approximately 12.4% and 0.6% respectively to the Group’s total turnover for six months ended 30 June 2006.

Fertilizer products

After the completion of the subscription of the enlarged 51% equity interest in Fulilong since December 2005, the Group has become a sizeable fertilizer manufacturer to capture the business of production and distribution of fertilizer production in PRC.

For the six months ended 30 June 2006, Fulilong recorded a total sales of approximately RMB129,441,000 of fertilizer products to various customers throughout the PRC. As at 30 June 2006, the total gross profit derived from the sale of fertilizer products amounted to approximately RMB12,603,000, representing an increase of 301% from that recorded in the corresponding period of 2005. It is expected that the sale of fertilizer products will be continually and steadily increased in the coming quarters of 2006 as the policy of the PRC central government continues to support and encourage of farmers to improve their productivity by using effective fertilizer products has been firm and continually carried out. As a result, the demand of compound fertilizers in the PRC market continues to steadily increase year by year.

Medical and health products

During the six months ended 30 June 2006, the total sales of diabetic health products by Alpha continued to record a new high of approximately RMB18,358,000 which is increased by approximately 25% when compared to the sale in the corresponding period of last year. The increase in sales was mostly contributed by the increase in sale of sugar free almond juice which is widely and generally accepted as one of the health drinks in the PRC market. The gross profit margin of “Alpha” products for the period under review maintained at about 45% for the six months ended 30 June 2006 (as at 30 June 2005: 48%).

– 138 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

For the coming quarters of 2006, the expected increase in sales will depend on the performance of sales of sugar free mooncakes and sugar free almond juice. This is the long term main objective for Alpha of achieving increased market share in the field of sugar free health food.

The Group continues to launch medical equipment under the “TEDA” brand name through its subsidiary, Beijing TEDAX2 Medical Engineering Company Limited (“TEDAX2”) and sold a series of new models of sleeping status monitoring equipment and multi-parameter equipment products through TEDAX2. With a view to coping with the changing market situation, the process in altering the model of product lines has been smoothly undergoing. It is expected that the improvement in sale performance will be achieved in the coming quarters of 2006.

The Group has already gotten the ISO 13485:2003 and ISO 9001:2000 Medical Equipment Quality System (醫療器材質量體系) certification for its intraocular lens (“IOLs”) products.

Tianjin Wan Tai Bio-development Company Limited (“Wan Tai”) tries its best to set up more sales network of intraocular lens (“IOL”) to expand and to develop the market channel all over the area in the PRC to position its IOLs products in order to cope with the keen competition in the PRC market.

Operation of a subsidiary

As at 30 June 2006, Fulilong continually owned five production lines located at Dongguan of Guangdong Province, the PRC and another one located at Xingping of Shaanxi Province, the PRC. The one in Xingping of Shaanxi Province firm adopts the advanced technology of “Melt Granulation Methods with High Tower”. The six production lines totally with an annual production capacity reach approximately 800,000 tones of fertilizer products. During the period under review, Guizhou Guihua project (貴州貴化項目) is smoothly under construction and is expected to commerce trial production by October 2006.

The Group is waiting for the approval of the application for three professional skill certification for production of fertilizer products and two of three certificates are advanced high tower technology and is expected to be completed in the coming quarters of 2006.

Currently, Fulilong concentrates on its sales of fertilizer products in Guangdong, Southern and Western China. The products are distributed to eight provinces, cities and autonomous regions in Southern China as well as to eleven provinces, cities and autonomous regions in Western China.

– 139 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

As at 30 June 2006, there was an increase by approximately 50% in the number of Fulilong’s sales team for promotion of fertilizer products over that as at 31 December 2005. With a view to supporting the Guizhou Guihua project (貴州貴化項目) to push the fertilizer products smoothly to the Western China market on time, Fulilong increased six wholesale channels with around 120 retail points closed to the Guizhou Guihua project (貴州貴化項目) in Guangxi. Fulilong also increased more than ten wholesale channels with around 200 retail points in the west of Guangdong as well as continued to expand the sales network in the PRC. As a result, the number of establishment of sale channels of Fulilong in Zhejiang, Jiangxi, Hunan Provinces, the PRC was continually and speedily increased.

In the future development process, Fulilong will deeply leverage on the existing production lines and sales channel of fertilizer products under the “Fulilong” brand to develop and to expand the market channel all over the area in the PRC and position its products as one of the best fertilizer products in the high-end market.

Distribution and selling

For the six months ended 30 June 2006, the Group’s distribution and selling expenses amounted to approximately RMB11,457,000, which is approximately 3.6% slightly higher than that incurred in the same period of last year (2005: RMB11,055,000). This was mainly due to the increase in distribution and selling expenses for fertilizer products.

Research and development and administration

For the six months ended 30 June 2006, the Group’s research and development and administration expenses amounted to approximately RMB7,627,000, which is slightly increased by approximately 0.2% from that recorded in the corresponding period of last year (2005: RMB7,611,000). The total employees of the Group were increased from 396 (as at 30 June 2005) to 691 (as at 30 June 2006). The increase was due to the inclusion of the staff of Fulilong after the subscription.

The Group continued firm to adopt its tight control policy for the purpose of cost reduction in order to increase its production efficiency and cost effectiveness.

Future outlook

On 25 June 2006, the Company, Wai Tai (a wholly-owned subsidiary of the Group) have entered into a Equity Transfer Agreement pursuant to which the Company, Wai Tai conditionally agreed to acquire the remaining 49% equity interest in Fulilong Compound Fertilizers Company Limited (“Fulilong”) from the other shareholders of Fulilong. Please refer to the section headed “Major acquisition and Connected Transaction” of this report for more details. The Directors believe that the acquisition of Fulilong’s remaining 49% equity interests provides the Group with a chance to capture the business opportunity of the fertilizer markets of the PRC by having an entire interest in a well established fertilizer manufacturer.

– 140 – APPENDIX 2 FINANCIAL INFORMATION OF THE GROUP

It is expected that the sale of fertilizer products will be continually and steadily increased since PRC central government continues to encourage the farmers to improve their productivity by using effective fertilizer products. The Chinese Phosphorus Compound Fertilizers Association forecasted in November 2004 that the consumption of compound fertilizers in the PRC will be doubled in the next 10 years, gradually reaching the level of semi-developed countries. As a result, the demand of compound fertilizers in the PRC market continues to increase year by year. It is the Group’s long term strategic plan to increase continually its investment in the industry of compound fertilizers.

FINANCIAL AND TRADING PROSPECTS FOR CURRENT FINANCIAL YEAR

Due to strong support by the PRC central government to agricultural industry, the consume volume of fertilizers continues to grow in the PRC. The consumption of compound fertilizers in the PRC represents approximately 25% of the total consumption of chemical fertilizers of the PRC and is far below 50% to 80% level of that of developed countries. In order to grapes the opportunities offered by the abovementioned growth, the Group will continue to increase its investment in the industry of compound fertilizers. Apart from building a compound fertilizer plant in Shandong province and Guizhou province of the PRC and the Acquisition, the Group will go on establishing a sales network of compound fertilizers throughout the PRC. The Directors believe that the Acquisition will bring a substantial profit stream to the Group based on the historical financial performance of Fulilong and the consolidation of the entire profits of Fulilong to the Group after the completion of the Acquisition.

On the other hand, there is also steady growth of medical and health products of the Group after completion of the initial investment in their research and development, such that the net profit derived therefrom could contribute to the success of the Group. For the three years ended 31 December 2005, the sales of the medical and health products of the Group were RMB48.01 million, RMB49.48 million and RMB48.92 million respectively.

Under the environment of fast economic growth in the PRC and together with the sound business development strategies and management expertise, the Group’s management believe that the Group will bring fruitful returns to its shareholders.

There are no specific trade factors or risks that could materially affect the profit of the Group.

– 141 – APPENDIX 3 UNAUDITED PRO-FORMA FINANCIAL INFORMATION

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE GROUP AFTER THE ACQUISITION

The following is the unaudited pro forma consolidated balance sheet of the Group after the Acquisition, assuming that the Acquisition had been completed on 30 June 2006 based on the unaudited consolidated balance sheet of the Group as at 30 June 2006, extracted from the Company’s 2006 half-yearly report as set out in Appendix 2 to this Circular, the audited balance sheet of Fulilong as at 31 March 2006 as set out in Appendix 1 to this Circular, and adjusted to reflect the effect of the Acquisition.

The unaudited pro forma consolidated balance sheet of the Group after the Acquisition is prepared to provide the unaudited pro forma financial information on the Group as a result of the completion of the Acquisition. As it has been prepared for illustrative purpose only, and because of its nature, it may not give a true picture of the financial position of the Group after the Acquisition as at the date to which it is made up to or at any future date.

Unaudited Audited The Group Fulilong Pro forma As at As at Group 30 June 31 March Pro forma after the 2006 2006 adjustments Acquisition RMB’000 RMB’000 Note RMB’000 RMB’000

Non-current assets Property, plant and equipment 70,261 8,502 (1) (8,502) 70,261 Deposits paid for property, plant and equipment – 1,294 (1) (1,294) – Proprietary technologies 978 – 978 Goodwill on consolidation 3,215 – 3,215 Investment in associate 16,314 8,867 (1) (8,867) 16,314 Trade receivables 4,795 – 4,795 Other receivables and prepayments 867 648 (1) (648) 867

96,430 19,311 96,430

Current assets Inventories 29,940 17,630 (1) (17,630) 29,940 Trade receivables 65,130 56,657 (1) (56,657) 65,130 Trade deposits paid – 2,580 (1) (2,580) – Prepayments and other receivables 10,600 6,955 (1) (6,955) 10,600 Amounts due from related parties 2,848 – 2,848 Amounts due from equity holders – 1,424 (1) (1,424) – Cash and bank balances 27,507 3,269 (1) (3,269) 9,104 (2) (18,403)

136,025 88,515 117,622

– 142 – APPENDIX 3 UNAUDITED PRO-FORMA FINANCIAL INFORMATION

Unaudited Audited The Group Fulilong Pro forma As at As at Group 30 June 31 March Pro forma after the 2006 2006 adjustments Acquisition RMB’000 RMB’000 Note RMB’000 RMB’000

Current liabilities Trade payables 18,986 12,879 (1) (12,879) 18,986 Government grants received in advance 672 – 672 Other payables and accruals – Shandong TEDA – 1,124 (1) (1,124) – – Others 8,209 15,810 (1) (15,810) 8,209 Amounts due to related parties 1,347 732 (1) (732) 1,347 Loans from Tianjin TEDA – 4,201 (1) (4,201) – Current portion of finance lease payable 347 – 347 Short-term bank borrowings 104,400 3,500 (1) (3,500) 119,400 (2) 15,000 – Other tax payables – 366 (1) (366) –

133,961 38,612 148,961

Net current assets/(liabilities) 2,064 49,903 (31,339)

Total assets less current liabilities 98,494 69,214 65,091

Non-current liabilities Finance lease payable 1,291 – 1,291

Net assets 97,203 69,214 63,800

Representing:

Paid-in capital 61,000 16,327 (1) (16,327) 61,000 Reserves 2,023 52,887 (1) (52,887) 2,023

Equity attributable to equity holders 63,023 69,214 63,023 Minority interests 34,180 – (2) (33,403) 777

Total equity 97,203 69,214 63,800

Notes:–

(1) The adjustments represent reversal of the audited account balances of Fulilong and elimination of paid-in capital and reserves of Fulilong as at 31 March 2006. As Fulilong becomes a 51% owned subsidiary of the Company since 30 December 2005, its balance sheet has been consolidated into the unaudited consolidated balance sheet of the Group as at 30 June 2006.

(2) The adjustments represent (i) the consideration of RMB33,402,972 to be paid for the Acquisition which is to be financed by internal cash resources of RMB18,402,972 and new short-term bank borrowings of RMB15,000,000; and (ii) elimination of minority interest of Fulilong recorded in the unaudited consolidated balance sheet of the Group as at 30 June 2006.

– 143 – APPENDIX 3 UNAUDITED PRO-FORMA FINANCIAL INFORMATION

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF TIANJIN TEDA BIOMEDICAL ENGINEERING COMPANY LIMITED

Horwath Hong Kong CPA Limited 2001 Central Plaza 18 Harbour Road Wanchai, Hong Kong Telephone : (852) 2526 2191 Facsimile : (852) 2810 0502 [email protected] www.horwath.com.hk

28 August 2006

We report on the unaudited pro forma consolidated balance sheet of Tianjin TEDA Biomedical Engineering Company Limited (the “Company”) and its subsidiaries (the “Group”) including Guangdong Fulilong Compound Fertilizers Company Limited (廣東福利龍複合肥有限公司)(“Fulilong”), a 51% owned subsidiary of the Company since 30 December 2005, which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of the remaining 49% interest in Fulilong might have affected the financial information of the Group presented, for inclusion as Appendix 3 of the circular dated 28 August 2006 (the “Circular”). The basis of preparation of the unaudited pro forma consolidated balance sheet is set out on page 142 of the Circular.

Respective responsibilities of directors of the Company and reporting accountants

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma consolidated balance sheet in accordance with paragraph 7.31 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 7.31 (7) of the GEM Rules, on the unaudited pro forma consolidated balance sheet and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma consolidated balance sheet beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with the source documents,

– 144 – APPENDIX 3 UNAUDITED PRO-FORMA FINANCIAL INFORMATION considering the evidence supporting the adjustments and discussing the unaudited pro forma consolidated balance sheet with the directors of the Company. The engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma consolidated balance sheet has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma consolidated balance sheet as disclosed pursuant to paragraph 7.31 (1) of the GEM Rules.

The unaudited pro forma consolidated balance sheet is for illustrative purpose only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 30 June 2006 or any future date.

Opinion

In our opinion:

• the unaudited pro forma consolidated balance sheet has been properly compiled by the directors of the Company on the basis stated;

• such basis is consistent with the accounting policies of the Group; and

• the adjustments are appropriate for the purposes of the unaudited pro forma consolidated balance sheet as disclosed pursuant to paragraph 7.31 (1) of the GEM Rules.

Yours faithfully, For and on behalf of Horwath Hong Kong CPA Limited Certified Public Accountants Hong Kong

Chan Kam Wing, Clement Director Practising Certificate number P02038

– 145 – APPENDIX 3 UNAUDITED PRO-FORMA FINANCIAL INFORMATION

INDEBTEDNESS

Borrowings

As at 30 June 2006 (the latest practicable date for this statement of indebtedness prior to printing of this Circular), the Group had total short-term bank borrowings of RMB104,400,000.

Securities and guarantees

As at 30 June 2006, the Group had been granted short-term credit facilities of RMB114,400,000 by local banks, of which RMB104,400,000 were utilised at the same date. The bank borrowings of RMB100,000,000 were secured by corporate guarantees provided by Tianjin TEDA Guarantee Co Ltd, an independent third party. The bank borrowings of RMB900,000 were secured by corporate guarantees provided by the Company. The remaining bank borrowings of RMB13,500,000 were secured by the buildings and inventories owned by Fulilong, land use rights owned by an unrelated party and personal guarantees by two directors of the Company to the extent of RMB13,500,000.

Contingent liabilities

As at 30 June 2006, the Group had no material contingent liabilities.

Commitments

As at 30 June 2006, the Group had operating lease commitments of approximately RMB9,437,000 in respect of rental premises and capital commitments of approximately RMB3,643,000 in respect of acquisition of property, plant and equipment, which were not provided for in the Group’s unaudited pro forma consolidated balance sheet.

Disclaimers

To the best knowledge of the Directors, save as aforesaid or as otherwise disclosed herein and apart from intra-group liabilities, none of the companies in the Group had outstanding mortgages, charges, debentures, or other loan capital, loans or other similar indebtedness or acceptance credits or hire purchase commitments or any guarantees or other material contingent liabilities as at the close of business on 30 June 2006.

The Directors have confirmed that, save as disclosed above, there has not been any material change in the indebtedness and contingent liabilities of the Group since 30 June 2006.

– 146 – APPENDIX 3 UNAUDITED PRO-FORMA FINANCIAL INFORMATION

WORKING CAPITAL

As at the Latest Practical Date, the Group has cash and bank balances of approximately RMB19 million and has been granted short-term credit facilities of RMB214,400,000 by local banks, of which RMB104,400,000 were utilised at the same date. The unutilised credit facilities of RMB110 million together with the cash and bank balances of RMB19 million should be able to settle the consideration of the Acquisition of RMB33,402,972. The existing credit facilities of the Group of RMB200 million are granted for one year since 25 August 2006 whereas the remaining facilities of RMB14.4 million are granted for various periods until June 2007. Accordingly, the Directors are of the opinion that the Group will, following the completion of the Acquisition, have sufficient working capital for their present requirements, that is for at least 12 months from the date of publication of this Circular, in the absence of unforeseeable circumstances.

MATERIAL ADVERSE CHANGE

The Directors confirm that (i) there has been no material adverse change in the financial or trading position of the Group since 31 December 2005, the date to which the latest audited financial statements of the Group were made up; and (ii) there has been no material adverse change in the financial or trading position of Fuilong since 31 March 2006, the date to which the latest audited financial statements of Fulilong were made up.

– 147 – APPENDIX 4 GENERAL INFOMRATION

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:

(a) the information contained in this circular is accurate and complete in all material respects and not misleading;

(b) there are no other matters the omission of which would make any statement in this circular misleading; and

(c) all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

2. DISCLOSURE OF INTERESTS

(a) Directors’, supervisors’ and chief executive’s interests in the shares of the Company

As at the Latest Practicable Date, the interest of the directors of the Company and their respective associates in the Company and its associated corporations (within the meaning of Part XV of the SFO) were as follows:

Long position in the ordinary shares of RMB0.1 each of the Company:

Number of the shares of the Company held and nature of interests Percentage of the issued share Personal Family Corporate Other Total capital (note)

Director

Xie Kehua 9,000,000 –––9,000,000 1.48%

Note: All represented domestic shares of the Company

Save as disclosed in this paragraph, as at Latest Practicable Date, none of the Directors or the supervisors or the chief executive of the Company had any interest in any securities and underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which are required (a) to be notified to the Company and the Stock Exchange pursuant to

– 148 – APPENDIX 4 GENERAL INFOMRATION

Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) or otherwise notified to the Company and the Stock Exchange pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules relating to securities transactions by directors to be notified to the Company and the Stock Exchange.

(b) Substantial Shareholders

As at the Latest Practicable Date, the following persons (other than the Directors and the supervisors of the Company) had interests and short positions in the shares and underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company pursuant to Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept under Section 336 of the SFO:

Long position in the ordinary shares of RMB0.1 each of the Company:

Number of Percentage Name of ordinary of the issued Shareholders Capacity shares share capital

Tianjin TEDA Beneficial owner 234,000,000 38.36% International (Note 1) Incubator

Dai Shi Hua Beneficial owner 32,180,000 5.28% (Note 2)

Notes:

1. All represented domestic shares of the Company.

2. All represented H shares of the Company.

Save as disclosed above, as at the Latest Practicable Date, the Directors were not aware of any other person (other than the Directors and the supervisors of the Company) who had any interest and short position in the shares and underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company pursuant to Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept under Section 336 of the SFO and/or were directly or indirectly interested in 10% or more of the issued share capital carrying rights to vote in all circumstances at general meetings of the Company and any other member of the Group.

– 149 – APPENDIX 4 GENERAL INFOMRATION

3. COMPLETING INTERESTS

As at the Latest Practicable Date, none of the Directors or the management shareholders (as defined in the GEM Listing Rules) of the Company or their respective associates competes or may compete with the business of the Group or has or may have any other conflicts of interest with the Group required to be disclosed pursuant to the GEM Listing Rules.

4. LITIGATION

None of the members of the Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors or the Company to be pending or threatened by or against any member of the Group.

5. SERVICE CONTRACTS

Except for, Mr. Guan Tong and Mr. Zhang Songhong, each of the Directors and the supervisors of the Company has entered into a service contract with the Company for an initial term of three years commencing from 1 January 2005 and, subject to the approval at the shareholders’ meeting of the Company, be renewed each time for further three years. For Mr. Guan Tong and Mr. Zhang Songhong, their service contracts commenced initially from 22 September 2005 and 16 June 2006 respectively and both will expire on 31 December 2007 and, subject to the approval at the shareholders’ meeting of the Company, be renewed for further three years.

6. QUALIFICATION OF EXPERTS

(a) The followings are the qualifications of the experts who have given opinions or advice which are contained in this circular.

Name Qualifications

Hantec Capital Limited Licensed corporation under the SFO

Horwath Hong Kong CPA Limited Certified Public Accountants

Times-Highland Law Firms Licensed legal advisers on PRC laws

(b) As at the Latest Practicable Date, none of Hantec Capital Limited, Horwath Hong Kong CPA Limited and Times-Highland Law Firm had any shareholding directly or indirectly in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for any securities in any member of the Group.

– 150 – APPENDIX 4 GENERAL INFOMRATION

(c) As at the Latest Practicable Date, none of Hantec Capital Limited, Horwath Hong Kong CPA Limited and Times-Highland Law Firm had any direct or indirect interest in any assets which had been acquired or disposed of by, or leased to, or which were proposed to be acquired or disposed of by, or leased to, any member of the Group since 31 December 2005, the date to which the latest published audited consolidated financial statements of the Group were made up.

7. CONSENTS

Hantec Capital Limited, Horwath Hong Kong CPA Limited and Times-Highland Law Firm have given and have not withdrawn their written consents as to the issue of the circular with the inclusion herein of their respective opinions or letters or reports and/or reference to their names, opinions or letters or reports in the form and context in which they respectively appear.

8. PARTICULARS OF THE DIRECTORS AND THE SUPERVISORS

The particulars of the existing Directors and supervisors of the Company are set out as follows:

Executive Directors

Mr. Wang Shuxin (王書新先生), aged 41, is the Chairman of the Board of Directors of the Company and its subsidiaries and is responsible for the Company’s strategic planning and business development. Mr. Wang was instrumental in the establishment of Tianjin TEDA International Incubator (天津泰達國際創業中心) (“TTII”) in April 1996 and has been the legal representative of Tianjin TEDA Institute of Biomaterials and Medical Engineering (天津開發區泰達生物材料與醫學工程研究所) (“IBME”) since January 1998. He was appointed as Chairman of the Board of Directors of the Company in September 2000, Mr. Wang graduated from Tianjin University (天津大學) in 1988 with a master’s degree in Organic Chemical Engineering (有機化工專業). In February 1999, he obtained a post-graduate qualification in accounting from Tianjin Financial Institute of Finance and Economic (天津財經學院). In 1997, Mr. Wang participated in the commercialization of the technology relating to clinical catheters. He subsequently became involved in the establishment of IBME in January 1998 and received one of the Ten Outstanding Youth awards (十大傑出青年) in 1998. In 1999, Mr. Wang led the establishment of an enterprise postdoctoral research workstation in Tianjin Economic-Technological Development Area (天津經濟技術開發區). Mr. Wang has been the supervisor of TTII since 1996 and has held the position of Chairman of TTII since December 1997.

Mr. Xie Kehua (謝克華先生), aged 49, is the director and general manager of Tianjin Alpha Health Care Products Co., Ltd. (天津阿爾發保健品有限公司) (“Alpha”). Mr. Xie graduated from Chinese Traditional Medicine Department of Heilongjiang Institute of Commerce (黑龍江商學院中藥系) in July 1982 with a bachelor degree. Mr. Xie was appointed as the chief engineer of the Chinese medicine factory (中藥制

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藥廠) under the Tianjin Chinese Medicine Group (天津中藥集團) and was the supervisor of Hangzhou Wahaha Group Research and Development Centre (杭州娃哈哈集團科研開發中心). He was awarded the Best Scholar of New Products (新品狀元) and became leader of the Initiation of Technology Development (新品開發帶頭人) in 1992 and was further recognized as a senior engineer in 1995. Mr. Xie was appointed as one of the first directors and the first manager of Alpha in August 1994. Mr. Xie was appointed as an executive Director in September 2000.

Mr. Zhang Songhong (張松鴻先生), aged 44, received his education in the People’s Republic of China (the “PRC”). He worked in various governmental authorities in Shenzhen, the PRC during the period from September 1985 to December 1995. Mr. Zhang has been the chairman of the board of directors of Fulilong. Since the end of 2005, 4 January and 15 June 2006, Mr. Zhang has been re-appointed as a director of Fulilong and appointed as the chief executive and the executive Director of the Company respectively. On 10 August 2006, Mr. Zhang resigned as the chief executive of the Company.

Non-executive Directors

Mr. Feng Enqing (馮恩慶先生), aged 47, graduated from Tianjin Industrial University (天津工業大學) in 1982 with a degree in textile chemical engineering (紡織化學工程) and joined TTII as the project manager in 1996. He was previously the supervisor and chief engineer of Tianjin Xingang Textile Manufacture (天津新港紡織廠). Mr. Feng is a director of Alpha and the chief engineer of TTII. He joined the Company in September 2000.

Mr. Xie Guangbei (謝光北先生), aged 51, graduated from Nankai University in 1993 with a master’s degree in Economics. In 1998, he was granted a MBA degree from Rensselaer Polytechnic Institute in Troy, New York, US. He is the investment and financial consultant of the Office of Residential Property Commercialization headed by the Ministry of Construction. He is also the vice chairman and president of Tianjin Securities Investment Consulting Company Limited (天津證券投資諮詢有限公司). He was an engineer of the Business Department of China Shizheng Huabei College of Design (中國市政華北設計院計畫經營處), director and deputy general manager and senior engineer of Tianjin Eastern International Engineering Consultancy (天津東方國際工程諮詢). He joined the Company as an independent supervisor of the Company in November 2000 and was appointed as a non-executive Director in November 2003.

Mr. Liu Zhenyu (劉振宇先生), aged 33, graduated from the Bachelor of Laws programme of 天津師範大學 (Tianjin Normal University) in 1995. He then undertook postgraduate study in Economic and Finance at Nankai University (南開大學) and was awarded the Master of Economics in 2001. From November 2000 to June 2002, he worked as project manager of the Investment and Development Department of Tianjin TEDA Group Company Limited (天津泰達集團有限公司). Currently, he is the Deputy Manager of Asset Management Department of Tianjin TEDA Investment (Holding) Company Limited (天津泰達投資控股有限公司) and a director of 天津泰達股份有限公司. Mr. Liu jointed the Company as a non-executive Director in November 2003.

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Independent non-executive Directors

Professor Xian Guoming (冼國明教授), aged 54, is a professor of Nankai University and the tutor of candidates pursuing the doctoral degree. He is the head of the Teda Faculty of Nankai University, and the director of Research Center of Multi-national Corporations of Nankai University. Professor Xian also acts as the deputy secretary of China Academy of Global Economics, and as an independent director of Yifangda Funds Management Company and Nankai Gede Co., Ltd. He specializes in research on international investments by multi-national corporations. He was appointed as an independent non-executive Director in August 2001.

Mr. Guan Tong (關彤先生), aged 38, graduated from the Enterprise Management Faculty (企業管理系) of Nankai University (南開大學) of the PRC in 1993. He was appointed as an accountant of Tianjin Zhonghuan Industrial and Development Company (天津中環實業開發公司) from 1991 to 1997 and as a Financial Manager of Tianjin LG Electronic Company Limited (天津LG電子有限公司) from 1997 to 1999. Mr. Guan became a qualified PRC Certified Public Accountant in July 2001 and a PRC qualified valuer in October 2003. During the period from 1999 to 2004, Mr. Guan worked with Tianjin Tiandi Certified Public Accountants (天津天地會計師事務所) involving in the audit work of various types of domestic and foreign investment enterprises and in asset valuation. He also participated in the auditing work of a private enterprise in Tianjin which was applying for its shares to be listed on the Singapore Exchange Securities Trading Limited in Singapore. From September 2004, Mr. Guan works with Tianjin Star Point Certified Public Accountants (天津起點會計師事務所) as audit manager.

Supervisor

Mr. Yuen Wei (袁偉先生), aged 55, graduated from the Tianjin School of Chinese Traditional Medicine (天津中藥學校) in 1975. He previously held the position of head of quality control at the Tianin Chinese Medicine Plant (中藥製藥廠) before joining Alpha in August 1994. He is currently the administrative officer (辦公室主任) of Alpha. Mr. Yuan was appointed as a supervisor of the Company in September 2000.

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Independent supervisors

Mr. Zhu Gang (祝剛先生), aged 41, graduated from Tianjin University in 1993 with a master’s degree in Management Engineering. He is a certified public accountant in PRC and obtained PRC registration in account and securities auditing in 1999. Mr. Zhu was the president of Tianjin Chuangxin Investment Management Co. (天津創新投資管理公司) and was employed as the general manager of Tianjin Songde Certified Public Accountants (天津松德會計師事務所) in 1997 and has considerable experience in accounting and management finance. Mr. Zhu was appointed as an independent supervisor of the Company in September 2000.

Saved as disclosed above, all Directors and supervisors of the Company did not hold any position in other companies listed on GEM or the Stock Exchange or any other subsidiary of the Company for the last three years.

The business address of Mr. Wang Shuxin, Mr. Xie Kehua, Mr. Zhang Songhong, Mr. Feng Enqing and Mr. Xie Guangbei is 9th Floor, Block A2, Tianda High-Tech Park, No. 80 The 4th Avenue, TEDA, Tianjin, the PRC. The business address of the other Directors and the other supervisors of the Company is as follows:

Name Business address

Mr. Liu Zhenyu 4th Floor, Block B Investment Service Centre, No. 19 Hong Da Street, TEDA Tianjin, the PRC

Professor Xian Guoming TEDA College, Nan Kai University No. 23 Hong Da Street, TEDA Tianjin, the PRC

Mr. Guan Tong Unit H, 15th Floor TEDA Building, No. 256, Je Fang Nan Lu He Xi District Tianjin, the PRC

Mr. Yuan Wei Block D3, Tianda High-Tech Park, No. 80 The 4th Avenue, TEDA Tianjin, the PRC

Mr. Zhu Gang 2nd Floor, North Block Xin Jin Long Building No. 21 Wei Jin Nan Road He Xi District Tianjin, the PRC

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9. MATERIAL CONTRACTS

The following contracts, not being contracts entered into in the ordinary course of business, had been entered into by members of the Group, within two years immediately preceding the date of this circular which may be material:

(i) a Processing Agreement entered into between Fulilong and Shaanxi Xing Fu dated 30 September 2004 pursuant to which Shaanxi Xing Fu processed the nitro-compound fertilizers under the “Fulilong” brand for Fulilong;

(ii) a Sole Agent Agreement entered into between Fulilong and Shandong TEDA dated 31 March 2005 pursuant to which Fulilong authorised Shandong TEDA as its sole agent within the PRC for the compound fertilizers and the fertilizers for specific purpose produced by Fulilong in Dongguan, Guangdong province and Shaanxi province, the PRC under all brand names for a term of three years commencing from 1 April 2005;

(iii) a Lease entered into between Fulilong and 揭陽市西馬複合肥有限公司 (Jieyang Xima Compound Fertilizer Company Limited#) (“Jieyang Xima”) dated 10 May 2005 pursuant to which a production line with an annual production capacity of 50,000 tonnes of compound fertilizer was leased by Fulilong to Jieyang Xima for a term of one year from 1 July 2005 to 30 June 2006;

(iv) a Lease entered into between Fulilong and 信陽市金地複合肥有限公司 (Xingyang Jinde Compound Fertilizer Company Limited#) (“Xingyang Jinde”) dated 12 June 2005 pursuant to which a production line with an annual production capacity of 50,000 tonnes of compound fertilizer was leased by Fulilong to Xingyang Jinde for a term of one year from 1 July 2005 to 30 June 2006;

(v) a Mortgage entered into between Fulilong and Guangdong Development Bank, Dongguan Branch (“GDBDB”) dated 29 June 2005 pursuant to which Fulilong mortgaged office and production plant in favour of GDBDB as security for the repayment of the loan granted under the Loan Agreement referred to as item (vi) below;

(vi) a Loan Agreement entered into between Fulilong and GDBDB dated 30 June 2005 pursuant to which GDBDB granted a loan of RMB3,500,000 to Fulilong repayable on 28 June 2006;

(vii) a Cooperation Agreement entered into between Fulilong and Guizhou Chemical dated 25 June 2005 for the establishment of a production base with an annual capacity of 200,000 tonnes of highly concentrated urine based compound fertiltizer (尿基複合肥);

(viii) an Exclusive Selling Agreement entered into between Fulilong and Guizhou Chemical dated 25 July 2005 pursuant to which Guizhou Chemical granted an exclusive selling right to Fulilong for the high concentrated compound fertilizers produced by Guizhou Chemical for a term of three years from 30 May 2006 to 30 May 2009;

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(ix) an Equity Transfer Agreement entered into between the Company and Lei Yu Hua dated 15 September 2005 for the disposal of 70% of the Company’s equity interests in 天津益生生物工程有限公司 (Tianjin Yisheng Bioengineering Company Limited#) to Lei Yu Hua;

(x) the Subscription Agreement entered into between the Company, the then existing shareholders of Fulilong and Fulilong dated 3 October 2005 pursuant to which the Company conditionally agreed to subscribe for 51% equity interests in the registered capital (as enlarged by the Company’s subscription) of Fulilong at a consideration of RMB32.5 million;

(xi) an undated Loan Agreement entered into between the Company and China Construction Bank, TEDA Branch (“CCBTB”) pursuant to which CCBTB granted a loan of RMB30,000,000 to the Company repayable on 19 January 2007;

(xii) an undated Loan Agreement entered into between the Company and CCBTB pursuant to which CCBTB granted a loan of RMB23,000,000 to the Company repayable on 29 April 2007;

(xiii) a Maximum Facility Moveable Property Pledging Contract entered into between Fulilong and Guangdong Development Bank, Dongguan Gaobu Sub-branch (“GDBDGSB”) dated 19 May 2006 pursuant to which Fulilong pledged certain finished products and raw materials to GDBDGSB as security for the maximum facility of RMB10,000,000 granted by GDBDGSB to Fulilong;

(xiv) a Maximum Facility Guarantee Contract entered into between Mr. Zhang Songhong and Mr. Wang Shuxin and GDBDGSB dated 19 May 2006 pursuant to which Mr. Zhang Songhong and Mr. Wang Shuxin gave guarantee in favour of GDBDGSB as security for the maximum facility of RMB13,500,000 granted by GDBDGSB to Fulilong;

(xv) a Maximum Facility Pledging Contract entered into between Fulilong and GDBDGSB dated 22 May 2006 pursuant to which Fulilong pledged the buildings owned by Fulilong and the land use rights owned by an unrelated party to GDBDGSB as security for the maximum facility of RMB3,500,000 granted by GDBDGSB to Fulilong;

(xvi) the Equity Transfer Agreement;

(xvii) a Supplemental Agreement to the Equity Transfer Agreement entered into between the Company, Wan Tai, the other shareholders of Fulilong and Fulilong dated 16 August 2006 pursuant to which the last date for fulfillment of the conditions stated in the Equity Transfer Agreement was extended from 30 September 2006 to 31 October 2006; and

(xviii) an agreement entered into between the Company and CCBTB dated 25 August 2006 pursuant to which CCBTB agrees to grant a facility of not exceeding RMB200 million to the Company.

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10. MISCELLANEOUS

(a) The registered office of the Company is situated at No. 12 Tai Hua Road, The 5th Avenue, TEDA, Tianjin, PRC. The head office and principal place of office of the Company in the PRC and in Hong Kong are situated at (i) 9th Floor, Block A2, Tiande High Tech Park, No.80 The 4th Avenue, TEDA, Tianjin, PRC; and (ii) Suites 1501-1503, 15th Floor, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong respectively while the Hong Kong Branch share registrar and transfer office of the Company is Computershare Hong Kong Investors Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

(b) The company secretary and qualified accountant of the Company is Mr. Ng Ka Kuen, Raymond (吳嘉權先生), CPA and the compliance officer of the Company is Mr. Wang Shuxin (王書新先生) who is also the chairman and an executive Director of the Company.

(c) The Company has established an audit committee with written terms of reference in compliance with the GEM Listing Rules. The primary duties of the audit committee are to review the Company’s annual report and accounts, half-year reports and quarterly reports and to provide advice and comments thereon to the Board and supervise the financial reporting process and internal control system of the Company. As at the Latest Practicable Date, the audit committee has two members comprising the two independent non-executive Directors, namely, Professor Xian Guoming and Mr. Guan Tong.

(d) There is no contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date in which any director or supervisor is materially interested and which is significant in relating to the business of the Group.

(e) Save as disclosed in this circular, none of the directors and supervisors of the Company is interested in any assets which have been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2005, the date to which the latest published audited accounts of the Company were made up.

(f) The Directors believe that there has been no material adverse change in the financial or trading position or prospects of the Company or its subsidiaries since 31 December 2005.

(g) The remuneration payable to and benefits in kind receivable by the Directors will not be varied in consequence of the Acquisition.

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11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of F. Zimmern & Co. during normal business hours at Suites 1501-1503, 15th Floor, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong from the day of this circular up to 11 September 2006:

(i) the articles of association of the Company;

(ii) the annual reports of the Company for the two years ended 31 December 2005 and the interim report for the six months ended 30 June 2006;

(iii) the accountants’ report on Fulilong, the text of which is set out in Appendix 1 to this circular;

(iv) the letter issued by Horwath Hong Kong CPA Limited in connection with the pro forma financial information of the Group, the text of which is set out in Appendix 3 to this circular;

(v) the letters of consent from Hantec Capital Limited, Horwath Hong Kong CPA Limited and Times-Highland Law Firm referred to in the paragraph headed “Consents” in this appendix;

(vi) the circular of the Company dated 30 September 2005 regarding the discloseable transaction in respect of disposal of a subsidiary;

(vii) the circular of the Company dated 11 November 2005 regarding the very substantial acquisition in respect of the subscription of 51% equity interests in Fulilong;

(viii) the material contracts referred to in the paragraph headed “Material contracts” in this appendix;

(ix) the service contracts referred to in the paragraph headed “Service contracts” in this appendix;

(x) the letter from the Independent Board Committee dated 28 August 2006 referred to in the section headed “Letter from the independent board committee” of this circular;

(xi) the letter of advice from Hantec Capital Limited dated 28 August 2006 in relation to the Acquisition, the text of which is set out on pages 22 to 33 of this circular; and

(xii) the legal opinion of Times-Highland Law Firm dated 28 August 2006 in relation to the property interests of Fulilong.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting of Tianjin TEDA Biomedical Engineering Company Limited (the “Company”) will be held at 9th Floor, Block A2, Tianda High-Tech Park, No. 80, The 4th Avenue, TEDA, Tianjin, the People’s Republic of China (the “PRC”) at 9:00 a.m. on Friday, 13 October 2006 for the purpose of considering and, if thought fit, passing with or without modifications, the following resolution as an ordinary resolution:

“THAT:

(A) the acquisition of the remaining 49% equity interests in 廣東福利龍複合肥有限公司 (Guangdong Fulilong Compound Fertilizers Company Limited#) (“Fulilong”) for a cash consideration of RMB33,402,971.87, subject to the fulfillment of certain conditions, contemplated under the equity transfer agreement (the “Equity Transfer Agreement”) dated 25 June 2006 and entered into among the Company, the other shareholders of Fulilong and Fulilong, more details of which are contained in the circular of the Company to its shareholders dated 28 August 2006, and all other transactions as contemplated under the Equity Transfer Agreement be and are hereby approved; and

(B) the board of directors of the Company (the “Board”) be and is hereby authorised to exercise all powers of the Company and execute all documents and things and take all other steps as might in its opinion be desirable or necessary in connection with the Equity Transfer Agreement and/or transactions as contemplated under the Equity Transfer Agreement and to agree to and make such variations, amendments and waivers of any of the matters relating thereto or in connection therewith.”

By order of the Board Wang Shuxin Chairman

Tianjin, the PRC 28 August 2006

– 159 – NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

1. Any shareholders of the Company entitled to attend and vote at the meeting mentioned above is entitled to appoint one or more proxies to attend and vote at the meeting on his, her or its behalf in accordance with the articles of association of the Company. A proxy needs not be a shareholder of the Company.

2. In order to be valid, the proxy form of the holder of the H Shares of the Company and, if such proxy form is signed by a person under a power of attorney or other authority on behalf of the appointer, a notarially certified copy of that power of attorney or authority shall be deposited at Computershare Hong Kong Investor Services Limited of Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong (the “Company’s Share Registrar”) not less than 48 hours before the time for holding the meeting or 48 hours before the time appointed for taking the poll.

3. In order to be valid, the proxy form of the holder of the Domestic Shares of the Company and, if such proxy form is signed by a person under a power of attorney or other authority on behalf of the appointer, a notarially certified copy of that power of attorney or authority shall be deposited at the registered address of the Company not less than 48 hours before the time for holding the meeting or 48 hours before the time appointed for taking the poll.

4. Shareholders of the Company or their proxies shall produce documents of their proof of identity when attending the meeting.

5. The register of the shareholders of the Company will be closed from 14 September 2006 to 13 October 2006 (both days inclusive), during which no transfer of shares of the Company will be registered. As regards holders of H Shares of the Company and in order to ascertain the entitlement to attendance at the above meeting, all properly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company’s Share Registrar not later than 13 September 2006 at 4:00 pm for registration.

6. Shareholders of the Company who intend to attend the meeting mentioned above should notify in writing of their attendance by sending such notice of the Company by hand, post or fax not later than 22 September 2006.

7. The registered address of the Company and the contact details of the Company are as follows:

No. 12 Tai Hua Road, The 5th Avenue, TEDA, Tianjin, the PRC Fax No.: (8622) 5981 6909

# For identification purposes only

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