31 December 2005 (Audited) HK$000
636,288 25,462 3,437 12,736 677,923
433,645 677,510 145,941 3,560,337 1,820,845
972,116 5,030 452,186 20,184 124,807 1,574,323 246,522 924,445
CONDENSED CONSOLIDATED BALANCE SHEET (Continued) 30 June 2006
30 June 2006 (Unaudited) Notes HK$000
NON-CURRENT LIABILITIES Convertible notes Provisions 13 157,957 16,606 211,528 8,806
Total non-current liabilities

174,563

220,334

Net assets

925,394

704,111

EQUITY Equity attributable to equity holders of the parent Issued equity Equity component of convertible notes Reserves 14 965,082 22,094 (138,437) 854,159 30,281 (251,670)
848,739 Minority interests 14 76,655

632,770 71,341

Total equity
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June 2006
For the six months ended 30 June 2006 (Unaudited) Notes HK$(Unaudited) HK$000
Total equity at 1 January

689,555

Changes in equity during the period: Profit/(loss) for the period Dividend to minority interests Equity-settled share option arrangements Exercise of share options Issue of convertible notes Conversion of convertible notes Acquisition of subsidiaries Disposal of subsidiaries 131,45,005 57,322 (13,342) (391,522) (6,126) 6,708 33,791 325,694

Total equity at 30 June

658,100
Total income and expense for the period attributable to: Equity holders of the parent Minority interests 126,575 5,314 (397,006) 5,484

131,889

(391,522)
CONDENSED CONSOLIDATED CASH FLOW STATEMENT For the six months ended 30 June 2006
For the six months ended 30 June 2006 (Unaudited) HK$(Unaudited) HK$000
NET CASH INFLOW FROM OPERATING ACTIVITIES

135,144

70,429
NET CASH INFLOW/(OUTFLOW) FROM INVESTING ACTIVITIES

(53,978)

56,545
NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES

(12,220)

19,879
NET INCREASE IN CASH AND CASH EQUIVALENTS

68,946

146,853
Cash and cash equivalents at beginning of period

560,337

242,741
CASH AND CASH EQUIVALENTS AT END OF PERIOD

629,283

389,594
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of less than three months when acquired 34,384 35,797 594,899 353,797
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 30 June 2006

Accounting Policies

The condensed consolidated interim financial statements are prepared in accordance with Hong Kong Accounting Standard (HKAS) 34 Interim Financial Reporting. The accounting policies and basis of preparation adopted in the preparation of the interim financial statements are the same as those used in the annual financial statements for the year ended 31 December 2005, except in relation to the following new and revised Hong Kong Financial Reporting Standards (HKFRSs, which also include HKASs and Interpretations) that affect the Group and are adopted the first time for the current periods financial statements:

HKAS 39 Amendment HKAS 39 & HKFRS 4 Amendments HK(IFRIC)-Int 4
The Fair Value Option Financial Guarantee Contracts Determining whether an Arrangement contains a Lease
The adoption of the above new and revised HKFRSs does not have any significant impact on the Groups condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

Segment Information

The Groups operating businesses are structured and managed separately according to the nature of their operations and the products they provide. Each of the Groups business segments represents a strategic business unit that offers products which are subject to risks and returns that are different from those of the other business segments. The following tables present revenue and result for the Groups primary segments.
For the six months ended 30 June 2006
Discontinued Continuing operations Washing machine business (Unaudited) HK$000 Corporate and others (Unaudited) HK$000 Total (Unaudited) HK$000 operation Mobile handset business (Unaudited) HK$000 Total (Unaudited) HK$000
Revenue: External sales Other income and gains 1,785, 1,785,1,014,2,800,121 1,741

1,786,817

1,015,045

2,801,862

Segment results

62,891

(12,420)

50,471

(49,795)
Gain on disposal of the discontinued operation Unallocated income Finance costs Tax 2,739 (4,079) (20,662) 156,(3,517) 156,449 3,022 (7,596) (20,662)

Profit for the period

28,469

103,420

Segment Information (Continued)
For the six months ended 30 June 2005
Revenue: External sales Other income and gains 1,304,081 4,048 1,304,081 4,048 813,955 2,791 2,118,036 6,839

1,308,129

816,746

2,124,875

22,382

(8,106)

14,276

(65,710)

(51,434)
Unallocated income Finance costs Impairment of goodwill Tax

1,240 (4,417) (2,888)

175 (4,433) (321,947) (7,818)
1,415 (8,850) (321,947) (10,706)
Profit/(loss) for the period

(399,733)

Other Income and Gains
Continuing operations: Interest income Rental income Government subsidies (Note) Others 2,696 1,240 2,673 1,221 154
3,598 Discontinued operation: Interest income Rental income Sale of spare parts Others 497

2,154 64

Dividend

The directors do not recommend payment of any interim dividend for the six months ended 30 June 2006 (2005: Nil).
Earnings/(Loss) Per Share
The calculation of basic earnings/(loss) per share amounts is based on the net profit/(loss) for the period attributable to ordinary equity holders of the parent and the weighted average number of ordinary shares in issue during the period.
Earnings/(Loss) Per Share (Continued)
The calculation of diluted earnings per share amounts is based on the net profit for the period attributable to ordinary equity holders of the parent, adjusted to reflect the interest on the convertible notes, where applicable (see below). The weighted average number of ordinary shares used in the calculation is the ordinary shares in issue during the period, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential ordinary shares into ordinary shares.
Dilutive loss per share amount has not been disclosed as share options and convertible notes outstanding have anti-dilutive effects on the basic loss per share amount.
The calculations of basic and diluted earnings/(loss) per share are based on:
Earnings/(loss) Net profit/(loss) attributable to ordinary equity holders of the parent, as used in the basic earnings/(loss) per share calculation: From continuing operations From a discontinued operation 23,155 103,420 2,727 (399,733)
126,575 Interest on convertible notes (note 4)

(397,006) 4,417

Net profit/(loss) attributable to ordinary equity holders of the parent before interest on convertible notes 130,326 (392,589)
Attributable to: Continuing operations

26,906 103,420

7,144 (399,733)

Discontinued operation

130,326

(392,589)

For the six months ended 30 June 2006 (Unaudited) 2005 (Unaudited)
Shares Weighted average number of ordinary shares in issue during the period, as used in the basic earnings/(loss) per share calculation Effect of dilution weighted average number of ordinary shares: Share options Convertible notes

17,194,251,187

14,819,658,465

152,146,296 987,934,534

221,660,673 1,444,444,444

1,140,080,830

1,666,105,117

18,334,332,017

16,485,763,582
Because the diluted earnings per share amounts for net profit from continuing operations for the six months ended 30 June 2006 and 2005 are increased when taking convertible notes into account, the convertible notes had an anti-dilutive effect on the basic earnings per share amounts for profit from continuing operations and were ignored in the calculation of diluted earnings per share amounts for profit from continuing operations. Therefore, diluted earnings per share amounts for profit from continuing operations are based on the net profit attributable to ordinary equity holders of the parent attributable to continuing operations of HK$23,155,000 (2005: HK$2,727,000) and the weighted average of 17,346,397,483 (2005: 15,041,319,138) ordinary shares in issue during the year.

Net cash inflow

10,953
Property, Plant and Equipment
During the six months ended 30 June 2006, the Group incurred construction costs for production plants and purchased fixed assets of HK$5,444,000 and HK$7,852,000, respectively (2005: HK$13,336,000 and HK$14,699,000, respectively). There was no disposal of fixed assets during the six months ended 30 June 2006 (2005: HK$1,551,000).
Trade and Bills Receivables
The Group normally allows an average credit period of 30 to 90 days to its trade customers. Trade receivables are non-interest-bearing.
An aged analysis of the trade and bills receivables as at the balance sheet date, based the invoice date and net of provisions, is as follows:
30 June 2006 (Unaudited) HK$000
Trade receivables Within 1 month 1 to 2 months 2 to 3 months Over 3 months 65,925 10,806 310,244 114,645 77,899 33,803
76,731 Bills receivable 55,907

536,591 140,919

132,638

677,510

Included in the Groups trade receivables are amounts due from subsidiaries and associates of Haier Group Corporation (Haier Corp) and Qingdao Haier Investment and Development Co., Ltd. (Haier Investment) of HK$53,820,000 (31 December 2005: 485,608,000), which are repayable on similar credit terms to those offered to the major customers of the Group. Haier Corp, Haier Investment, their subsidiaries and associates (collectively the Haier Group) are companies that have certain key management personnel in common with the Company. Further details in respect of the sales to these parties are set out in note 15.

Trade and Bills Payables

An aged analysis of the trade payables as at the balance sheet date, based on the invoice date, is as follows:
Trade payables Within 1 month 1 to 2 months 2 to 3 months Over 3 months 216,820 5,602 445,144 129,504 119,850 181,473

223,388 Bills payable

875,971 96,145

223,388

972,116
Included in the Groups trade payables are amounts due to subsidiaries and associates of Haier Corp and Haier Investment of HK$213,213,000 (31 December 2005: HK$756,040,000), which are repayable on similar credit terms to those offered by major suppliers of the Group. Further details of the purchases from these related parties are set out in note 15.

Convertible Notes

On 28 January 2005, the Company issued convertible notes with an aggregate principal amount of HK$260 million to Haier BVI.
The convertible notes have a three-year term and are non-interest-bearing. Each note is convertible at any time prior to the fifth business days before 27 January 2008, at the note holders option, into the Companys ordinary shares at a conversion price of HK$0.18 per share. When the notes were issued, the prevailing market interest rate for similar notes without the conversion option was higher than the interest rate at which the notes were issued.

Convertible Notes (Continued)
The fair value of the liability component of the convertible notes was determined at the issuance date, using the prevailing market interest rate for similar debt without a conversion option of 4.75% and is carried as a long term liability. The remaining portion was allocated to the conversion option that is recognised and included in shareholders equity.
During the period, convertible notes with face value of HK$63,000,000 (2005: Nil) were converted into 350,000,000 (2005: Nil) ordinary shares of the Company. At 30 June 2006, the outstanding aggregate principal amount of the convertible notes was HK$170 million (31 December 2005: HK$233 million).
Equity Attributable to equity holders of the parent Equity component of convertibleShare option Issued equity notes reserve Reserve fund Retained profits/ Exchange Minority Total interests Total equity
(accumulated fluctuation losses) reserve
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) HK$000 At 1 January 2005 Loss for the period Dividend Exercise of share options Issue of convertible notes Acquisition of subsidiaries At 30 June 2005 352,324 6,708 445,307 804,339 HK$000 33,791 33,791 HK$000 HK$000 29,412 29,412 HK$000 127,443 (397,006 ) (269,563 ) HK$000 HK$000 509,179 (397,006 ) 6,708 33,791 445,307 597,979 HK$000 180,376 5,484 (6,126 ) (119,613 ) 60,121 HK$000 689,555 (391,522 ) (6,126 ) 6,708 33,791 325,694 658,100
At 1 January 2006 Profit for the period Equity-settled share option arrangements Exercise of share options Conversion of convertible notes Disposal of subsidiaries At 30 June 2006

854,159

30,281

59,260

(335,369 ) 126,575

24,439

632,770 126,575

71,341 5,314

704,111 131,889

45,414 65,509 965,082

(8,187 ) 22,094

409 (409 )

(3,010 ) 56,250*

3,010 (205,784)*

(13,342 ) 11,097*
409 45,005 57,322 (13,342 ) 848,739

76,655

409 45,005 57,322 (13,342 ) 925,394
These reserves accounts comprise the consolidated reserves in the condensed consolidated balance sheet.
Related Party Transactions
In addition to the related party transactions detailed in notes 9, 11, 12 and 13 to the financial statements, the Group had the following material transactions with related parties during the period.
Pegasus Qingdao and Pegasus Electronic, which were disposed of during the period (note 9), had the following material transactions with Haier Corp and Haier Investment, their subsidiaries and associate.
Sales of mobile handset products Purchases of materials Utility service fee expenses Interest expenses Interest income Other service fee expenses

(i) (ii) (iii) (iv) (iv) (v)
817,038 816,103 2,546 3,1,230
783,357 243,466 3,371 3,467 624

Notes:

The sales of mobile handset products were made at selling prices based on the costs of raw materials plus a processing fee which is not less than the industry standard.
The purchases were charged no more than the average market price or the consolidated and integrated tender and bidding price plus 2.6% commission.
Utility service fee expenses were charged with reference to the state-prescribed prices.
Interest expenses/income was determined with reference to the standard rates published by the Peoples Bank of China.
Other service fee expenses included legal consulting service fee, general security service fee, human resources service fee which were determined with reference to actual costs incurred.
Related Party Transactions (Continued)
The Companys subsidiaries, Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde Haier Electric Co., Ltd., Hefei Haier Washing Machine Co., Ltd., Qingdao Jiaonan Haier Washing Machine Co., Ltd., Foshan Shunde Haier Intelligent Electronic Co., Ltd. (collectively the Washing Machine Companies) and Qingdao Haier Electronics Sales Co., Ltd. had the following material transactions with Haier Corp, Haier Investment, their subsidiaries and associates. For the six months ended 30 June 2006 (Unaudited) Notes HK$(Unaudited) HK$000
Sales of washing machines before 28 January 2005 on or after 28 January 2005 Purchases of materials Printing and packaging fee expenses Mould charges Utility service fee expenses Logistics charges Promotion fee expenses Other service fee expenses Interest income Trademark licence fee expenses (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) 182,064 1,217,031 2,638 22,074 5,443 55,050 19,259 9,031 1,015 12,473 287,492 121,569 1,076,983 5,104 27,751 4,577 53,473 5,10,416
Notes: (vi) The sales of washing machines before 28 January 2005 comprised domestic sales made to subsidiaries and fellow subsidiaries of Haier Investment and export sales made to Haler Electrical Appliances Co., Ltd. (Haier Electrical), a subsidiary of Haier Investment. The domestic sales of washing machines were made at selling prices quoted by the subsidiaries and fellow subsidiaries of Haier Investment to third party distributors less discounts ranging from 10.5% to 17.5%. The export sales of washing machines were made at selling prices representing differences between the selling prices of washing machines mutually agreed and the selling expenses of Haier Electrical not exceeding 2.5% of the selling prices of washing machines.

The sales of washing machines on or after 28 January 2005 were made to Haier Electrical at selling prices representing differences between the selling prices of washing machines mutually agreed and the selling expenses of Haier Electrical not exceeding 2.5% of the selling prices of washing machines.
Subsequent to 28 January 2005, all domestic sales of washing machines are directly made to third party customers and are no longer transacted through the related companies.

(viii)

The purchases of materials were determined based on the lower of the average market price or the consolidated and integrated tender and bidding price plus 2.6% commission.
Printing and packaging fee expenses were determined with reference to actual costs incurred.
Moulds were charged with reference to the average market tender and bidding price.
Logistics charges were determined with reference to actual costs incurred.

(xiii)

Promotion fee expenses were determined at a rate of 1.2% of the domestic sales of washing machines.
Other service fee expenses included legal consulting service fee, catering and travel agency service fee, human resources service fee, general security service fee, product certification service fee and equipment repair and maintenance service fee which were determined with reference to actual costs incurred.
Interest income was determined with reference to the standard rates published by the Peoples Bank of China.
Trademark licence fee expenses were charged at a rate of 0.8% of certain sales made by the Washing Machine Companies.
On 25 June 2005, Haier Corp provided a corporate guarantee of RMB70,000,000 (equivalent to HK$67,308,000) to Haier Group Finance Co., Ltd. (Haier Finance), a subsidiary of Haier Corp and a financial institution approved by the Peoples Bank of China, as a security for banking facilities granted to Pegasus Qingdao for the period from 25 June 2005 to 24 June 2006. Pegasus Qingdao was disposed of to Haier BVI during the period (note 9).
On 30 December 2005, Haier Corp provided a corporate guarantee of RMB30,000,000 (equivalent to HK$28,846,000) to Haier Finance as a security for banking facilities granted to Qingdao Jiaonan Haier Washing Machine Co., Ltd. (Jiaonan Washing Machine) for the period from 30 December 2005 to 29 December 2006. Jiaonan Washing Machine borrowed RMB15,000,000 (equivalent to HK$14,423,000) from Haier Finance in December 2005 and the borrowings were fully repaid during the period.

BUSINESS REVIEW

Top loading washing machine business
The top loading washing machine business reported substantially improved results with sales of HK$1,786 million, representing an increase of 37% as compared to the first half of 2005. Gross profit margin improved from 22.4% in the first half of 2005 to 26.5% in the first half of 2006. As a result, operating profit grew substantially by 181% from HK$22 million in the first half of 2005 to HK$63 million in the first half of 2006. The strong performance was the results of our successful product positioning and marketing strategies whilst focusing effort on technology innovation, leading to higher growth in sales of high end products which generated better margins.
MANAGEMENT DISCUSSION AND ANALYSIS (Continued) BUSINESS REVIEW (Continued) Top loading washing machine business (Continued) Our environmentally friendly dual-drive washing machines, which are developed by our own R&D team and do not require the use of washing powder, in particular, recorded a robust growth in sales and established a sound reputation both domestically and internationally for its environmentally friendly, safety and energy efficient features. In recognition of its excellence in both technology and quality, our dual-drive washing machines have been awarded quality and technology certificates from international organizations in more than 10 countries. Moreover, our environmentally friendly dual-drive washing machines were awarded a golden prize in 2006 China International Patent Fair, adding another trophy to the already long list of awards we have on our washing machine products. To cope with our rapid growth in sales, a new factory with annual production capacity of approximately 1 million units was recently established in Jiaonan, Shandong Province, the PRC. Production has commenced in the fourth quarter of 2005, boasting our annual production capacity to more than 6 million units. To cater for further growth of our washing machine business, another factory with annual production capacity of approximately 1 million units is being constructed in Chongqing, the PRC and is scheduled to commence production in the fourth quarter of 2006. This will further increase our annual production capacity to more than 7 million units by the end of 2006. We will continue to leverage on our committed team of R&D professionals to focus on developing products with high level of quality, reliability and technology innovation. The Directors are confident that the top loading washing machine business of the Group will continue to perform well in the second half of 2006. Mobile handset business With competition in the PRCs mobile handset industry remained intensive and given the Haier Groups determination to transform the Group into the listed flagship of its white goods businesses, with the mobile handset business falling outside the scope of its white goods businesses, the Company entered into an agreement in April 2006 to dispose of the mobile handset business to the Haier Group for a consideration of approximately HK$420 million. The disposal was completed in June 2006, enabling the Group to focus on improving its core competencies in the white goods businesses. Moreover, resources could now be better directed to our white goods businesses with promising prospects, resulting in improved profitability in the future.

MANAGEMENT DISCUSSION AND ANALYSIS (Continued) MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS
The Company has adopted a Model Code for Securities Transactions by Directors (the Haier Electronics Model Code) on no less exacting terms than the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules. Upon enquiry by the Company, all directors of the Company have confirmed that they have complied with the required standard as set out in the Haier Electronics Model Code throughout the period of six months ended 30 June 2006.

AUDIT COMMITTEE

The Company has established an audit committee comprising three independent non-executive directors of the Company. The audit committee had reviewed with the management the accounting principles and practices adopted by the Group and discussed internal controls and financial reporting matters including the review of the unaudited condensed consolidated interim financial statements of the Group for the six months ended 30 June 2006.

APPRECIATION

I would like to take this opportunity to thank all my fellow directors and staff for their dedicated services, contributions and support during the period.
By Order of the Board Yang Mian Mian Chairman
Hong Kong, 22 September 2006
DISCLOSURE OF INTERESTS Interests of Directors As at 30 June 2006, the interests and short positions of the directors and the chief executive of the Company in the shares (the Share(s)), underlying Shares and debentures of the Company or shares, underlying shares and debentures of any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the SFO) as recorded in the register required to be kept by the Company under section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the Stock Exchange) pursuant to Part XV of the SFO or the Model Code (the Model Code) for Securities Transactions by Directors adopted by the Company on 29 December 2004, which is on no less exacting terms than The Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules, were as follows: Long positions in the underlying Shares Share options outstanding under the share option scheme adopted by the Company on 28 February 2002: Number of share options Exercise price per Date of Name of Director Mr. Wu Ke Song Mr. Chai Yong Sen Mr. Liang Hai Shan Mr. Cui Shao Hua Mr. Lam Kin Kau, Mark Mr. Fung Hoi Wing, Henry grant 19/11/2002 19/11/2002 19/11/2002 19/11/2002 16/08/2002 16/08/2002 Exercisable period 19/11/200318/11/2007 19/11/200318/11/2007 19/11/200318/11/2007 19/11/200318/11/2007 16/08/200315/08/2007 16/08/200315/08/2007 251,000,000 (206,500,000 ) 44,500,000 0.26 0.156 2,000,000 2,000,000 0.01 0.156 5,000,000 (2,500,000 ) 2,500,000 0.01 0.150 60,000,000 (50,000,000 ) 10,000,000 0.06 0.150 60,000,000 (50,000,000 ) 10,000,000 0.06 0.150 62,000,000 (52,000,000 ) 10,000,000 0.06 Share HK$ 0.150 Outstanding as at 1 January 2006 62,000,000 Exercised during the period (52,000,000 ) Outstanding as at 30 June 2006 10,000,000 Approximate percentage of total shareholding 0.06

DISCLOSURE OF INTERESTS (Continued) Interests of Directors (Continued) Save as disclosed above, as at 30 June 2006, none of the directors and the chief executive of the Company and their respective associates had any interests and short positions in the Shares, underlying Shares and debentures of the Company or shares, underlying shares and debentures of any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept by the Company under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to Part XV of the SFO or the Model Code. Interests of Substantial Shareholders As at 30 June 2006, the following shareholders (other than the directors or the chief executive of the Company) had interests or short positions in the Shares or underlyings Shares as recorded in the register required to be kept by the Company under section 336 of the SFO: Long positions in the Shares: Approximate Number of Shares Name of shareholder Qingdao Haier Collective Asset Management Association (Haier Collective Asset Management) Haier Group Corporation (Haier Corp) Qingdao Haier Investment and Development Co., Ltd. (Haier Investment) Qingdao Haier Group Holdings (BVI) Limited (Haier BVI) Deutsche Bank Aktiengesellschaft (Deutsche Bank) (4) (5) 8,497,001,486 12,145,981,486 49.07 70.15 (3) 13,633,945,930 78.74 (1) (2) 13,633,945,930 13,633,945,930 78.74 78.74 Notes interested percentage of total shareholding
DISCLOSURE OF INTERESTS (Continued) Interests of Substantial Shareholders (Continued) Short positions in the underlying Shares: Number of underlying Shares Name of Shareholder Deutsche Bank Note (5) interested 3,926,774,819 Approximate percentage of total shareholding 22.68
Long positions in the underlying Shares: Number of underlying Shares Name of shareholder Haier BVI Note (4) interested 944,444,444 Approximate percentage of total shareholding 5.45
By virtue of the SFO, Haier Collective Asset Management was deemed to be interested in (i) 3,366,000,000 Shares held by its non-wholly owned subsidiary, namely Haier Investment; (ii) 826,500,000 Shares held by Haier Investments indirect non-wholly owned subsidiary. In addition, as Haier Investment was acting in concert with Haier Corp and Haier BVI is a non-wholly owned subsidiary of Haier Corp, Haier Collective Asset Management was also deemed to be interested in an aggregate of 9,441,445,930 Shares held by Haier BVI as stated in note (4) below pursuant to the SFO.

Ms. Yang Mian Mian, Mr. Wu Ke Song, Mr. Chai Yong Sen and Mr. Liang Hai Shan, the executive directors of the Company, are also members of the board of management of Haier Collective Asset Management.
As Haier BVI is a non-wholly owned subsidiary of Haier Corp, Haier Corp was deemed to be interested in an aggregate of 9,441,445,930 Shares held by Haier BVI as stated in note (4) below pursuant to the SFO.
DISCLOSURE OF INTERESTS (Continued) Interests of Substantial Shareholders (Continued)
Furthermore, as Haier Corp was acting in concert with Haier Investment, Haier Corp was deemed to be interested in 3,366,000,000 Shares held by Haier Investment and 826,500,000 Shares held by a non-wholly owned subsidiary of Haier Investment.
Ms. Yang Mian Mian, Mr. Wu Ke Song, Mr. Chai Yong Sen and Mr. Liang Hai Shan, the executive directors of the Company, are also members of the management committee of Haier Corp.
Haier Investment was holding 3,366,000,000 Shares and was deemed to be interested in 826,500,000 Shares held by its indirect non-wholly owned subsidiary and an aggregate of 9,441,445,930 Shares held by Haier BVI as stated in note (4) below pursuant to the SFO by reason of its acting in concert with Haier Corp.
Ms. Yang Mian Mian and Mr. Cui Shao Hua, the executive directors of the Company, are also directors of Haier Investment.
Haier BVI was holding 4,526,706,667 Shares. In addition, Haier BVI was acting in concert with Deutsche Bank pursuant to an undertaking letter dated 5 January 2006 executed by Haier BVI and Deutsche Bank, pursuant to which Deutsche Bank agreed that, unless otherwise agreed and subject to the exceptions set out therein, Deutsche Bank will not sell or dispose of any of the 3,926,774,819 DB Shares (as defined in note (5) below). Accordingly, Haier BVI was deemed to be interested in the DB Shares pursuant to the SFO.
Haier BVI was also interested in 944,444,444 underlying Shares under the convertible notes as part of the consideration pursuant to an agreement dated 5 March 2004 entered into between Haier Corp, Haier Investment and the Company respectively.
Ms. Yang Mian Mian and Mr. Wu Ke Song, the executive directors of the Company, are also directors of Haier BVI.

16/08/200315/08/2007 16/08/200315/08/2007

0.156 0.156

5,000,000 2,000,000

(2,500,000 )

2,500,000 2,000,000
7,000,000 Other employees In aggregate

(2,500,000 )

4,500,000

23/01/2006

23/01/200622/01/2011

0.2134

5,000,000

(5,000,000 )

Other participants In aggregate

16/08/2002

16/08/200315/08/2007

356,500,000

(83,000,000 ) 273,500,000

607,500,000

5,000,000 (294,500,000 ) 318,000,000
SHARE OPTION SCHEME (Continued)
The vesting period of the share options is from the date of grant until the commencement of the exercisable period.
The exercise price of the share options is subject to adjustment(s) in the case of rights or bonus share issues, or other similar changes in the share capital of the Company.
No share options were lapsed or cancelled under the New Share Option Scheme during the period.
During the period, the weighted average closing price per Share as quoted on the Stock Exchange immediately before the dates on which the share options were exercised was HK$0.259 whilst the closing price per Share as quoted on the Stock Exchange immediately before the date on which the share options were granted was HK$0.213.

Haier Electronics Group Co., Ltd.

*

(Incorporated in Bermuda with limited liability)

)

: 1169
For identification purpose only

annual report 2005

Table of Contents
Mission and Corporate Development Corporate Information Chairmans Letter Directors and Senior Management Financial Review Corporate Governance Report Report of the Directors Report of the Auditors Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Balance Sheet Notes to Financial Statements Five Year Financial Summary Notice of Annual General Meeting 83 84
Haier Electronics Group Co., Ltd. annual report 2005
Mission and Corporate Development

MISSION

Haier Electronics aims to become the listed flagship of the white goods business of the Haier Group and to be a global top 3 white goods manufacturer.

CORPORATE STRUCTURE

After the injection of the top loading washing machine business and the remaining 35.5% interest in Pegasus Telecom (Qingdao) Co., Ltd. from the Haier Group in January 2005 (Asset Injection) as well as the establishment of a new plant in Jiaonan, Qingdao, our simplified corporate structure is as follows:

Washing Machine Business

Mobile Handset Business

93.44%

Hefei Haier Washing Machine Co., Ltd.
Qingdao Haier Washing Machine Co., Ltd.
Foshan Shunde Haier Electric Co., Ltd.
Pegasus Electronic (Qingdao) Co., Ltd.
Pegasus Telecom (Qingdao) Co., Ltd.
Qingdao Jiaonan Haier Washing Machine Co., Ltd.
The completion of the Asset Injection during the year has built up a solid foundation for us to proceed to the next stage of our transformation through both internal growth as well as potential further asset injection from the Haier Group. We are confident that we will succeed in achieving our mission to become a global top 3 white goods manufacturer.

Corporate Information

COMPANY NAME

AUDITORS

Ernst & Young
BOARD OF DIRECTORS Executive Directors
YANG Mian Mian (Chairman) WU Ke Song (Deputy Chairman) CHAI Yong Sen LIANG Hai Shan CAO Chun Hua CUI Shao Hua SONG Chun Guang

FINANCIAL YEAR END

December 31

REGISTERED OFFICE

Canons Court 22 Victoria Street Hamilton HM12 Bermuda
Independent Non-executive Directors
LAM Kin Kau, Mark FUNG Hoi Wing, Henry LAU Ho Wai, Lucas WU Yinong
HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS
Unit 3513 35/F., The Center 99 Queens Road Central Hong Kong
PRINCIPAL BOARD COMMITTEES Audit Committee
LAM Kin Kau, Mark (Chairman) FUNG Hoi Wing, Henry LAU Ho Wai, Lucas WU Yinong
BRANCH SHARE REGISTRAR AND TRANSFER OFFICE IN HONG KONG
Tengis Limited 26/F., Tesbury Centure 28 Queens Road East Hong Kong

Remuneration Committee

FUNG Hoi Wing, Henry (Chairman) LAM Kin Kau, Mark LAU Ho Wai, Lucas WU Yinong WU Ke Song CUI Shao Hua

TELEPHONE NUMBER

FAX NUMBER COMPANY SECRETARY

Yip Wai Ming +0880

STOCK CODE SOLICITORS
Mallesons Stephen Jaques 01169
WEBSITE PRINCIPAL BANKER IN HONG KONG
Nanyang Commercial Bank, Ltd. www.haier-elec.com.hk
PRINCIPAL BANKER IN THE PRC
China Construction Bank Corporation

Chairmans Letter

OVERVIEW
With an overhaul in the corporate structure and direction of the Group, the year 2005 will be remembered as a year of historical milestone of the Group. On 28 January 2005, the Group completed the acquisition of the top loading washing machine business and remaining 35.5% equity interest in Pegasus Telecom (Qingdao) Co., Ltd. (the Asset Injection) from Haier Group Corporation and Qingdao Haier Investment and Development Co., Ltd. (together with their respective subsidiaries, excluding the Group, the Haier Group). As the Asset Injection was mainly satisfied by the issue of new shares, the Haier Group has thereby become the controlling shareholder of the Group and the name of the Company was also changed from Haier-CCT Holdings Limited to Haier Electronics Group Co., Ltd. with effect from 31 January 2005.
This is expected to be the first in a series of steps being undertaken by the Haier Group to position the Company as the listed flagship of the Haier Groups white goods business. Our long term goal is to become a global top 3 white goods manufacturer and we believe that the Asset Injection has built up a solid foundation for the Group to achieve such mission.

Directors and Senior Management (contd)
EXECUTIVE DIRECTORS (contd)
Mr. CUI Shao Hua*, aged 48, has served as an Executive Director of the Company since November 2002 and is a member of the remuneration committee of the Company. He is responsible for the Groups corporate finance function. He graduated from Jilin Institute of Finance and Commerce, the PRC in 1982. He joined the Haier Group in 1993 and has over 20 years of experience in financial management and listed companies operations. He is also a Deputy Chairman of the A Share Company. The appointment of Mr. Cui will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance with the Bye-laws. Mr. Cui is not entitled to any fixed remunerations but is entitled to payment of discretionary bonus to be determined by the Board. As at the Latest Practicable Date, Mr. Cui is holding 10,000,000 options to subscribe for 10,000,000 shares in the Company at an exercise price of HK$0.150 per share. The options were granted on 19 November 2002 and are exercisable at any time between 19 November 2003 and 18 November 2007. Save as disclosed above, he does not have any other interests in the shares of the Company within Part XV of the SFO. Mr. Cui does not have any relationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and save as disclosed above, there are no other matters that need to be brought to the attention of shareholders. Mr. SONG Chun Guang, aged 41, has served as an Executive Director of the Company since January 2005. He is now a Deputy General Manager and the Sales Director of the Groups mobile handset business. He obtained a Bachelors degree of Engineering from Tianjin Industrial and Engineering College, the PRC in 1988. He joined the Haier Group in 1995 and has extensive experience in both washing machine business and mobile handset business.
INDEPENDENT NON-EXECUTIVE DIRECTORS
Mr. LAM Kin Kau, Mark*, aged 51, has served as an Independent Non-executive Director of the Company since April 2000 and is a member of both the audit committee and the remuneration committee of the Company. He is a fellow of the Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Secretaries and Administrators. He has been a practising accountant for over 20 years and is a director of various private companies. The appointment of Mr. Lam will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance with the Bye-laws. The emolument of Mr. Lam comprise a basic directors fee of HK$20,000 per month and a discretionary bonus to be determined by the Board which is determined by taking into account the experience of Mr. Lam and by reference to market range of the directors fee of independent non-executive directors for other listed companies of comparable size. As at the latest practicable date, Mr. Lam is holding 2,500,000 options to subscribe for 2,500,000 shares in the Company at an exercise price of HK$0.156 per share. The options were granted on 16 August 2002 and are exercisable at any time between 16 August 2003 and 15 August 2007. Save as disclosed above, he does not have any other interests in the shares of the Company within Part XV of the SFO. Mr. Lam does not have any relationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and save as disclosed above, there are no other matters that need to be brought to the attention of shareholders.

For the year ended 31 December 2005, turnover of the mobile handset business amounted to HK$1,629 million, representing a decrease of 48% from the year 2004. Competition remained intensive due to over capacity in the industry, price cutting strategy adopted by foreign branded manufacturers and the flood of illegal handsets into the PRC market which forced a majority of the domestic branded manufacturers to clear their inventories by cutting prices. These had adversely impacted the Group, and lead to a drop in volume and increase in provisions for doubtful debts and inventories. These resulted in an operating loss of HK$139 million in 2005, as compared to an operating profit of HK$47 million in the year 2004. In view of the intense competition in the mobile handset market in the PRC, during the year, the Board had conducted a review and decided to write off the entire amount of goodwill attributable to the Groups acquired interest in the mobile handset business, which resulted in an impairment loss of HK$322 million in 2005. The impairment loss had already been included in the Groups interim results for the six months ended 30 June 2005 announced on 23 September 2005.
LIQUIDITY AND FINANCIAL RESOURCES
The Group has maintained a healthy financial and liquidity position with a current ratio of 116% at 31 December 2005 (2004: 119%). As at 31 December 2005, the Group had a cash balance of HK$560 million (2004: HK$243 million), total bank and other loans of approximately HK$125 million (2004: HK$147 million) and zero-coupon 3-year convertible notes (Convertible Notes) with a face value of HK$233 million and a liability element of HK$212 million (2004: Nil). The Convertible Notes were issued to the Haier Group as part consideration for the Asset Injection, and are convertible into ordinary shares of the Company at HK$0.18 per share. During the year, 150,000,000 new shares were issued upon part conversion of the Convertible Notes. All the other borrowings of the Group were arranged on a short-term basis for working capital purposes, and were denominated in Renminbi, repayable within one year and bore interest at floating rates. Due to our focus on cash flow management, the Group has been able to generate a net cash inflow from operating activities of HK$350 million in 2005 despite a substantial loss being reported. The Group also has a very healthy cash position with a net cash balance (cash balance less borrowings) of HK$224 million as at 31 December 2005. There is no material effect of seasonality on the Groups borrowing requirements. The Group had contracted capital commitments amounting to HK$3 million as at 31 December 2005, which were mainly related to purchase of machinery for the expansion in production capacity of the Groups washing machines business.

DIRECTORS AND SENIOR MANAGEMENTS BIOGRAPHIES
Biographical details of the directors of the Company and the senior management of the Group are set out on pages 9 to 11 of this annual report.
DIRECTORS SERVICE CONTRACTS
During the year, no director had a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.
DIRECTORS INTERESTS IN CONTRACTS
No director had a material interest, either directly or indirectly, in any contract of significance to the business of the Group to which the Company, or its holding company, or any of its subsidiaries or fellow subsidiaries was a party during the year.
DIRECTORS INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES
At 31 December 2005, except for the interests in share options of the Company as disclosed in note 32 to the financial statements, none of the Directors has any interests and short positions in the ordinary share(s) (Share(s)) or underlying shares of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the SFO)), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO, or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the Stock Exchange) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 of the Listing Rules.
DIRECTORS RIGHTS TO ACQUIRE SHARES OR DEBENTURES IN THE COMPANY
Save as disclosed in note 32 to the financial statements regarding the share option scheme of the Company, at no time during the year were rights to acquire benefits by means of the acquisition of Shares in or debentures of the Company granted to any director of the Company or their respective spouse or minor children, or were any such rights exercised by them; or was the Company, its holding company, or any of its subsidiaries or fellow subsidiaries a party to any arrangement to enable the directors of the Company to acquire such rights in any other body corporate.

SUBSTANTIAL SHAREHOLDERS INTERESTS IN SHARES AND UNDERLYING SHARES
As at 31 December 2005, the following shareholders interested in 5% or more of the issued shares and/or underlying shares of the Company were recorded in the register of substantial shareholders required to be kept by the Company pursuant to Section 336 of the SFO: Long positions in Shares: Approximate percentage of the Companys issued share capital 56.63
Name Qingdao Haier Group Holdings (BVI) Limited

Notes 1

Number of Shares interested 4,176,706,667 3,970,294,819
Number of Shares under equity derivatives 1,294,444,444
Nature of interests Beneficial owner Interests of parties acting in concert Interests of controlled corporation Interests of parties acting in concert
Total number of Shares interested 9,441,445,930

Haier Group Corporation

9,441,445,930

13,633,945,930

4,192,500,000
SUBSTANTIAL SHAREHOLDERS INTERESTS IN SHARES AND UNDERLYING SHARES (contd)
Long positions in Shares: (contd) Approximate percentage of the Companys issued share capital 81.78
Name Qingdao Haier Investment and Development Co., Ltd.

Notes 3

Number of Shares interested 3,366,000,000 826,500,000
Number of Shares under equity derivatives
Nature of interests Beneficial owner Interests of controlled corporation Interests of parties acting in concert Interests of controlled corporation
Total number of Shares interested 13,633,945,930
Qingdao Haier Collective Asset Management Association Deutsche Bank AG
3,970,294,819 8,219,206,667
Beneficial owner Interests of parties acting in concert Beneficial owner Interests of controlled corporation Interests of controlled corporation

12,189,501,486

Greatway International Corp. Soaring Profit Holdings Limited
880,172,486 3,926,774,819

5.28 23.55

CCT Telecom Holdings Limited

3,926,774,819

Short positions in Shares: Approximate percentage of the Companys issued share capital 23.55 23.55
Name Deutsche Bank AG CCT Telecom Holdings Limited

Notes 5 8

Number of Shares interested 3,926,774,819
Number of Shares under equity derivatives 3,926,774,819
Nature of interests Beneficial owner Interests of controlled corporation
Total number of Shares interested 3,926,774,819 3,926,774,819
Notes: 1. Qingdao Haier Group Holdings (BVI) Limited (Haier BVI) held 4,176,706,667 Shares. Haier BVI was also interested in 1,294,444,444 underlying Shares under the convertible notes (Convertible Notes) issued to it as part of the consideration pursuant to an agreement dated 5 March 2004 entered into between Haier Group Corporation (Haier Corp), Qingdao Haier Investment and Development Co., Ltd. (Haier Investment) and the Company. In addition, Haier BVI was acting in concert with Deutsche Bank AG (Deutsche Bank) pursuant to an undertaking letter (Undertaking Letter) dated 5 January 2006 executed by Haier BVI and Deutsche Bank, pursuant to which Deutsche Bank agreed that, unless otherwise agreed and subject to the exceptions set out therein, Deutsche Bank will not sell or dispose of any of the 3,926,774,819 Shares acquired by Deutsche Bank pursuant to an agreement (Sale and Purchase Agreement) dated 16 November 2005 entered into between Deutsche Bank and CCT Telecom Holdings Limited (CCT). Furthermore, Deutsche Bank held another 43,520,000 Shares. Accordingly, Haier BVI was deemed to be interested in the said 3,926,774,819 Shares and 43,520,000 shares held by Deutsche Bank pursuant to the SFO. 2. Haier Corp was interested in 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI were interested. Haier BVI is a non-wholly owned subsidiary of Haier Corp. In addition, Haier Corp was taken to be interested in 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO as stated in note (1). Furthermore, Haier Corp was acting in concert with Haier Investment. As Haier Investment held 3,366,000,000 Shares and was interested in 826,500,000 Shares held by its non-wholly owned subsidiary as stated in note (3), Haier Corp was also taken to be interested in the 3,366,000,000 Shares held by Haier Investment and the 826,500,000 Shares which Haier Investment was taken to be interested. 3. Haier Investment held 3,366,000,000 Shares and was interested in (i) 826,500,000 Shares held by an indirect non-wholly owned subsidiary; and, by reason of its acting in concert with Haier Corp as set out in note (2), the following Shares in which Haier Corp were deemed to be interested pursuant to the SFO: (ii) the 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI was interested; and (iii) the 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO as stated in note (1). Qingdao Haier Collective Asset Management Association was interested in (i) 3,366,000,000 Shares held by its non-wholly owned subsidiary, Haier Investment; (ii) 826,500,000 Shares held by Haier Investments indirect non-wholly owned subsidiary as stated in note (3); (iii) 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI were interested; and (iv) 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO. Deutsche Bank held 43,520,000 Shares. In addition, it held another 3,926,774,819 Shares acquired pursuant to the Sale and Purchase Agreement referred to in note (1). Furthermore, Deutsche Bank was acting in concert with Haier BVI pursuant to the Undertaking Letter referred to in note (1) above and is deemed to be interested in the 8,219,206,667 Shares in which Haier BVI was interested. Pursuant to a subscription agreement dated 16 November 2005 entered into between Deutsche Bank and Haier BVI, Haier BVI agreed to issue and Deutsche Bank agreed to subscribe for put warrants (the Warrant(s)) in respect of 3,926,774,819 Shares at an issue price of HK$0.03 per Warrant. Upon exercise, the holders of the Warrants are entitled to put the Shares to Haier BVI. The exercise price of the Warrants is fixed at HK$0.1975 per Warrant. The number of Shares under the Warrants is equal to the number of Shares acquired by Deutsche Bank from CCT pursuant to the Sale and Purchase Agreement referred to in note (1) above. 6. 7. Greatway International Corp. (Greatway) held 880,172,486 Shares. Soaring Profit Holdings Limited (Soaring Profit) was interested in 479,002,333 Shares held by Info-net International Corp. (Info-net), 880,172,486 Shares held by Greatway, 810,000,000 Shares held by Clear Access Agents Limited (Clear Access), 733,600,000 Shares held by Super Control Investments Limited (Super Control), 700,000,000 Shares held by Invest Paradise Group Limited (Invest Paradise) and 324,000,000 Shares held by Full Elite Assets Limited (Full Elite). Info-net, Clear Access, Super Control, Invest Paradise and Full Elite were wholly-owned subsidiaries of Soaring Profit Holdings Limited (Soaring Profit). Pursuant to the Sale and Purchase Agreement referred to in note (1), CCT is under an obligation to deliver 3,926,774,819 Shares (including the 479,002,333 Shares held by Info-net, the 880,172,486 Shares held by Greatway, 810,000,000 Shares held by Clear Access, 733,600,000 Shares held by Super Control, 700,000,000 Shares held by Invest Paradise and 324,000,000 Shares held by Full Elite) to Deutsche Bank upon completion of the Sale and Purchase Agreement. 8. CCT was interested in 3,926,774,819 Shares in which Soaring Profit were taken to be interested through the subsidiaries as disclosed in note (7). Soaring Profit is a wholly-owned subsidiary of CCT.

Subsequent to the balance sheet date, on 5 January 2006, CCT and its subsidiaries disposed of their 3,926,774,819 Shares to Deutsche Bank, details of which were set out in the Company's announcements dated 22 November 2005 and 5 January 2006. Save as disclosed above, as at 31 December 2005, no other person, other than the directors of the Company, whose interests are set out in the section headed Directors interests and short positions in shares and underlying shares above, had registered an interest or short position in the Shares or underlying shares of the Company that was required to be recorded pursuant to Section 336 of the SFO.
CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS
(a) During the year, the Companys subsidiary, Pegasus Telecom (Qingdao) Co., Ltd. (Pegasus Qingdao), had the following continuing connected transactions with Haier Corp, Haier Investment, their subsidiaries and associates: Group Notes Sales of mobile handset products Purchases of materials Utility service fee expenses Interest expenses Interest income Other service fee expenses
Notes: (i) For the year ended 31 December 2005, the sales of mobile handset products were made at selling prices based on the costs of raw materials plus a processing fee which is not less than the industry standard. For the year ended 31 December 2004, the sales of mobile phones were made at selling prices based on the cost of materials plus processing fees ranging from 5% to 40% of the purchase price of the materials. (ii) The purchases were charged no more than the average market price or the consolidated and integrated tender and bidding price plus a 2.6% commission. Utility service fee expenses were charged based on the state-prescribed prices plus actual administrative costs. Interest expenses/income was determined with reference to the standard rates published by the Peoples Bank of China. Other service fee expenses included legal consulting service fee, general security service fee, human resources service fee which were determined with reference to actual costs incurred.
2005 HK$000 1,523,428 606,607 5,745 3,1,286
2004 HK$000 2,747,869 1,786,847 4,657 3,174
(i) (ii) (iii) (iv) (iv) (v)

(iii) (iv) (v)

CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS (contd)
(a) (contd) Since Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde Haier Electric Co., Ltd. and Hefei Haier Washing Machine Co., Ltd. have become the Companys subsidiaries on 28 January 2005, they, together with Qingdao Jiaonan Haier Washing Machine Co., Ltd. and Qingdao Haier Electronics Sales Co., Ltd., had the following continuing connected transactions with Haier Corp, Haier Investment, their subsidiaries and associates: Group From 28 January 2005 to 31 December 2005 Notes HK$000 Sales of washing machines Purchases of materials Printing and packaging fee expenses Mould charges Utility service fee expenses Logistics charges Promotion fee expenses Other service fee expenses Interest income Trademark licence fee expenses

Notes At 1 January 2004 (as restated) Net profit for the year (as restated) Transfer to reserves (as restated) Dividend (as restated) At 31 December 2004 and 1 January 2005 (as restated) Net loss for the year Transfer from retained profits Exchange realignment Dividend Acquisition of subsidiaries Issue of convertible notes Conversion of convertible notes Exercise of share options At 31 December 2005
Issued equity HK$000 352,324
Reserve fund (note) HK$000 15,697 13,715
Exchange fluctuation reserve (note) HK$000
Total HK$000 398,208 119,479 (8,508)
Minority interests HK$000 156,899 29,149 (5,672)
Total equity HK$000 555,107 148,628 (14,180)
352,324 445,307 27,926 28,602 854,159

33,790 (3,509) 30,281

29,412 29,848 59,260
127,443 (432,964) (29,848) (335,369)

24,439 24,439

509,179 (432,964) 24,439 445,307 33,790 24,417 28,602 632,770
180,376 15,127 1,754 (6,303) (119,613) 71,341
689,555 (417,837) 26,193 (6,303) 325,694 33,790 24,417 28,602 704,111
Note: These reserve accounts comprise the consolidated reserves in the consolidated balance sheet.
Consolidated Cash Flow Statement
CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax Adjustments for: Finance costs Interest income Depreciation Amortisation of prepaid land premiums Amortisation of intangible assets Provision for bad and doubtful debts Provision for obsolete and slow-moving inventories Loss on disposal of items of property, plant and equipment Impairment of goodwill Operating profit before working capital changes Increase in inventories Decrease in trade and bills receivables Decrease in prepayments, deposits and other receivables Increase/(decrease) in trade and bills payables Increase/(decrease) in other payables and accruals Increase in provisions Effect of foreign exchange rate changes, net Cash generated from operations Interest received Mainland China corporate income tax paid Net cash inflow from operating activities
(400,982) 7 20,232 (3,329) 69,598 35,663 53,831 4,587 321,947 102,659 (50,537) 260,358 15,528 (164,958) 176,440 7,912 1,538 348,940 3,329 (2,265) 350,004
165,646 12,152 (3,069) 41,581 18,430 235,510 (78,291) 790 9,681 279,109 (1,248) 56,405 501,956 3,069 (45,935) 459,090
Consolidated Cash Flow Statement (contd)
2004 HK$000 (Restated) 459,090
Net cash inflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment Prepayment for land premiums Proceeds from disposal of items of property, plant and equipment Acquisition of subsidiaries Decrease/(increase) in pledged deposits Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares upon exercise of share options Interest paid Dividends paid to minority interests Dividends paid New bank loans Repayment of bank loans Net repayment of trust receipts Net cash outflow from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of less than three months when acquired

Notes to Financial Statements (contd)
3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (contd)
The adoption of HKASs 2, 7, 8, 10, 11, 12, 14, 16, 18, 19, 20, 21, 23, 27, 28, 31, 32, 33, 37, 38, 39 and 40 and HKFRS 2 and 5, HK(SIC)-Int 21 and HK-Int 4 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Groups and the Companys financial statements. HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and other disclosures. HKAS 21 had no material impact on the Group. In respect of acquisitions subsequent to 1 January 2005, any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of the assets and liabilities are treated as assets and liabilities of the foreign operation and are translated at the closing rate in accordance with HKAS 21. HKAS 24 has expanded the definition of related parties and affected the Groups related party disclosures. The impact of adopting the other HKFRSs is summarised as follows:

(a) HKAS 17 Leases

In prior years, leasehold land and buildings held for own use were stated at cost less accumulated depreciation and any impairment losses. Upon the adoption of HKAS 17, the Groups leasehold interest in land and buildings is separated into leasehold land and buildings. The Groups leasehold land is classified as an operating lease, because the title of the land is not expected to pass to the Group by the end of the lease term, and is reclassified from property, plant and equipment to prepaid land premiums, while buildings continue to be classified as part of property, plant and equipment. Prepaid land premiums for land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over the lease term. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment. This change in accounting policy has had no effect on the consolidated income statement and retained profits. The comparative amounts in the consolidated balance sheet for the year ended 31 December 2004 have been restated to reflect the reclassification of the leasehold land.
(b) HKFRS 2 Share-based Payment

(b) (c) (d) (e) (f)

Property, plant and equipment and depreciation
Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and machinery is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the 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 an item of property, plant and equipment and the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement. Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows: Buildings Plant and machinery Tools, furniture and fixtures Motor vehicles 2% to 10% 5% to 19% 10% to 33% 9% to 20%
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset. Construction in progress represents a building under construction and equipment pending installation. It is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is reclassified to the appropriate category of the property, plant and equipment when completed and ready for use.

20,198 19,455 83,513

70,710 118,453 53,831 36,663 108,272
42,351 50,378 18,430 83,513
SEGMENT INFORMATION (contd) (b) Geographical segments
The following table presents revenue information for the Groups geographical segments for the year ended 31 December 2005 and 2004. Elsewhere in the Peoples Republic of Hong Kong China (the PRC) European Union Others Consolidated HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 (Restated) (Restated) (Restated) (Restated) (Restated) Segment revenue: Sales to external customers Other revenue Total revenue

47,095 47,095

154,457 154,457
4,893,379 13,026 4,906,405
5,626,353 14,629 5,640,982

75,137 75,137

37,892 37,892
4,940,474 13,026 4,953,500
5,893,839 14,629 5,908,468
No further geographical segment information is presented as over 90% of the Groups assets are located in Mainland China.
REVENUE, OTHER INCOME AND GAINS
Revenue, which is also the Groups turnover, represents the net invoiced value of goods sold, net of value-added tax and after allowances for returns and trade discounts. An analysis of revenue, other income and gains is as follow: Group 2005 HK$HK$000 (Restated)
Revenue Sale of washing machines Sale of mobile phones
3,311,644 1,628,830 4,940,474
2,750,454 3,143,385 5,893,839
Other income and gains, net Compensation received from suppliers Interest income Sale of scrap materials Government subsidies (note) Gross rental income in respect of: Land and buildings Plant and machinery
4,575 3,329 2,739 2,121 1,548 1,548
3,069 3,000 4,963 1,892 4,401 6,17,698

Others

2,043 16,355
During the year, two of the Groups subsidiaries in Mainland China received subsidies from the relevant authorities of Qingdao Municipality and Shunde Municipality as an encouragement for advanced research and development.

PROFIT/(LOSS) BEFORE TAX

The Groups profit/(loss) before tax is arrived at after charging/(crediting): 2005 HK$HK$000 (Restated) 5,182,772 41,581 75,557 2,100
Cost of inventories sold Depreciation Amortisation for prepaid land premiums Amortisation of intangible assets* Research and development costs* Auditors remuneration Staff costs (including directors remuneration note 9): Wages and salaries Net pension scheme contributions Total staff costs Minimum lease payments under operating leases in respect of land and buildings Provision for obsolete and slow-moving inventories* Provision for bad and doubtful debts**: Trade receivables Other receivables

Performance related bonuses HK$000

Total HK$000

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.
* Mak Shiu Tong, Clement, Tam Ngai Hung, Terry and Man Wei Dong resigned as directors of the Company on 28 January 2005.
10. FIVE HIGHEST PAID EMPLOYEES
The five highest paid employees during the year did not include any director (2004: Nil), details of whose remuneration are set out in note 9 above. Details of the remuneration of the five (2004: five) non-director, highest paid employees for the year are as follows: Group 2005 HK$HK$000 (Restated) 4,153 14 4,167
Salaries, allowances and benefits in kind Performance related bonuses Employee share option benefits Pension scheme contributions

4,124 34 4,158

10. FIVE HIGHEST PAID EMPLOYEES (contd)
The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows: Number of employees Nil to HK$1,000,000 HK$1,500,001 to HK$2,000,000 HK$2,000,001 to HK$2,500,5

11. TAX

No provision for Hong Kong profits tax has been made as the Group did not generate any assessable profits arising in Hong Kong during the year (2004: Nil). The Group has seven subsidiaries established in the PRC, four of which are Sino-foreign equity joint ventures, two of which are wholly-foreign owned enterprises and the remaining one is a limited liability company. Except for the limited liability company and one Sino-foreign equity joint venture, all subsidiaries are entitled to preferential tax treatments including reduction of PRC corporate income tax (CIT) and full exemption from CIT tax for two years starting from its first profit-making year following by a 50% reduction for the next consecutive three years. 2005 HK$HK$000 (Restated)
Group: Current Mainland China: Charge for the year Overprovision in prior years Deferred (note 30) Tax charge for the year

8,068 8,787 16,855

18,617 (1,860) 261 17,018

11. TAX (contd)

A reconciliation of the tax charge/(credit) applicable to profit/(loss) before tax using the statutory or applicable rates for the locations in which the Company and its subsidiaries are domiciled to the tax charge/(credit) at the effective tax rates, and a reconciliation of the statutory or applicable rates to the effective tax rates, are as follows: Group 2005 Hong Kong HK$000 Loss before tax Tax at the statutory or applicable tax rates Income not subject to tax Expenses not deductible for tax Tax losses not recognised Temporary differences not recognised Tax exemption Tax charge at the Groups effective rate Group 2004 Hong Kong HK$000 Profit before tax Tax at the statutory or applicable tax rates Expenses not deductible for tax Overprovision in prior years Tax exemption Tax charge at the Groups effective rate PRC HK$000 165,646 Total HK$000 165,646 (339,816) PRC HK$000 (61,166) Total HK$000 (400,982)

(59,468) (1,742) 56,350 4,860

17.5 0.5 (16.5) (1.5)

(20,185) 45,350 21,182 (29,492)

33.0 (74.1) (34.7) 48.2

(79,653) (1,742) 56,350 50,210 21,182 (29,492)
19.9 0.4 (14.1) (12.5) (5.3) 7.4

16,855

(27.6)
54,663 2,601 (1,860) (38,386)

33.0 1.6 (1.1) (23.2)

17,018
12. NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
The net loss from ordinary activities attributable to equity holders of the parent for the year ended 31 December 2005 dealt with in the financial statements of the Company, was HK$1,250,311,000 (note 33(b)).

13. DIVIDEND

No dividend has been paid or declared by the Company during the year (2004: Nil). The dividend disclosed for the year ended 31 December 2004 represented dividend declared by a subsidiary of Haier Holdings (BVI) Limited to its previous owner, Haier Corp, out of its retained profits after setting aside a required percentage of its net earnings to the relevant statutory reserves in accordance with the rules and regulations applicable in the PRC and its article of association.
14. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT
Under reverse acquisition accounting method (note 2.2), the 6,369,706,667 ordinary shares issued by the Company for the purposes of the Asset Injection and the Call Option Exercise (note 2.1) are deemed to be issued on 1 January 2004 for the purposes of calculating earnings/(loss) per share. The calculation of basic earnings/(loss) per share amounts is based on the net profit/(loss) for the year attributable to ordinary equity holders of the parent, and the weighted average number of ordinary shares in issue during the year. A diluted loss per share amount for the year ended 31 December 2005 has not been disclosed as share options and convertible notes outstanding during the year had anti-dilutive effects on the basic loss per share amount for the year. A diluted earnings per share amount for the year ended 31 December 2004 has not been disclosed as no diluting events existed during that year. The calculations of basic earnings/(loss) per share is based on: 2005 HK$HK$000 (Restated)
Earnings Net profit/(loss) attributable to ordinary equity holders of the parent, used in the basic earnings/(loss) per share calculation

20. INTERESTS IN SUBSIDIARIES
Company 2005 HK$000 3,517,747 2,360 (8,894) 3,511,213 (2,127,707) 1,383,HK$000 1,963,(8,747) 1,955,499 (904,028) 1,051,471
Unlisted investments, at cost Due from subsidiaries Due to a subsidiary

Impairment

20. INTERESTS IN SUBSIDIARIES (contd)
During the year, due to intensifying competition and price reduction of mobile phones in the Mainland China market, the Company recognised an impairment loss of investment costs of HK$1,223,679,000 for its subsidiaries engaging in the mobile phone business. The impairment loss is determined with reference to the recoverable amount of the subsidiaries. The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayment. Particulars of the principal subsidiaries are as follows: Percentage of equity attributable to the Company Direct Indirect 100
Place of registration and operations
Nominal value of registered capital

Principal activities

Pegasus Telecom (Qingdao) Co., Ltd*

US$12,000,000

Manufacture and sale of mobile phones Manufacture and sale of mobile phones Manufacture and sale of washing machines Manufacture and sale of washing machines Manufacture and sale of washing machines Manufacture and sale of washing machines Sale of washing machines
Pegasus Electronic (Qingdao) Co., Ltd.*

US$29,980,000

Qingdao Haier Washing Machine Co., Ltd.**

RMB150,000,000

Foshan Shunde Haier Electric Co., Ltd.**

RMB48,000,000

Hefei Haier Washing Machine Co., Ltd.**

RMB12,000,000

Qingdao Jiaonan Haier Washing Machine Co., Ltd.***

RMB10,000,000

Qingdao Haier Electronics Sales Co., Ltd.**

* ** ***

RMB5,000,000
Registered as a wholly-foreign-owned enterprise under the PRC law. Registered as a Sino-foreign equity joint venture enterprise under PRC Law. Registered as a limited liability company under the PRC law. Interest held through Foshan Shunde Haier Electric Co., Ltd., a 60% indirectly owned subsidiary of the Company.
The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

21. INVENTORIES

Group 2005 HK$HK$000 (Restated) 224,735 123,212 88,992 436,939
Raw materials Work in progress Finished goods
113,927 68,993 250,725 433,645