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<TITLE>CHINA GRENTECH CORPORATION LIMITED</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
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<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
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<DIV align="center" style="font-size: 14pt; margin-top: 12pt"><B>UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt"><B>Washington, D.C. 20549<BR>
<BR>
<DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B>FORM 20-F</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">(Mark One)
</DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)&nbsp;OF
THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#254;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)&nbsp;OF THE SECURITIES
EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d)&nbsp;OF THE SECURITIES
EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>FOR THE TRANSITION PERIOD FROM <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> TO <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 12%"><B>Date of event requiring this shell company report </B><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>For the transaction period from <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> to <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>COMMISSION FILE NUMBER</B></DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt"><B>CHINA GRENTECH CORPORATION LIMITED</B>
</DIV>

<DIV align="center" style="font-size: 10pt">(Exact name of Registrant as specified in its charter)

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Cayman Islands</B><BR>
(Jurisdiction of incorporation or organization)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>16th Floor, Zhongyin Tower<BR>
Caitian North Road, Futian District<BR>
Shenzhen 518026, People&#146;s Republic of China</B><BR>
(Address of principal executive offices)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Securities registered or to be registered pursuant to Section&nbsp;12 (b)&nbsp;of the Act.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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    <TD width="50%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
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<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Name of Each Exchange</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Title of Each Class</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>On Which Registered</B></TD>
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    <TD><DIV style="margin-left:15px; text-indent:-15px">American depositary shares, each representing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">25 ordinary shares of par value US$0.00002 per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">The Nasdaq National Market</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Ordinary shares of par value US$0.00002 per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">The Nasdaq National Market *</TD>
</TR>
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</TABLE>
</DIV>

<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Not for trading, but only in connection with the registration of American depositary
shares.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Securities registered or to be registered pursuant to Section&nbsp;12 (g)&nbsp;of the Act:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>None</B><BR>
(Title of Class)</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Securities for which there is a reporting obligation pursuant to Section&nbsp;15 (d)&nbsp;of the Act:
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>None</B><BR>
(Title of Class)</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate the number of outstanding shares of each of the issuer&#146;s classes of capital or common
stock as of the close of the period covered by the annual report.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2006, 625,000,000 ordinary shares were issued and outstanding.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule&nbsp;405 of
the Securities Act.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#254;</FONT></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#254;</FONT></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Registrant is required to file reports pursuant to Section&nbsp;13 or 15(d) of the Securities
Exchange Act of 1934.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note &#151; Checking the box above will not relieve any registrant required to file reports pursuant to
Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those
Sections.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the registrant (1)&nbsp;has filed all reports required to be filed by
Section&nbsp;13 or 15 (d)&nbsp;of the Securities Exchange Act of 1934 during the preceding 12&nbsp;months (or for
such shorter period that the Registrant was required to file such reports), and (2)&nbsp;has been
subject to such filing requirements for the past 90&nbsp;days.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#254;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#111;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of &#147;accelerated filer and large accelerated
filer&#148; in Rule&nbsp;12b-2 of the Exchange Act. (Check one):
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Large accelerated filer <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accelerated filer <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Non-accelerated filer <FONT face="Wingdings">&#254;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark which financial statement item the Registrant has elected to follow.
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Item&nbsp;17 <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Item&nbsp;18 <FONT face="Wingdings">&#254;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule&nbsp;12b-2 of the Exchange Act).
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#254;</FONT></DIV>


<DIV style="width: 100%; border-bottom: 1pt solid black; margin-top: 10pt; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>





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<DIV style="font-family: 'Times New Roman',Times,serif">







<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Table of Contents</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="10%">&nbsp;</TD>
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    <TD width="87%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="0%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="0%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Page</TD>
    <TD>&nbsp;</TD>
</TR>

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<!-- Begin Table Body -->
<TR valign="bottom">
    <TD colspan="3" align="left"><A href="#101">FORWARD-LOOKING STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" align="left"><A href="#102">SUPPLEMENTAL INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#103">PART I</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">3</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#104">ITEM 1.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#104">IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">3</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#105">ITEM 2.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#105">OFFER STATISTICS AND EXPECTED TIMETABLE</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">3</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#106">ITEM 3.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#106">KEY INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">3</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#107">ITEM 4.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#107">INFORMATION ON THE COMPANY</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">18</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#108">ITEM 4A.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#108">UNRESOLVED STAFF COMMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">32</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#109">ITEM
5.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#109">OPERATING AND
FINANCIAL REVIEW AND PROSPECTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">33</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#110">ITEM
6.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#110">DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">51</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#111">ITEM
7.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#111">MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">57</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#112">ITEM
8.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#112">FINANCIAL
INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">58</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#113">ITEM
9.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#113">THE OFFER AND
LISTING</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">59</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#114">ITEM
10.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#114">ADDITIONAL
INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">59</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#115">ITEM
11.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#115">QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#116">ITEM
12.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#116">DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#117">PART
II</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#118">ITEM
13.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#118">DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#119">ITEM
14.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#119">MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#120">ITEM
15.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#120">CONTROLS AND
PROCEDURES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#121">ITEM
16A</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#121">AUDIT COMMITTEE
FINANCIAL EXPERT</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#122">ITEM
16B</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#122">CODE OF ETHICS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#123">ITEM
16C</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#123">PRINCIPAL ACCOUNTANT
FEES AND SERVICES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#124">ITEM
16D</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#124">EXEMPTIONS FROM THE
LISTING STANDARDS FOR AUDIT COMMITTEES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#125">ITEM
16E</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#125">PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#126">ITEM
17.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#126">FINANCIAL
STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#127">ITEM
18.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#127">FINANCIAL
STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#128">ITEM
19.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#128">EXHIBITS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h01182exv11w1.txt">EX-11.1 Code of Ethics</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h01182exv12w1.txt">EX-12.1 302 CEO Certification</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h01182exv12w2.txt">EX-12.2 302 CFO Certification</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h01182exv13w1.txt">EX-13.1 906 Certification by the CEO and the CFO</A></FONT></TD></TR>
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>


<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="101"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>FORWARD-LOOKING STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This annual report filed on Form 20-F contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial
condition, results of operations, cash flows, dividends, financing plans, business strategies,
capital and other expenditures, competitive positions, availability of capital, growth
opportunities for new and existing products, availability and deployment of new technologies, plans
and objectives of management, mergers and acquisitions, and other matters.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Statements in this Form 20-F that are not historical facts are hereby identified as
&#147;forward-looking statements&#148; for the purpose of the safe harbor provided by Section&nbsp;27A of the
Securities Act of 1933, as amended, and Section&nbsp;21E of the Securities Exchange Act of 1934, as
amended. The words &#147;estimate,&#148; &#147;project,&#148; &#147;intend,&#148; &#147;expect,&#148; &#147;believe,&#148; &#147;plan&#148; and similar
expressions are intended to identify forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date of this
document. In addition, other written or oral statements which constitute forward-looking statements
have been made and may in the future be made by us or on our behalf, including with respect to the
matters referred to above. These forward-looking statements are necessarily estimates reflecting
the best judgment of senior management that rely on a number of assumptions concerning future
events, many of which are outside of our control, and involve a number of risks and uncertainties
that could cause actual results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth in this annual report. Important factors that could
cause actual results to differ materially from estimates or projections contained in the
forward-looking statements include, without limitation:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the Company&#146;s reliance on business relationships with the Chinese
telecommunications operators and base station equipment manufacturers, in particular,
the annual capital spending by China Mobile group and China Unicom group;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>risks associated with large accounts receivable, long collection periods and accounts receivable cycles;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>fierce competition in the wireless communication industry;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>growth of, and risks inherent in, the wireless communication industry in China;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>uncertainty as to future profitability and the Company&#146;s ability to obtain
adequate financing for its planned capital expenditure requirements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>uncertainty as to its ability to continuously develop and manufacture new
radio frequency, or RF technology and keep up with changes in RF technology;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>uncertainty as to the issuance of 3G licenses by the PRC governmental
authorities;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>future changes to the regulations and policies governing the
telecommunications industry in China, including possible future industry restructuring;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>limitation on the Company&#146;s production capacity for RF products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>risks associated with possible defects and errors in its wireless coverage products or RF products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>uncertainty as to the Company&#146;s ability to protect and enforce its intellectual property rights; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>uncertainty as to the Company&#146;s ability to attract and retain qualified
executives and personnel, particularly in its research and development department.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->1<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>CONVENTIONS</B><BR>
<B>Definitions</B>
</DIV>

<DIV align="left">
<A name="102"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SUPPLEMENTAL INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have twice subdivided our share capital since our inception in 1999. On December&nbsp;24, 2003,
we subdivided each of our issued and unissued ordinary shares, par value US$1.00 per share, into
100 ordinary shares, par value US$0.01 per share. On August&nbsp;25, 2005, we further subdivided each of
our issued and unissued ordinary shares, par value US$0.01 per share, into 500 ordinary shares, par
value US$0.00002 per share. Unless otherwise specified, we present ownership of our ordinary shares
throughout this annual report as if our ordinary shares, including ordinary shares into which our
existing preference shares are convertible and exchangeable bonds are exchangeable, were so
subdivided since our inception, with a par value of US$0.00002 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the purposes of this annual report, we refer to Actis China Investment Holdings No.&nbsp;1
Limited, or Actis China, Standard Chartered Private Equity Limited, or Standard Chartered Private
Equity, and JAFCO Asia Technology Fund, or JAFCO, holders of our outstanding mandatorily redeemable
convertible preference shares prior to our initial public offering in March&nbsp;2006, as our preference
shareholders; all geographical and statistical references to &#147;China,&#148; &#147;mainland China&#148; and &#147;PRC&#148; in
this annual report are to the People&#146;s Republic of China and do not include the Hong Kong Special
Administrative Region, or Hong Kong, the Macau Special Administrative Region, or Macau, and Taiwan.
References to &#147;provinces&#148; of China are to the provinces, municipalities under direct administration
of the PRC central government and provincial-level autonomous regions of China.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All references to &#147;RMB&#148; or &#147;Renminbi&#148; are to the legal currency of China and all references to
&#147;U.S. dollar&#148; or &#147;US$&#148; are to the legal currency of the United States of America, or the United
States or U.S. For your convenience, this annual report contains translations of Renminbi amounts
into U.S. dollars at the noon buying rate for U.S. dollars in effect on December&nbsp;29, 2006, the last
business day in 2006, in The City of New York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of New York at RMB7.8041 = US$1.00.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On May&nbsp;1, 2007, the latest practicable date, the noon buying rates in the City of New York
for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York are
RMB7.7065 = US$1.00. See &#147;Exchange Rate Information.&#148; We make no representation that any amounts
in Renminbi or U.S. dollars referred to in this annual report could be or could have been converted
into each other at any particular rate or at all.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have approximated all numbers in this annual report to their closest round numbers. Also
due to rounding, figures shown as totals in tables may not be an arithmetic aggregation of the
figures preceding them.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->2<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="103"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">PART I
</DIV>

<DIV align="left">
<A name="104"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="105"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="106"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 3. KEY INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>SELECTED FINANCIAL DATA</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following tables present our selected consolidated financial data as of and for the years
ended December&nbsp;31, 2002, 2003, 2004, 2005 and 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our consolidated financial statements have been prepared in accordance with U.S. GAAP and we
publish our financial statements in Renminbi. We have derived the selected consolidated financial
data as of and for the years ended December&nbsp;31, 2002, 2003, 2004, 2005 and 2006 from our
consolidated financial statements audited by KPMG, an independent registered public accounting
firm. Our audited consolidated financial statements as of December&nbsp;31, 2005 and 2006 and for each
of the years ended December&nbsp;31, 2004, 2005 and 2006 are included elsewhere in this annual report.
You should read the selected consolidated financial data below together with our consolidated
financial statements, including the notes thereto, included elsewhere in this annual report, and
&#147;Item&nbsp;5. Operating and Financial Review and Prospects.&#148;
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22"><B>(in thousands, except for per share and number of shares data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Consolidated statements of income
information</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">315,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">360,816</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">566,504</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">832,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(127,094</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(141,053</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(241,930</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(328,064</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(437,040</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(56,001</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">188,716</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">219,763</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">324,574</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">388,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">395,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,711</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,573</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,410</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,326</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(30,616</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(47,671</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,108</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and distribution expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,965</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(71,035</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(91,489</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(112,948</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,473</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,885</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(23,865</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,744</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(41,057</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55,944</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,169</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(48,492</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,240</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117,105</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(163,162</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(216,563</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,750</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">140,224</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">207,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">225,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income/(expense):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">695</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,049</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,458</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,245</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,933</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(39,392</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(36,105</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,026</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,591</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investment income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">176</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency exchange gain/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,875</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,265</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Grant income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,431</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,293</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,732</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">983</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total other income/(expense)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,119</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33,771</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,417</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,807</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,385</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income tax expense and
minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">139,105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159,108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,698</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">214,627</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,703</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,841</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,020</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(26,097</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(18,277</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,342</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">129,402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">151,267</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">188,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,234</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interests, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(826</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,117</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,086</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,267</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(162</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,848</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends, accretion to redemption
value and foreign currency rate
movements on mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,509</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,428</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(549</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(70</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income available to ordinary
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,848</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,002</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income per share available to
ordinary shareholders:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.32</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.31</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.32</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.29</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average number of ordinary
shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">593,150,684</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">593,150,684</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total cash dividend declared to
ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54,411</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,609</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">975</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->3<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Consolidated balance sheet information</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,988</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">302,932</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">467,423</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">59,895</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pledged time deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,682</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,214</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238,618</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66,768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">325,821</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248,662</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">537,321</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">747,859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,829</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110,539</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">169,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">296,404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">370,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">434,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,664</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">357,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">776,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,014,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,172,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,948,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">249,665</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property, plant and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66,602</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">96,505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,604</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115,654</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">126,649</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">162,032</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">268,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,464</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">525,394</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">970,983</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,250,539</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,475,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,415,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">309,560</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Short-term bank loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">61,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">239,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">160,614</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">336,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,061</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">235,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">479,209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">662,838</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">738,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">866,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,023</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">171,325</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">171,325</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167,053</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">235,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">650,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">834,163</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">905,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">866,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,023</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mandatorily redeemable convertible
preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,184</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">282,626</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260,149</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">348,790</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">506,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,530,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">196,106</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>EXCHANGE RATE INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We prepare our financial statements in Renminbi. Solely for the convenience of the reader,
this annual report contains translations of Renminbi amounts into U.S. dollars, and vice versa, at
RMB7.8041 = US$1.00, the noon buying rates on December&nbsp;29, 2006, the last business day in 2006, in
the City of New York for cable transfers as certified for customs purposes by the Federal Reserve
Bank of New York. You should not assume that Renminbi amounts could actually be converted into
U.S. dollars at these rates or at all.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On May&nbsp;1, 2007, the latest practicable date, the noon buying rates in the City of New York
for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York are
RMB7.7065 = US$1.00.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth, for the periods indicated, the noon buying rates for U.S.
dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the
Federal Reserve Bank of New York:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Noon buying rate</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Period end</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Average</B><SUP style="font-size: 85%; vertical-align: text-top"><B>(1)</B></SUP></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(RMB per US$1.00)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2001</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2766</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2786</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2676</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2669</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2767</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2771</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2765</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2765</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2774</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2764</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.1826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2765</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0702</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.9723</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8041</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">November</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8340</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8303</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">December</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.0841</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007 (through May&nbsp;1, 2007)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7065</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">January</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7705</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">February</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7410</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7410</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">March</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7232</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7454</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7232</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">April</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7090</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.7090</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 0pt; margin-bottom: 6pt">Source: Federal Reserve Bank of New York.
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Determined by averaging the noon buying rates on the last business day of each month or the
elapsed portion thereof during the relevant period.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>CAPITALIZATION AND INDEBTEDNESS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>REASONS FOR THE OFFER AND USE OF PROCEEDS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->4<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>RISK FACTORS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Risks Relating to Our Company</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We derive a significant portion of our revenues from the China Unicom group and the China Mobile
group and our revenues could decline significantly if either of them reduces its purchases of, or
fails to pay for, our wireless coverage products and services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide most of our wireless coverage products and services to the China Unicom group and
the China Mobile group. This is primarily because the China Unicom group and the China Mobile group
are currently the only two licensed wireless operators in China. In 2004, 2005 and 2006, we derived
61.0%, 45.1% and 35.9%, respectively, of our revenues from China Unicom group&#146;s local affiliates
and 27.8%, 33.8% and 33.3%, respectively, from China Mobile group&#146;s local affiliates. In addition,
as of December&nbsp;31, 2004, 2005 and 2006, 59.2%, 52.3% and 40.4%, respectively, of our gross accounts
receivable were attributable to China Unicom group&#146;s local affiliates and 26.3%, 27.3% and 30.2%,
respectively, to China Mobile group&#146;s local affiliates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because of the current procurement policies and practices of the China Unicom group and the
China Mobile group, we typically contract with their individual local affiliates and treat these
local affiliates as separate customers. Although our business practice is to interact with each
local affiliate individually, they are under the common control of their parent company. In certain
instances, procurement decisions are made only with the approval of the parent company. For
example, parent company approval was required before we were awarded our first CDMA contracts by
China Unicom group&#146;s affiliates in 2001. More recently in the fourth quarter of 2006, China Mobile
group announced that it would, effective immediately, separately run the bidding processes for the
procurement of GSM wireless coverage equipment at the parent company level. For more details, see
&#147;Risk Factors&#151;Risks Relating to Our Company&#151; Changes in the procurement policies by our major
customers may adversely affect our revenue and profit margin on our wireless coverage products.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also experience delays in payments from the China Unicom group and the China Mobile group
during the ordinary course of our business. As explained in the next risk factor, this is largely
due to our limited bargaining leverage and the resulting lack of a specific timetable in our sale
and purchase contracts to require our customers to issue completion certificates and to perform
preliminary inspections, which are pre-conditions to their initiation of payments. Despite our
constant attempts, we have not been able to significantly change this prevalent practice in our
industry due to the limited bargaining leverage of wireless coverage operators such as ourselves
and we expect this practice to continue in coming periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;One or more of China&#146;s main telecommunication operators (including our two principal group
customers) may reorganize by means of a corporate spin-off, merger or otherwise. Any such
reorganization could disrupt, slow down or otherwise materially affect their capital expenditures
and, therefore, our revenues. Additionally, the competitive situation in the wireless communication
market in China may be altered, or the resulting entities may change suppliers or sourcing
policies. If the China Unicom group or the China Mobile group decides to centralize or otherwise
significantly change its procurement methods for wireless coverage products and services, reduces
or eliminates the purchase of our products and services or becomes unable or refuses to pay for our
products and services it has purchased, our revenues would decline significantly.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Because we have limited bargaining leverage with the China Unicom group and the China Mobile group,
some contractual terms and market practices are materially adverse to our interest</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The China Unicom group and the China Mobile group award contracts through competitive bidding.
According to Infosage Analysis, a market research and consulting firm focusing on innovative
technologies, there are over 70 entities competing in the wireless coverage market in China. As
the China Unicom group and the China Mobile group are currently the only two licensed wireless
operators in China, we have limited negotiating leverage with these key clients in the bidding
process. As a result, many proposed contractual terms and market practices subject to bidding are
materially adverse to our interest. For example, in most instances, the wireless operators will not
sign sale and purchase agreements with us until they have formally accepted our products delivered
for a whole project. In addition, most of our contracts, in the form contained in the bidding
materials, do not specify a timetable for our customers to issue a completion certificate or
perform the preliminary inspection of products we install. This affects our revenues as the
execution of the sale and purchase contract and the issuance of a completion certificate are
conditions to our recognition of revenues for our products and the preliminary inspection by our
wireless operator customers is a condition to our recognition of service revenue. As a result of
these contractual terms and market practices, we are required to finance significant operating
expenses before we recognize revenues and to finance significant accounts receivable once we
recognize revenues. Any worsening of these terms and conditions could have a material adverse
effect on our liquidity and cash flows from operations. Also see &#147;&#151; We have long accounts
receivable cycles and long collection periods and our liquidity and cash flows from operations will
deteriorate if our accounts receivable cycles or collection periods continue to lengthen&#148; below for
additional cash flow and liquidity risks resulting from these market practices.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Changes in the procurement policies by our major customers may adversely affect our revenue and
profit margin on our wireless coverage products</I></B>

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</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Historically we have been awarded contracts by the local affiliates of China Mobile Group
through bidding and negotiation, and these contracts covered wireless coverage equipment and
services. For more details on the bidding process conducted by wireless operators in China, please
see &#147;Item&nbsp;4. Information on the Company&#151;Business&#151;Our Wireless Coverage Products and Services&#151;Our
Sales Cycle&#151;Bidding Process.&#148; China Mobile group, in an effort to shift to a more centralized
procurement model, announced during the fourth quarter of 2006 that it was going to adopt a new
procurement policy whereby the bidding processes for wireless coverage equipment and services will
be separately conducted, and procurement decisions for wireless coverage equipment and services
made by the parent company and local affiliates, respectively. Under the new policy, even if we
win the bid for wireless coverage equipment, we may not win the bid for services, or vice versa.
Consequently, we may lose revenue with respect to any single wireless coverage project if we cannot
win both equipment contract and service contract for the project. In order to achieve the same
level of revenues from China Mobile group, we may be required to obtain a higher number of projects
from China Mobile group as the per project revenue may be lowered as a result of the policy change
by China Mobile group. Further, the change in procurement policy aims to encourage more
competitive pricing among providers of wireless coverage equipment, which could lead to a
significant decrease in aggregate bidding price for the equipment contracts and the service
contract in relation to any project. As a result, our profit margin may be adversely affected.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We often begin work on a project before we have a contract for our products and services, which may
materially and adversely affect our cash flows from operating activities and liquidity</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In line with industry practice in China, when a customer accepts our bid for a wireless
coverage project, it does not immediately sign a sale and purchase contract. On a typical project,
we must complete the initial installation of our coverage products before our customer will issue a
completion certificate to confirm the acceptance of the products we have delivered and sign a
contract with us. Although we believe that our bidding documents, together with our customers&#146;
acceptances of our bids, effectively constitute binding contracts under PRC law, our PRC counsel
has advised us that enforcement of our rights to payment in the PRC courts may be difficult. In
particular, it is unclear what terms and provisions need to be included in a bid and acceptance in
order for a payment obligation to exist under PRC law. As a result, we effectively assume the risk
of loss for our projects before the customer signs a contract with us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, in line with current industry practice in China, most of our bid documents do not
specify a time period or date by which our customers must issue completion certificates or sign a
sale and purchase contract. As a result, our sales and marketing staff spend a significant amount
of time persuading customers to conduct inspections, issue completion certificates and sign
contracts. These unfavorable practices are in large part attributable to the market dominance of
our customers and the competitive landscape of our wireless coverage industry. We expect that this
unfavorable industry practice in China will continue and that it will continue to materially and
adversely affect our cash flows from operating activities and liquidity.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We have long accounts receivable cycles and long collection periods and our liquidity and cash
flows from operations will deteriorate if our accounts receivable cycles or collection periods
continue to lengthen</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our wireless coverage revenues consist of two components: (i)&nbsp;sale of products and (ii)
product installation services. We only begin to recognize revenues from sale of our products when
all of the following revenue recognition criteria have been met:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>title has been transferred, i.e. the risk and rewards are transferred;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>delivery has occurred;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persuasive evidence of an arrangement exists;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>price to the buyer is fixed and determinable;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>collectibility is reasonably assured; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have an enforceable legal right to receive the contractually specified amount in cash
attributable to sale of products and such right is not contingent upon the installation
services and/or further action of the customers.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recognize revenues from the provision of installation services when:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the services have been rendered in full;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the customer has issued a preliminary inspection certificate which indicates the
customer&#146;s acceptance of the installation services provided; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have an enforceable legal right to receive the contractually specified amount in cash
attributable to the installation services and such right is not contingent upon further
action of the customer.</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, our sale and purchase contracts, in line with industry practice, generally permit our
customers to pay their purchase price in installments even though the revenue for that contract has
already been recognized. Under these contracts, on a weighted average basis, our installment
payment schedule is approximately as follows:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>43% of the contract value due upon the signing of the contract and the issuance of the completion certificate,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an additional 38% due upon the issuance of the preliminary inspection certificate,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a further 16% due upon the issuance of the final inspection certificate, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the final 3% due upon the expiration of our warranty period.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because our contracts often do not stipulate when our customers must conduct the relevant
inspections, our customers may delay their payments. To the extent revenue recognized under a
contract is not yet paid, it is recorded as an account receivable. From time to time, we sell a
portion of our accounts receivable to third parties to meet our working capital needs. Installment
intervals range from six months to three years and the amounts of individual payments have varied
and may continue to vary in the future. As of December&nbsp;31, 2006, we had in aggregate gross accounts receivable,
including amounts not yet due pursuant to contractual terms, of RMB1,005.0&nbsp;million (US$128.8
million). Of this total amount, RMB700.9&nbsp;million (US$89.8&nbsp;million), or 69.7%, had been outstanding
for less than 12&nbsp;months from the time the revenue was recognized, RMB231.3&nbsp;million (US$29.7
million), or 23.0%, had been outstanding for 12 to 24&nbsp;months from the time the revenue was
recognized, RMB68.0&nbsp;million (US$8.7&nbsp;million), or 6.8%, had been outstanding for 24 to 36&nbsp;months
from the time the revenue was recognized, and RMB4.8&nbsp;million (US$0.6&nbsp;million), or 0.5%, had been
outstanding for over 36&nbsp;months from the time the revenue was recognized. Our net accounts
receivable as of December&nbsp;31, 2006 increased by 39.2% to RMB747.9&nbsp;million (US$95.8&nbsp;million) from
our net accounts receivable of RMB537.3&nbsp;million (US$66.6&nbsp;million) as of December&nbsp;31, 2005 as a
result of (1)&nbsp;an increased proportion of our annual revenues being generated in the third and
fourth quarters of 2006, (2i) a 16.3% increase in our total revenues from 2005 to 2006, and (iii)
reduced sales of our accounts receivable to receivable purchasing banks in 2006 as compared to
2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
principal customers, such as China Mobile group and China Unicom
group may delay in paying their installments to us as they come due and, because of our limited bargaining leverage and our need to maintain an ongoing relationship with these principal customers, it is impracticable for us to obtain a significant improvement in their payment patterns. As of December&nbsp;31, 2006, accounts receivable that became due under our contracts and remained
unpaid amounted to RMB353.5&nbsp;million (US$45.3&nbsp;million), or 35.2%, of our gross accounts receivable
of RMB1,005.0&nbsp;million (US$128.8&nbsp;million). Historically, we have made allowances for doubtful
accounts representing 100% of our accounts receivable outstanding for more than 24&nbsp;months from the
date they became due under the relevant contract. As of December&nbsp;31, 2006, this allowance amounted to
RMB6.2&nbsp;million (US$0.8&nbsp;million). Apart from these doubtful accounts for which allowances are made,
all of our remaining accounts receivable were outstanding for less than six months as of December
31, 2006 from the date they became due under the relevant contract. We cannot assure you that our
past allowance practice will not change in the future or that our allowance will be sufficient to
cover defaults in our accounts receivable. You should refer to &#147;Item&nbsp;5. Operating and Financial
Review and Prospectus&#151;Key Factors Affecting Our Results of Operations&#151;Revenue Recognition Policy
and Accounts Receivable Cycle&#148; for further details on our revenue recognition policy and collection
periods. Our liquidity and cash flows from operations will deteriorate if our accounts receivable
cycles or collection periods continue to lengthen.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We historically recognized significantly lower revenues in the first quarter, which sometimes
resulted in net losses in the first quarter, and our revenues may fluctuate significantly from
quarter to quarter in the future, resulting in quarterly net losses</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our customers typically set their annual budgets at the beginning for each year. Once the
annual budget is set, the customers will commence the bidding process for specific projects. As a
wireless coverage equipment and service provider, we do not recognize revenues until installation
is completed. In other words, the amount of revenues we could recognize is typically lower during
the earlier part of the year, especially during the first quarter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our customers generally use the same team to manage different aspects of a project, including
bidding, contracting and payment. Their work is performed in accordance with their internal annual
and semi-annual project management process. As a result, our customers prefer to perform
completion inspections and sign contracts for each batch of installed projects at the same time. We
typically recognize higher levels of revenue during the second and third quarter than that of the
first quarter, because more projects are installed and inspected, and for which completion
certificates are issued, during the second and the third quarter. During the fourth quarter,
especially in December, our principal customers, being public companies and influenced by their
annual reporting obligations, usually perform completion inspection, issue completion certificate
and sign contracts for a vast majority of our projects. Therefore, we typically recognize the
highest level of revenue during the fourth quarter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Despite the quarterly fluctuations experienced in revenue, our overall volume of contracts has
increased, resulting in increasing costs associated with servicing these contracts. Fluctuations in
quarterly revenue with expanding costs have resulted in net losses
being incurred in certain quarters of the recent years, particularly in the first quarter. In 2004, 1.5%, 41.1%, 8.3% and 49.1% of our
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">annual revenues were generated in the first, second, third and fourth quarters of that year, respectively,
and we reported net losses of RMB20.7&nbsp;million and RMB7.7&nbsp;million in the first and third quarters,
respectively. In 2005, 1.2%, 24.3%, 21.8% and 52.7% of our annual revenues were generated in the first, second, third and fourth quarters of that
year, respectively, and we reported net losses of RMB32.3&nbsp;million (US$4.0&nbsp;million) in the first
quarter. In 2006, 1.8%, 21.6%, 22.5% and 54.1% of our annual revenues were generated in the first,
second, third and fourth quarters of that year, respectively, and we reported a net loss of RMB35.7
million in the first quarter. You should refer to &#147;Item&nbsp;5. Operating and Financial Review and
Prospectus&#151;Key Factors Affecting Our Results of Operations&#151;Revenue Recognition Policy and
Accounts Receivable Cycle&#148; and &#147;&#151;Significant Quarterly Fluctuations of Our Results of Operations&#148;
for further details on our revenue fluctuation and other quarterly financial information. However,
past quarterly results may not provide an accurate indication of future performance or fluctuation.
Whether we continue to recognize the majority of our revenues in the fourth quarter will depend
largely upon the timing of our customers&#146; project management processes. We anticipate that we will
continue to experience significant fluctuations in revenues on a quarterly basis and may continue
to experience net losses as a result, particularly in the first quarter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We rely on short-term bank financing, including bills payable and sale of receivables, to finance
our operations; any expansion of our business will require further financing and will increase our
financial leverage</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We tend to recognize more revenues and collect payments primarily in the fourth quarter. In
2004, 2005 and 2006, 54.5%, 53.0% and 53.8%, respectively, of our total annual collections were
made in the fourth quarter. This is because our customers prefer to pay for our completed projects
toward the end of their budget year. However, we commence our production and arrange installation
of products for a significant number of projects beginning in the second quarter of the year and
typically complete and deliver a majority of our wireless coverage products during the third and
fourth quarters. As a result, we tend to generate more cash flow from operating activities toward
the end of the year and encounter increasing working capital needs during the middle part of the
year, especially the third quarter. We are therefore highly dependent on bank financing, including
issuing bills payable and selling accounts receivable, to fund our working capital requirements and
maintain liquidity. Historically, we have relied on short-term bank loans to finance our working
capital needs. As of December&nbsp;31, 2006, we had an aggregate of RMB336.1&nbsp;million (US$43.1&nbsp;million)
of bank loans outstanding and RMB78.6&nbsp;million (US$10.1&nbsp;million) in bills payable. As of December
31, 2006, interest rates on our short-term bank loans ranged from 4.9% to 7.0% and interest rates
on our bills payable financing ranged from 2.4% to 4.4%. In 2005 and 2006, we sold an aggregate of
RMB180.1&nbsp;million and RMB117.7&nbsp;million (US$15.1&nbsp;million), respectively, of our accounts receivable
to third party financial institutions. We expect external financing required for expanding our
operations will increase our financial leverage. See &#147;&#151; Our inability to access long-term working
capital financing due to the current regulatory conditions in China has adversely affected, and
could continue to have a negative impact on, our liquidity&#148; below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may be unable to generate sufficient cash to pay the principal and interest due on our
indebtedness. Our ability to service our debts will largely depend on our ability to collect
accounts receivable from our customers and on our future operating performance. If we do not have
sufficient available sources of liquidity to repay our outstanding indebtedness, we may have to
refinance our obligations. However, we cannot assure you that financing or refinancing will be
available on terms acceptable to us or at all. If we encounter any difficulties in generating
sufficient cash to pay our outstanding indebtedness or in securing financing or refinancing or
receivable selling arrangements on terms satisfactory to us as and when required, our business and
liquidity will be materially and adversely affected, and we will be unable to expand our business.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Our inability to access long-term working capital financing due to the current regulatory
conditions in China has adversely affected, and could continue to have a negative impact on, our
liquidity</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As with most small- and medium-sized enterprises in China, it is difficult for us to enter
into working capital financing arrangements with maturities longer than 12&nbsp;months with lenders or
from the capital markets. Under the current regulatory regime in China, commercial banks are
required by the People&#146;s Bank of China, the central bank in China, to strictly control the making
of working capital loans to small- and medium-sized borrowers with maturities of longer than one
year. We therefore finance our working capital needs through the issue of bills payable backed by,
short-term borrowings from, and sale of accounts receivable to, various financial institutions. The
rates of interest, duration, need for collateral, documentation and other key terms of these
financing arrangements vary significantly and are generally less favorable than long-term financing
or similar arrangements available in other jurisdictions. In addition, we may not be able to renew
existing financing arrangements, and lenders may also have the ability to unilaterally withdraw or
change the terms of our funding, either due to their own internal review process or as guided by
national economic policies. See &#147;&#151; Risks Relating to Business Operations in China &#151; Changes in
China&#146;s political and economic policies and conditions could cause a substantial decline in the
demand for our products and services.&#148; We therefore face a higher cost of funding than non-PRC and
large-sized PRC companies and greater uncertainty as to the availability of financing, which in
turn has adversely affected, and could continue to have a negative impact on, our liquidity.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>If the wireless communication sector in China does not maintain its current pace of growth, or the
PRC government does not issue 3G licenses in the near future, the profitability and future
prospects of our business and our liquidity could be materially and adversely affected</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We generate almost all of our revenues from the provision of wireless coverage products and
services to telecommunication
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">operators in China. Our future success depends on the continued
growth of the PRC wireless communication industry. Any slowdown in the development of the wireless
communication industry in China or reduction in our customers&#146; expenditures on wireless coverage
products and services may reduce market demand for our products and services. Alternatively, if the
PRC government or other relevant regulatory authorities fail to allow construction of new wireless
communication networks, or decide to terminate, delay or suspend construction or extension of new
or existing wireless communication networks, the profitability and future prospects for our
business could be materially and adversely affected.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The third generation wireless communication, or 3G, network deployment will require
significant capital investment by PRC telecommunication operators, including investments in
wireless coverage products and services, RF parts and components and wireless communication
systems. Therefore, we believe that issuance of 3G licenses will in general have a positive impact
on the growth of our business. Mr.&nbsp;Xudong Wang, Minister of the Ministry of Information Industry
in China, or MII, mentioned on the national information industry conference in December&nbsp;2006 that
&#147;the conditions for the development of China&#146;s 3G mobile communication are more or less mature, and
we will continue our efforts to improve the results of large-scale TD-SCDMA application trials
2007.&#148; In the absence of an official guidance from the PRC government on the timing of the
issuance of 3G licenses, the expected return on our investments in 3G technology is uncertain.
Continued delay in the issuance of 3G licenses will negatively impact our business growth and
liquidity.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We may fail to offer products that meet industry standards or our customers&#146; specific requirements,
and as a result we may lose customers or orders or incur significant warranty or other costs, and
our revenue growth may be materially and adversely affected</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The development of our products is based upon a complex technology, and requires significant
time and expertise in order to meet industry standards and customers&#146; specifications. Our customers
also have their own sets of standards and criteria relating to their requirements for wireless
coverage or base station RF products, including standards and criteria issued by the relevant
governmental authorities. We must satisfy these standards and criteria in order to be eligible to
supply our products and services to those customers. If we are unable to continue to meet these
standards and criteria, we may become ineligible to provide our products and services that have in
the past generated most of our revenues and profitability. For example, in 2003, because of a
miscommunication with a China Unicom group&#146;s local affiliate with respect to its bidding
requirements, we failed to tailor our wireless coverage products to the required specifications of
its base stations. As a result, we lost a RMB6.4&nbsp;million bid. Furthermore, quality and performance
problems could damage our reputation and our relationships with existing and prospective customers
and could have a material and adverse effect on our revenue growth.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We customarily provide our customers with one to three years of warranty protection, under
which we agree to repair or replace defectively installed wireless coverage products at no
additional cost to our customers. Our contracts generally do not contain disclaimers or limitations
on product liabilities for special, consequential and incidental damages, nor do we typically cap
the amounts our customers may recover for damages. In addition, we do not currently maintain any
insurance for product liability or warranty claims. The failure of our installed projects to
operate properly and the potential damage from malfunction of our products could give rise to
substantial liabilities under our warranties and otherwise.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Our research and development efforts may not lead to successful development of commercially viable
or acceptable products, which could cause a decline in customer use of our products</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The markets in which we compete are characterized by:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>rapidly changing technology;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>evolving industry standards and transmission protocols;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>frequent improvements in products and services; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>fierce competition from well-funded and technologically advanced companies.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To succeed, we must continually improve our current products and develop and introduce new or
enhanced products that adequately address the requirements of our customers and are competitive in
terms of functionality, performance, quality and price. We expend considerable efforts in the
development of new and enhanced RF technology and in its commercial applications, including the
development of 3G products and base station RF components. Although we have successfully developed
products that meet customers&#146; requirements in the past, there is no assurance that any of our
research and development efforts will necessarily lead to any new or enhanced products or generate
sufficient market share to justify commercialization. For example, 3G is a new and evolving
technology. We cannot assure you that our research and development efforts will yield RF wireless
coverage products that are readily deployable in 3G networks or that our customers will be
satisfied with the performance of our 3G coverage products. Under those circumstances, we will not
be able to recoup our research and development costs and expenses, we may not be able to serve our
customers&#146; 3G needs, and customers may refuse to use our products.
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Gross profit margins for our products and services vary substantially and any deterioration in the
gross profit margin for our principal products and services will have a material and adverse effect
on our results of operations</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit margins for our products and services vary substantially. Although the gross
profit margin for our wireless coverage products and services has been on average higher than the gross profit margin of our
RF parts and components, all of our products and services have been subject to downward pricing
pressure over their life cycles. In addition, the gross profit margin of our products has
fluctuated significantly from year to year. For example, the gross profit margin of our wireless
coverage products was 48.0% in 2006, compared to 54.9% in 2005 and 59.6% in 2004. Further, due to
the rapidly changing technology and evolving industry standards and transmission protocols or
changes in the procurement policies of our major customers, our historical gross profit margin is
not an accurate measure for estimating our future gross profit margins. Any deterioration in the
gross profit margin for our principal products and services will have a material and adverse effect
on our results of operations.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Our industry is highly competitive and our inability to compete effectively would hurt our current
business and future growth potential</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our industry is extremely competitive and is characterized by rapid technological advancement,
frequent development of new products, evolving industry standards and a downward pricing trend over
the life cycle of a product. According to Infosage Analysis, there were more than 70 companies
providing wireless coverage products and services in China as of December&nbsp;31, 2006 and the top
three providers in China in this business, including our company, accounted in aggregate for
approximately 50% of the total market share in 2006. We compete on the following principal bases:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>research and development capability;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>product quality;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>scope and flexibility of product offering;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>after-sale service capability;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>pricing; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>relationships with wireless operators at the local level.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, China has gradually lifted its import restrictions, lowered import tariffs and
relaxed foreign investment restrictions after its entry into the World Trade Organization in
December&nbsp;2001. This has led to increased competition from foreign wireless equipment companies,
such as Andrew Corporation, Sagem Communication and Powerwave Technologies, Inc., who are
significantly larger and financially stronger than us. Many of our foreign competitors have
established PRC-based manufacturing facilities to lower production costs, which has further
intensified price competition in the marketplace and may in the future affect our profit margins.
If we fail to compete effectively in the future, our current business and future growth potential
would be adversely affected.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We have limited experience in operating outside mainland China, and failure to achieve our overseas
expansion strategy may have an adverse effect on our business growth in the future</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future growth depends, to a considerable extent, on our ability to expand our customer
base in both the domestic and overseas markets. We are currently exploring new business
opportunities outside mainland China for our wireless coverage products and services. We have set
up local sales offices in some Southeast Asian countries, such as the Philippines and Indonesia, to
explore market opportunities for our wireless coverage products. However, we have limited
experience in operating outside mainland China or with foreign regulatory environments and market
practices, and cannot guarantee that we will be able to penetrate any overseas market. In
connection with our initial efforts to expand overseas, we have encountered many obstacles,
including cultural and linguistic differences, difficulties in keeping abreast of market, business
and technical developments in foreign jurisdictions, and political and social disturbances. For
example, our products and services sold in China are tailored to the specifications of our domestic
operators and their wireless systems and are not readily deployable overseas. To meet the
requirements of our potential overseas customers, we have to adjust some of our technical
parameters such as transmission frequencies and make other modifications. In addition, recent
political instability in some Southeast Asian countries has hindered our expansion efforts into
those wireless coverage markets. Failure in the development of overseas markets may have an adverse
effect on our business growth in the future.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We rely on key managerial and technical personnel and failure to attract or retain such personnel
may compromise our ability to develop new products and to effectively carry on our research and
development and other efforts</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future growth and success depend largely on the efforts and abilities of our senior
management and senior technical staff, particularly Mr.&nbsp;Yingjie Gao, our chairman and chief
executive officer, Professor Kunjie Zhuang, our director and chief
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">technology officer, and our
other senior technicians and engineers. We have entered into employment agreements with these
individuals. These employment agreements have an initial term of three years, subject to the right
of termination under specified circumstances, such as a material breach of their contractual
obligations. If we lose the services of Mr.&nbsp;Gao, Professor Zhuang or any other senior technicians
or engineers, our operations will be materially and adversely affected. We also believe that our
future success will depend in large part upon our ability to attract and retain senior, experienced
and highly qualified scientific and technical personnel.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The wireless coverage industry is characterized by a high level of employee mobility.
Competition in China for experienced RF technology experts is intense. In 2004, 2005 and 2006, our
employee turnover rate was 14.0%, 17.7% and 24.6%, respectively, as determined by dividing the
number of our employees departing during the year over the total number of employees at the end of
the year. There are few senior-level research and development or technical personnel available for
hire as the costs of hiring and retaining such individuals are high, and such personnel may not
remain with us once hired. If we are unable to successfully attract or retain senior-level research
and development employees, our ability to develop new technologies and products and to effectively
conduct our operations could be compromised and our ability to carry on our research and
development and other efforts could be materially and adversely affected.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We rely on third parties to carry out the initial installation of our wireless coverage products,
are liable for the failure or inadequacy of their services, and are vulnerable to the loss and
unavailability of their services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on independent third party contractors to carry out the initial installation of our
wireless coverage products, which include affixing the products to the customers&#146; physical
structure and interconnection of the products under the supervision of engineers from our technical
support team. We outsource substantially all of our initial installation work to independent third
party contractors located across China. Under our contracts, we are responsible to our customers
not only for the quality of our wireless coverage products but also for the quality of the
installation service. We therefore effectively take the credit and workmanship risks of these
independent contractors. To the extent our independent contractors fail to install our products
properly, we will be liable to cure the defects. We usually contract our initial installation work
to those contractors located near the project sites for cost efficiency reasons. If any of the
local contractors becomes unavailable and we are not able to find any suitable replacement, we will
be forced to use contractors located farther away from the project sites. This is likely to delay
our projects or increase our project costs. It is also possible that we may not be able to find
suitable replacements at all to complete our project installations on schedule. In each case, our
business would be harmed, and our reputation would be adversely affected if we fail to find the
appropriate third party contractors to carry out the initial installation.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss
or misappropriation of, or disputes over, our intellectual property</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our ability to compete successfully and to achieve future revenue growth will depend, in
significant part, on our ability to protect our proprietary technology and operate without
infringing upon the intellectual property rights of others. The legal regime in China for the
protection of intellectual property rights is still at its early stage of development. Intellectual
property protection became a national effort in China in 1979 when China adopted its first statute
on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and
Copyright Law and promulgated related regulations such as Regulation on Computer Software
Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on
Internet Domain Names. China has also acceded to various international treaties and conventions in
this area, such as the Paris Convention for the Protection of Industrial Property, Patent
Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of
Marks. In addition, when China became a party to the World Trade Organization in 2001, China
amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of
Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made
by China over the years with a view to tightening up its regulation and protection of intellectual
property rights, private parties may not enjoy intellectual property rights in China to the same
extent as they would in many Western countries, including the United States, and enforcement of
such laws and regulations in China have not achieved the levels reached in those countries. Both
the administrative agencies and the court system in China are not well-equipped to deal with
violations or handle the nuances and complexities between compliant technological innovation and
non-compliant infringement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on trade secrets and registered patents and trademarks to protect our intellectual
property. We have also entered into confidentiality agreements with our management and employees
relating to our confidential proprietary information. However, the protection of our intellectual
properties may be compromised as a result of:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>departure of any of our management members or employees in possession of our confidential
proprietary information;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>breach by such departing management member or employee of his or her confidentiality and
non-disclosure undertaking to us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>expiration of the protection period of our registered patents or trademarks;</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>infringement by others of our proprietary technology and intellectual property rights; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>refusal by relevant regulatory authorities to approve our patent or trademark applications.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any of these events or occurrences may have a material adverse effect on our operations. There
is no assurance that the measures that we have put into place to protect our intellectual property
rights will be sufficient. As the number of patents, trademarks, copyrights and other intellectual property rights in our industry increases, and
as the coverage of these rights and the functionality of the products in the market further
overlap, we believe that business entities in our industry may face more frequent infringement
claims. Litigation to enforce our intellectual property rights could result in substantial costs
and may not be successful. If we are not able to successfully defend our intellectual property
rights, we might lose rights to technology that we need to conduct and develop our business. This
may seriously harm our business, operating results and financial condition, and enable our
competitors to use our intellectual property to compete against us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Furthermore, if third parties claim that our products infringe their patents or other
intellectual property rights, we might be required to devote substantial resources to defending
against such claims. If we are unsuccessful in defending against such infringement claims, we may
be required to pay damages, modify our products or suspend the production and sale of such
products. We cannot guarantee that we will be able to modify our products on commercially
reasonable terms.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>If we lose certain government tax concessions, our profitability may be materially and adversely
affected.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shenzhen GrenTech Co., Ltd., or Shenzhen GrenTech, is our principal operating subsidiary in
China. Shenzhen GrenTech and one of our indirect majority-owned subsidiaries, Shenzhen Lingxian
Technology Co., Ltd., or Shenzhen Lingxian, were recognized by Shenzhen municipal tax authorities
as newly established production-oriented enterprises in 2000 and 2002, respectively. According to
the relevant September&nbsp;1988 regulation issued by the Shenzhen municipal government, such status and
accompanying tax concessions are granted to all newly established enterprises in Shenzhen engaged
in industrial, agricultural, transportation and other production-oriented businesses that have an
expected corporate existence of over 10&nbsp;years. These enterprises are exempt from 100% of their
corporate income tax for each of the first and second profitable years and 50% of their corporate
income tax for each of the following three years. In addition, advanced technology enterprises
recognized by the Shenzhen municipal government may continue to enjoy a 50% reduction in their
corporate income tax for a further three years. As newly established production-oriented
enterprises, both Shenzhen GrenTech and Shenzhen Lingxian were exempt from PRC corporate income tax
for the first two profitable years from January&nbsp;1, 2001 to December&nbsp;31, 2002 for Shenzhen GrenTech
and from January&nbsp;1, 2002 to December&nbsp;31, 2003 for Shenzhen Lingxian. The companies were subject to
a reduced tax rate of 7.5% for the three financial years from January&nbsp;1, 2003 to December&nbsp;31, 2005
for Shenzhen GrenTech and from January&nbsp;1, 2004 to December&nbsp;31, 2006 for Shenzhen Lingxian. Because
Shenzhen GrenTech was recognized by Shenzhen municipal government as an advanced technology
enterprise in December&nbsp;2004, Shenzhen GrenTech applied for and was granted on December&nbsp;13, 2005 an
extension of its 50% relief from income tax for an additional three-year period commencing from
January&nbsp;1, 2006 and ending on December&nbsp;31, 2008. Shenzhen Lingxian is currently applying for
recognition as an advanced technology enterprise. If we receive the government approval, Shenzhen
Lingxian will be subject to the 50% relief from income tax rate for the three financial years
commencing from January&nbsp;1, 2007 to December&nbsp;31, 2009.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although we have the right to apply for advanced technology enterprise recognition and
extension of our tax exemption, there is no assurance that Shenzhen Lingxian will receive such
recognition and approval in due course, or that any of the current tax exemptions that we enjoy
will be extended upon their expiration. Without extension of the tax relief period, Shenzhen
Lingxian will be subject to the corporate income tax rate generally applicable to enterprises
established in the Shenzhen Special Economic Zone.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;16, 2007, the National People&#146;s Congress of the PRC passed the Enterprise Income Tax
Law, which will take effect as of January&nbsp;1, 2008. In accordance with the enterprise income tax
law, a unified enterprise income tax rate of 25%, a unified deduction measure and standard and
unified tax preferential treatment will be applied to both foreign invested and domestic
enterprises and an income tax rate of 15% will be provided to advanced technology enterprises
recognized by the government authorities. The new law also provides for transitional measures for
enterprises established prior to the promulgation of the new law and eligible for lower tax rate
preferential treatment in accordance with the then prevailing tax laws and administrative
regulations. These enterprises will gradually become subject to the new, unified tax rate over a
five-year period; enterprises eligible for regular tax reductions or exemptions may continue to
enjoy tax preferential treatments after the implementation of the new law and until their
preferential treatment expire. The preferential treatment period of enterprises which have not
enjoyed any preferential treatments for the reason of not having made any profits, however, shall
be deemed as starting from the implementation of the new law. In addition, foreign companies
headquartered in China may be classified as PRC resident enterprises and their worldwide income may
be subject to tax under the new law. Given that the new law has been promulgated only recently,
its implementation has yet to be further clarified in practice. Moreover, our historical operating
results may not be indicative of our operating results for future periods as a result of the
expiration of the tax holidays we enjoy.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>If our customers increasingly provide their own equipment or accessories instead of ordering
them from us, our ability to generate revenues to sustain our business or support our growth may be
materially and adversely affected</I></B>
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our wireless coverage products often include, among other things, various accessories such as
cables and antennas for installation. In 2004, 2005 and 2006, accessories included as a part of our
product sales accounted for approximately 29.8%, 26.4% and 33.9% of our revenues, respectively. In
2003, some of our customers began to procure accessories on their own and exclude accessories from
our wireless coverage products. This practice effectively reduced our revenues. We lost revenues
from sale of accessories from our wireless coverage products in 2004, 2005 and 2006 by RMB24.4
million, RMB20.4&nbsp;million and RMB20.0&nbsp;million, or 4.3%, 2.8% and 2.4% of our revenues, respectively.
If customers continue to choose to procure their own accessories, our ability
to generate revenues to sustain our business or support our growth may be materially and adversely
affected. Similarly, the new procurement policy adopted by China Mobile during the fourth quarter
of 2006 may result in lower revenues for us from certain product offerings. For more details, see
&#147;Risk Factors&#151;Risks Relating to Our Company&#151;Changes in the procurement policies by our major
customers may adversely affect our profit margin on our wireless coverage products.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>If our idle or insufficient production capacity significantly increases during any particular
period, our results of operations for that period may be materially and adversely affected</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We plan the utilization of our production capacity primarily based on our projected orders
from our customers. We cannot guarantee the accuracy of our internal projections for demands of our
products and the effectiveness of our planning for production capacity utilization. For example, we
currently have 16 assembly lines in Shenzhen with a monthly production capacity of 2,400 sets of
wireless coverage products and 15,000 sets of RF parts and components for base stations. We also
have six assembly lines in Quanzhou with a monthly production capacity of 18,000 sets of RF parts
and components. Our actual average monthly production at the Shenzhen facility in 2006 amounted to
approximately 2049 sets of wireless coverage products and 10,000 sets of RF parts and components
for base stations; and our actual average monthly production at the Quanzhou facility in 2006
amounted to approximately 10,700 sets of RF parts and components. It costs approximately RMB1.3
million (US$0.2&nbsp;million) to add or remove an assembly line for wireless coverage products, and
approximately RMB4.3&nbsp;million (US$0.5&nbsp;million) to add or remove an assembly line for RF parts and
components. Therefore, if our projections are inaccurate, there may be periods when we will have
idle or insufficient production capacity for all or some types of our products. For example,
demands for our base station RF parts and components exceeded our projections in 2006. We were
limited by our production capacity and unable to fill all orders. Any significant increase in our
idle or insufficient production capacity during any particular period may materially and adversely
affect our results of operations for that period.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Our operations may be adversely affected by shortages of raw materials and the volatility in the
prices of raw materials.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We purchase raw materials such as various electronic components, metal cases for modules and
wireless coverage products, electronic cables, packaging materials and other accessories. In
order to meet our production delivery schedules, we must obtain sufficient quantities of high
quality raw materials in a timely manner. In this respect, we do not enter into long-term
contracts with our suppliers of raw materials. As a result, our operations are vulnerable to
changes in the supply and prices of raw materials. For example, in the third quarter of 2006, the
cost of coaxial cables rose as a result of increases in copper prices, which in turn led to a
reduction of 1.6% in the gross profit margin of our products incorporating coaxial cables.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No assurance can be given that we will be able to obtain sufficient quantities of raw
materials in the future and no assurance can be given that our operations will not be adversely
affected by increases in prices of raw materials.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>If we fail to acquire raw materials on time or on acceptable terms and consequently fail to fill
our customers&#146; orders in a timely and cost-effective manner, our business operations may be
materially and adversely affected</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on third-party suppliers for our raw materials. Although we purchased raw materials
from over 460 suppliers in 2006, our ten largest suppliers in 2006 supplied approximately 32.9% of
our orders for raw materials. If any of our major suppliers fails to deliver our required raw
materials in time for our production, and we are unable to find the required raw materials from
other suppliers in a timely manner and on acceptable terms, there will be a delay in our provision
of products and services to our customers. Such delays would damage our relationship with our
customers and may materially and adversely affect our business operations.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>We maintain limited insurance coverage and any significant product liability claim could have a
material and adverse effect on our financial condition</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We currently do not maintain any product liability insurance for our products and services,
nor do we carry any business interruption insurance, third-party liability insurance for personal
injuries, or environmental damage insurance for environmental emissions or accidents on our
properties or relating to our operations. There is no assurance that there will not be any product
liability claims against us in relation to our RF products. Furthermore, we cannot assure you that
we will not experience any major accidents in the course of our operations, which may cause
significant property damage and personal injuries. The occurrence of any such accidents and their
consequential losses may not be adequately covered, or at all, by our insurance policies. Losses
incurred, or payments we may be required to make, may have a material and adverse effect on our
financial condition.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>The interest of our principal shareholders may differ from your interest and their vote may
disadvantage our minority shareholders</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since
the completion of our initial public offering in March&nbsp;2006, several of our current principal
shareholders continue to be our largest shareholders with the following equity interests in our
company as of the date of this annual report:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Guoren Industrial with 24.0%;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Heng Xing Yue Investments Limited, or HXY Investments, with 18.3%; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Drag Investments with 10.3%.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, two of our principal shareholders, Mr.&nbsp;Gao and Professor Zhuang, who beneficially
own 24.0% and 10.3%, respectively, of our company immediately upon completion of our initial public
offering, are our chairman and chief executive officer, and our director and chief technology
officer, respectively. They will be able to exercise substantial control over our business by
voting at shareholders&#146; meetings or board meetings on matters of significance, such as:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>composition of our board of directors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>selection of our senior management;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>amount and timing of dividends and other distributions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our overall strategic and investment decisions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>issuance of securities and adjustment to our capital structure;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>amendment to our memorandum and articles of association; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>other corporate actions requiring approval of our shareholders, including election and
removal of directors, merger, consolidation or sale of our assets, or any other change of
control event that may benefit our other shareholders generally.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The interest of any of these principal shareholders may differ from your interest. There is no
assurance that any of these principal shareholders will vote in a way that benefits you. If
circumstances arise in which the interest of any of these principal shareholders conflicts with the
interest of other holders of our shares or ADSs, you as a minority shareholder could be
disadvantaged.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>The major shareholder of one of our consolidated PRC subsidiaries has a veto right on some matters
under PRC law and may vote his shares or exercise his veto right in a manner adverse to our
interests</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Professor Zhuang, our director and chief technology officer, together with his son, is the
20%-shareholder of one of our consolidated PRC subsidiaries, Quanzhou Lake Microwave Co., Ltd., or
Lake Microwave. Conflict of interests between his duties to, and interest in, our company and our
consolidated subsidiary may arise. We cannot assure you that, when any conflict of interest arises,
Professor Zhuang will act completely in our interest or that any conflict of interest will be
resolved in our favor. Also, under PRC law, minority shareholders of foreign-invested joint
ventures, such as Lake Microwave, have veto power on certain issues such as share transfer, capital
increase and amendment to their articles of association. We cannot assure you that Professor Zhuang
will not exercise his influence over Lake Microwave in a manner that may conflict with our interest
or that he will not vote his shares or exercise his veto right in a manner adverse to our
interests.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Our primary source of funds for dividend and other distributions from our operating subsidiary in
China is subject to various legal and contractual restrictions and uncertainties, and our ability
to pay dividends or make other distributions to our shareholders is negatively affected by those
restrictions and uncertainties</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a holding company established in the Cayman Islands and conduct our core business
operations through our principal operating subsidiary, Shenzhen GrenTech, in China. As a result,
our profits available for distribution to our shareholders are dependent on the profits available
for distribution from Shenzhen GrenTech and its subsidiaries. If Shenzhen GrenTech or its
subsidiaries incur debt on their own behalf, the debt instruments may restrict their ability to pay
dividends or make other distributions, which in turn would limit our ability to pay dividends on
our shares and ADSs. Under current PRC law, because we are incorporated in the Cayman Islands, our
PRC subsidiary, Shenzhen GrenTech, is regarded as a wholly foreign-owned enterprise in China.
Although dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises
and sino-foreign joint ventures, are not subject to any PRC corporate withholding tax, PRC law
permits payment of dividends only out of net income as determined in accordance with PRC accounting
standards and regulations. Determination of net income under PRC accounting standards and
regulations may differ from determination under U.S. GAAP in significant aspects, such as the use
of
</DIV>


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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">different principles for recognition of revenues and expenses. In addition, if any
undistributed profits of our PRC subsidiary, Shenzhen Grentech, are used to increase its registered
capital so that our equity interests in our PRC subsidiary are increased, approval of the PRC
government is required. Under PRC law, Shenzhen GrenTech, a wholly foreign-owned enterprise, is
required to set aside a portion of its net income each year to fund designated statutory reserve
funds. These reserves are not distributable as cash dividends. As a result, our primary internal
source of funds for dividend payments from Shenzhen GrenTech is subject to these and other legal
and contractual restrictions and uncertainties, which in turn may limit or impair our ability to
pay dividends to our shareholders. Moreover, any transfer of funds from us to Shenzhen GrenTech,
either as a shareholder loan or as an increase in registered capital, is subject to registration
with or approval by PRC governmental authorities. These limitations on the flow of funds between us
and Shenzhen GrenTech could restrict our ability to act in response to changing market conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Some of our production and research and development facilities and offices are situated on
properties under short-term leases or with defective titles and our operating costs may increase if
we are not able to renew the existing leases or if such leases can only be renewed on less
favorable terms</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The production and research and development facilities of Shenzhen GrenTech and Shenzhen
Lingxian are currently situated on properties leased from independent third parties. They occupy an
aggregate gross floor area of approximately 5,213.5 square meters. Our leases for these facilities
range from one to two years in original lease terms and are due to expire between June&nbsp;2007 and
December&nbsp;2007. Our total rental payment for these leased properties in 2006 was approximately
RMB6.3&nbsp;million (US$0.8&nbsp;million).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are in the process of constructing our new research and production facilities in Shenzhen
High Technology Industrial Park, which is expected to be completed by December&nbsp;2007 or shortly
thereafter. Upon completion of the construction, we expect to relocate our existing facilities
from the leased premises to Shenzhen High Technology Industrial Park. Even though the
construction of our new facilities in Shenzhen High Technology Industrial Park has been on
schedule, we may experience construction delays, in which case we will need to renew our leases
with short notice. We have no assurance that the leases will be renewed on terms and conditions
that are acceptable to us<B>. </B>If these leases cannot be renewed, we will have to find other
appropriate premises. Although our equipment and machinery may be relocated without undue financial
difficulties, such relocation may disrupt our current operations or otherwise have an adverse
effect on our financial condition. Alternatively, if the existing leases can only be renewed on
less favorable terms, our operating costs will increase and thus our results of operations could be
adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For some of the properties leased by us for office use, we are unable to ascertain whether or
not their respective landlords have valid title to them or legal rights to lease them. If the
relevant leases become invalid for any reason and we have to relocate to other office premises, we
may incur additional costs and expenses and experience business disruptions as a result.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Investor confidence and market price of our ADSs may be adversely impacted if we or our independent
registered public accountants are unable to attest to the adequacy of the internal controls over
our financial reporting as of December&nbsp;31, 2007, as required by Section&nbsp;404 of the U.S.
Sarbanes-Oxley Act of 2002</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are subject to the reporting requirements of the U.S. Securities and Exchange Commission,
or SEC. The SEC, as directed by Section&nbsp;404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules
requiring public companies such as ourselves, to include a report of management of their internal
control structure and procedures for financial reporting in their annual reports on Form 10-K or
Form 20-F, as the case may be, that contain an assessment by management of the effectiveness of
their internal controls over financial reporting. In addition, independent registered public
accountants of these public companies must attest to and report on management&#146;s assessment of the
effectiveness of their internal controls over financial reporting. These requirements will first
apply to our annual report on Form 20-F for the fiscal year ending on December&nbsp;31, 2007. Our
management may not conclude that our internal controls over financial reporting are effective.
Moreover, even if our management does conclude that our internal controls over financial reporting
are effective, if our independent registered public accountants are not satisfied with our internal
control structure and procedures, the level at which our internal controls are documented,
designed, operated or reviewed, or if the independent registered public accountants interpret the
requirements, rules or regulations differently from us, they may decline to attest to our
management&#146;s assessment or may issue a report that is qualified. Any of these possible outcomes
could result in an adverse reaction in the financial marketplace due to a loss of investor
confidence in the reliability of our financial statements, which could negatively impact the market
price of our ADSs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Risks Relating to Our Industry</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Our business might become subject to new regulatory restrictions, which may restrict the way in
which we conduct our business and subject us to severe penalties, and we may be materially and
adversely affected by any change in the composition of the primary telecommunication operators in
China</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are subject to regulation by PRC law with respect to the products we manufacture and sell
in China. We must obtain regulatory approvals from the national and local government authorities
before we may manufacture and sell our products. MII is the primary central government agency
responsible for regulating the PRC wireless communication industry and has broad
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">discretion and authority to regulate our industry in China. Introduction of any new
transmission protocol will require the approval of MII and other regulatory bodies. MII has
adopted, and may adopt in the future, regulations that impose stringent standards on the wireless
communication industry in China, with which we must comply. New regulations or readjustment of
previously implemented regulations could require us to change our business plan, increase our costs
or limit our ability to sell our products or services. Our failure to comply with these regulations
may subject us to various penalties, including fines and suspension or discontinuation of our
operations. Therefore, enactment by the PRC government of new laws or regulations or a change in
the interpretation of existing laws or regulations may also materially and adversely affect our
business.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The PRC government has considerable control over the structure and overall development of the
telecommunication industry in China. It also maintains substantial ownership in all major
telecommunication operators in China. Prior to 1994, PRC government-controlled entities held a
monopoly over the telecommunication networks across China. In order to introduce competition into
the telecommunication industry, the PRC government in 1994 separated China&#146;s telecommunication
business into four independent sectors: fixed-line, wireless, satellite and paging. In 2002, the
PRC government further separated the then China Telecom group into two companies along geographical
boundaries, with the portion in southern China as the current China Telecom group and the northern
portion as the current China Netcom group. In early 2005, the PRC government decided to swap some
of the senior management members among China&#146;s largest telecommunication operators. In mid-2005,
there was speculation among industry analysts, as well as comments by some senior officers of
China&#146;s largest telecommunication operators, regarding a potential restructuring of the PRC
wireless communication industry in advance of the issuance of 3G licenses. According to some
commentators, the PRC government believes that there are too many national wireless operators to
receive 3G licenses. If these market speculations prove to be true and the PRC government
reorganizes, splits or merges one or more of China&#146;s main telecommunication operators, including
our two principal group customers, the China Unicom group and the China Mobile group, such
restructuring could disrupt our existing relationship with our current customers and result in
changes in supplier and sourcing policies of these companies, all of which have been critical to
our business growth and profitability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Risks Relating to Business Operations in China</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Changes in China&#146;s political and economic policies and conditions could cause a substantial decline
in the demand for our products and services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Historically, we derived almost all of our revenues from a single market, mainland China. We
anticipate that mainland China will continue to be our primary production and sales base in the
near future and currently almost all of our assets are located in China and all of our services are
performed in China. While the PRC government has pursued economic reforms to transform its economy
from a planned economy to a market-oriented economy since 1978, a large part of the PRC economy is
still being operated under varying degrees of control by the PRC government. By imposing industrial
policies and other economic measures, such as restrictions on lending to certain sectors of the
economy, control of foreign exchange, taxation and restrictions on foreign participation in the
domestic market of various industries, the PRC government exerts considerable direct and indirect
influence on the development of the PRC economy. Many of the economic reforms carried out by the
PRC government are unprecedented or experimental and are expected to be refined and improved. Other
political, economic and social factors may also lead to further adjustments of the PRC reform
measures. This refining and adjustment process may not necessarily have a positive effect on our
operations and our future business development. For example, the PRC government has in the past
implemented a number of measures intended to slow down certain segments of the PRC economy that the
government believed to be overheating, including placing additional limitation on the ability of
commercial banks to make loans by raising bank reserve-against-deposit rates. Our operating results
may be materially and adversely affected by changes in the PRC economic and social conditions and
by changes in the policies of the PRC government, such as measures to control inflation, changes in
the rates or method of taxation and the imposition of additional restrictions on currency
conversion.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Changes in foreign exchange regulation in China may affect our ability to pay dividends in foreign
currencies</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We currently receive all of our operating revenues in Renminbi. Currently, Renminbi is not a
freely convertible currency and the restrictions on currency exchanges in China may limit our
ability to use revenues generated in Renminbi to fund our business activities outside China or to
make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion
of Renminbi into foreign currencies. Over the years, the PRC government has significantly reduced
its control over routine foreign exchange transactions under current accounts, including trade- and
service-related foreign exchange transactions, foreign debt service and payment of dividends. In
accordance with the existing foreign exchange regulations in China, our PRC subsidiary, Shenzhen
GrenTech, is able to pay dividends in foreign currencies, without prior approval from the PRC State
Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The
PRC government may, however, at its discretion, restrict access in the future to foreign currencies
for current account transactions and prohibit us from converting our Renminbi-denominated earnings
into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay us dividends in
foreign currency without prior approval from SAFE. In addition, conversion of Renminbi for most
capital account items, including direct investments, is still subject to government approval in
China and companies are required to open and maintain separate foreign exchange accounts for
capital account items. This restriction may limit our ability to invest earnings of Shenzhen
GrenTech.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Fluctuation in the value of Renminbi could adversely affect the value of, and dividends payable on,
our shares and ADSs in foreign currency terms</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The value of Renminbi is subject to changes in PRC government policies and depends to a large
extent on China&#146;s domestic and international economic, financial and political developments, as
well as the currency&#146;s supply and demand in the local market. For over a decade from 1994, the
conversion of Renminbi into foreign currencies, including the U.S. dollar, was based on exchange
rates set and published daily by the People&#146;s Bank of China, the PRC central bank, based on the
previous day&#146;s interbank foreign exchange market rates in China and exchange rates on the world
financial markets. The official exchange rate for the conversion of Renminbi into U.S. dollars
remained stable until Renminbi was revalued in July&nbsp;2005 and allowed to fluctuate by reference to a
basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi was be
permitted to fluctuate within a band against a basket of foreign currencies. As a result, as of May
1, 2007, the Renminbi has appreciated approximately 7.4% against the U.S. dollar since July&nbsp;2005.
There remains significant international pressure on the PRC government to adopt a substantially
more liberalized currency policy, which could result in a further and more significant appreciation
in the value of Renminbi against the U.S. dollar. Further revaluations of Renminbi against the U.S.
dollar may also occur in the future. Since our income and profits are denominated in Renminbi, any
appreciation of Renminbi would increase the value of, and any dividends payable on, our shares and
ADSs in foreign currency terms. Conversely, any depreciation of Renminbi would decrease the value
of, and any dividends payable on, our shares and ADSs in foreign currency terms.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>The uncertain legal environment in China could limit the legal protections available to you</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The PRC legal system is a civil law system based on written statutes. Unlike the common law
system, the civil law system is a system in which decided legal cases have little precedential
value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and
regulations to provide general guidance on economic and business practices in China and to regulate
foreign investment. Our PRC subsidiary, Shenzhen GrenTech, is a wholly foreign-owned enterprise and
is subject to laws and regulations applicable to foreign investment in China in general and laws
and regulations applicable to wholly foreign-owned enterprises in particular. China has made
significant progress in the promulgation of laws and regulations dealing with economic matters such
as corporate organization and governance, foreign investment, commerce, taxation and trade.
However, the promulgation of new laws, changes of existing laws and abrogation of local regulations
by national laws may have a negative impact on our business and prospects. In addition, as these
laws, regulations and legal requirements are relatively recent and because of the limited volume of
published cases and their non-binding nature, the interpretation and enforcement of these laws,
regulations and legal requirements involve significant uncertainties. These uncertainties could
limit the legal protections available to foreign investors, including you. For example, it is not
clear if a PRC court would enforce in China a foreign court decision brought by you against us in
shareholders&#146; derivative actions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Moreover, the enforceability of contracts in China, especially with governmental entities, is
relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations,
we might not have adequate remedies. Such uncertainties or inability to enforce our contracts could
materially and adversely affect our revenues and earnings.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Outbreak of SARS or other epidemics could materially and adversely affect our overall operations
and results of operations</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From March to July&nbsp;2003, mainland China, Hong Kong, Singapore, Taiwan and some other areas in
Asia experienced an outbreak of a new and contagious form of atypical pneumonia known as severe
acute respiratory syndrome, or SARS. Our operating results for 2003 were adversely affected by this
outbreak. A recurrent outbreak, or an outbreak of a similarly contagious disease, such as the H5N1
avian flu, could potentially disrupt our operations to the extent that any one of our employees is
suspected of having the infection or that any of our facilities is identified as a possible source
of spreading the virus or disease. We may be required to quarantine employees who are suspected of
having an infection. We may also be required to disinfect our facilities and therefore suffer a
suspension of production of indefinite duration. Any quarantine or suspension of production at any
of our facilities will adversely affect our overall operations. In addition, any such outbreak will
likely restrict the level of economic activities in the affected areas, which could materially and
adversely affect our business and results of operations.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Recent regulations relating to offshore investment activities by PRC residents may limit our
ability to acquire PRC companies and adversely affect our business and prospects</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In October&nbsp;2005, SAFE issued a circular concerning foreign exchange regulations on investments
by PRC residents in China through special purpose companies incorporated overseas. The circular
states that, if PRC residents use assets or equity interests in their domestic entities as capital
contribution to establish offshore companies or inject assets or equity interests of their PRC
entities into offshore companies to raise capital overseas, such PRC residents must register with
local SAFE branches with respect to their overseas investments in offshore companies and must also
file amendments to their registrations if their offshore companies experience material events, such
as changes in share capital, share transfer, mergers and acquisitions, spin-off transactions or use
of assets in China to guarantee offshore obligations. Our shareholders have completed the relevant
SAFE registration procedures as currently required.
</DIV>

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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As it is uncertain how SAFE will interpret or implement its circular, we cannot predict how
this circular and other SAFE circulars will affect our business operations or future strategies.
For example, we may be subject to more stringent review and approval process with respect to our
foreign exchange activities, such as remittance of dividends and foreign currency-denominated
borrowings, which may adversely affect our business and prospects.
</DIV>
<DIV align="left">
<A name="107"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 4. INFORMATION ON THE COMPANY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>HISTORY AND DEVELOPMENT</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our legal and commercial name is China GrenTech Corporation Limited. Our principal executive
offices are located at 16th Floor, Zhongyin Tower, Caitian North Road, Futian District, Shenzhen
518026, People&#146;s Republic of China. Our telephone number is (86-755) 83501796. Our registered
offices are located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman
KY1-1111, Cayman Islands. We have appointed CT Corporation System, 111 Eighth Avenue,
13<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> Floor, New York, New York 10011, United States of America, with telephone number
1-212-894-8940, as our agent for service of processes for actions brought under the U.S. securities
laws.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The diagram below illustrates our current corporate structure:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><IMG src="h01182x0118204.gif" alt="(FLOW CHART)">
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->18<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>The remaining 1% interest in Shenzhen Lingxian is owned by Ms.&nbsp;Xiujun Zhang, an employee of
ours.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>The remaining 20% interest in Lake Communication is owned by Mr.&nbsp;Haifan Zhuang, son of
Professor Zhuang.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>The remaining 20% interest in Lake Microwave is owned by Lake (Hong Kong) Technology Limited,
an affiliated company of Professor Zhuang.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We were incorporated on December&nbsp;3, 2003 in the Cayman Islands as an exempted company with
limited liability under the Cayman Islands Companies Law. We hold, through our wholly owned
subsidiary, GrenTech (BVI)&nbsp;Limited, or GrenTech BVI, 100% of the equity interest of Shenzhen
GrenTech. Shenzhen GrenTech was formed on July&nbsp;5, 1999 by Mr.&nbsp;Gao and Professor Zhuang, as a
domestic limited liability company in China. Subsequent to our incorporation, we converted Shenzhen
GrenTech into a wholly foreign-owned enterprise under PRC law in order to benefit from various tax
and other incentives available to foreign-invested enterprises in China.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since our inception in 1999, we have been focused on the development and application of our RF
technologies for commercial uses. In 2000, we produced and commercialized our first integrated
repeater. In 2001, we began the testing of CDMA repeaters, which we subsequently began selling to
the China Unicom group later that year. In 2003, we completed our first PHS network coverage
project. In March&nbsp;2007, we were among the first PRC enterprises to obtain relevant government
approvals for the development and production of TD-SCDMA repeaters and trunk amplifiers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We conduct our business in China through our indirect wholly-owned subsidiary, Shenzhen
GrenTech, and our other indirect majority-owned subsidiaries:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Shenzhen Lingxian;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Lake Communication; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Lake Microwave.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Shenzhen Lingxian</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shenzhen Lingxian was formed in February&nbsp;2002 by Shenzhen GrenTech as a domestic limited
liability company in China. Shenzhen Lingxian purchases RF parts and components from Lake
Communication and manufactures semi-finished repeaters for Shenzhen GrenTech. As of December&nbsp;31,
2005, we owned 99% of the equity interest in Shenzhen Lingxian and Ms.&nbsp;Xiujun Zhang, one of our
employees, owned the remaining 1% equity interest.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Lake Communication</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Lake Communication was formed in August&nbsp;1989 by Mr.&nbsp;Haifan Zhuang, son of Professor Zhuang, as
a collectively owned enterprise in China and was subsequently converted and registered as a limited
liability company in 1999. Lake Communication specializes in RF part and component production. In
order to strengthen our production capabilities, Shenzhen GrenTech acquired an 82% equity interest
in Lake Communication in December&nbsp;1999. In November&nbsp;2003, Shenzhen GrenTech disposed of an
aggregate 10% equity interest in Lake Communication as part of the consideration for its
acquisition of the equity interest in Lake Microwave, described below, and acquired an additional
8% equity interest in Lake Communication. As of December&nbsp;31, 2006, we indirectly owned an 80%
equity interest in Lake Communication and the remaining 20% equity interest in Lake Communication
was owned by Mr.&nbsp;Haifan Zhuang. As of December&nbsp;31, 2006, substantially all of the RF parts and
components produced at Lake Communication were purchased by Shenzhen Lingxian for use in its
production of semi-finished repeaters.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Lake Microwave</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Lake Microwave was formed in March&nbsp;1993 by Lake Microwave Communication Equipment Co., Ltd. as
a Sino-foreign equity joint venture. Lake Microwave focuses on the research and development of RF
technologies, including the design and development of RF integrated circuits and other new RF
technologies. It also produces RF parts and components exclusively for sale to third party
purchasers. To strengthen our expertise in RF integrated circuits and RF technology, Shenzhen
GrenTech acquired a 51% equity interest in Lake Microwave in November&nbsp;2003, and in June&nbsp;2004
GrenTech BVI acquired a 29% equity interest in Lake Microwave. As of December&nbsp;31, 2006, we
indirectly owned 80% of the equity interest in Lake Microwave and the remaining 20% equity interest
of Lake Microwave was owned by Lake (Hong Kong) Technology Limited, an affiliated company of
Professor Zhuang. Lake Microwave primarily produces the RF parts and components we use for sale to
wireless operators, wireless communication equipment manufacturers and other providers of wireless
coverage products and services.
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>BUSINESS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Overview</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a leading provider of wireless coverage products and services in China. We believe that
we are also a leading developer of radio frequency, or RF, technology in China. RF is the
fundamental technology that enables wireless communication products to transmit and receive
signals. Our core research and development efforts in RF technology and our integrated design,
engineering and production processes have allowed us to design, develop and produce in-house our
two main product lines, namely, (1)&nbsp;wireless coverage products, which are supplied to
telecommunications operators, and (2)&nbsp;base station RF parts and components, which are supplied to
base station equipment manufacturers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have a strong in-house RF technology research and development capability. Our team of 468
researchers and technicians with extensive experience in the wireless communication industry in
China are based in Shenzhen and Quanzhou. We have 23 registered patents and 36 pending patent
applications with the Patent Office of the National Intellectual Property Office of China. Our RF
expertise has provided a platform from which we intend to further broaden our product offerings.
Our integrated development, engineering and production capabilities provide us with a distinct
competitive advantage over our competitors in China by allowing us to quickly respond to customized
design requests from our customers while keeping down our production costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our wireless coverage products enable telecommunication operators to expand the reach of their
wireless communication networks to areas with little or weak coverage, such as buildings, highways,
railways, tunnels and remote regions. Our wireless coverage products include indoor coverage
products and outdoor coverage products, as well as base station coverage extension products. To
date, we have developed over 200 models of wireless coverage equipment. We provide most of our
wireless coverage products and services to local affiliates of the two leading wireless operators
in China, the China Unicom group and the China Mobile group. Since 2004, we have also provided a
portion of our wireless coverage products and services to the China Netcom group and the China
Telecom group. According to Infosage Analysis, we were the second largest provider of wireless
coverage products and services in China in 2006 with an estimated market share of 15.6%. In recent
years, the wireless coverage market in China has benefited from increased capital expenditures by
PRC wireless operators. Further, the capital expenditures of the wireless coverage industry in
China is expected to reach RMB5.6&nbsp;billion in 2007, RMB5.9&nbsp;billion in 2008 and RMB6.2&nbsp;billion in
2009, according to Infosage Analysis. We believe that the increasing capital expenditures will
afford us an opportunity to grow our revenues in the wireless coverage market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our RF parts and components are supplied to base station equipment manufacturers. These
customers use our RF parts and components in their base station manufacturing. To date we have
become a qualified supplier of RF parts and components to six major domestic and foreign base
station manufacturers, which are Huawei Technologies Co., Ltd, ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Siemens AG Communications and
TD-Tech Ltd. We have developed over 20 types of base station RF modules. Since 2006 we have begun
supplying base station RF modules to Alcatel Shanghai Bell Co., Ltd, ZTE Corporation and Siemens AG
Communications in bulk quantities. With rising production costs incurred by base station equipment
manufacturers, more foreign base station equipment manufacturers have chosen to procure base
station RF parts and components mainly in China in order to reduce their costs. We believe the
demand for base station RF parts and components will grow rapidly and our revenues from base
station RF modules will become a major revenue contributor for us in coming periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our revenues were RMB566.5&nbsp;million in 2004, RMB716.3&nbsp;million in 2005 and RMB832.8&nbsp;million
(US$106.7&nbsp;million) in 2006. Our gross profit was RMB324.6&nbsp;million in 2004, RMB388.2&nbsp;million in
2005 and RMB395.8&nbsp;million (US$50.7&nbsp;million) in 2006. Our net income was RMB146.6&nbsp;million in 2004,
RMB181.4&nbsp;million in 2005 and RMB148.8&nbsp;million (US$19.1&nbsp;million) in 2006. Our operating income
increased from RMB207.5&nbsp;million in 2004 to RMB225.0&nbsp;million in 2005 and RMB179.2&nbsp;million (US$23.0
million) in 2006, with operating income margins of 36.7% in 2004, 31.4% in 2005 and 21.5% in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Our Wireless Coverage Products and Services</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal business is the provision of wireless coverage products and services in China
with our self-developed RF technology. In 2004, 2005 and 2006, revenues generated from the
provision of wireless coverage products and services accounted for approximately 94.2%, 95.5% and
95.3% of our revenues, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Wireless Coverage Products</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We produce a wide range of wireless coverage products, including repeaters, trunk amplifiers,
base station amplifiers, tower amplifiers and related accessories. The principal functions of
wireless coverage products are to extend wireless coverage and improve radio signal quality. Our
wireless coverage products support various transmission protocols, including CDMA, GSM, PHS and
digital trunk communications. We have completed our research and development for various 3G network
coverage products. In 2006, Our TD-SCDMA repeaters and trunk amplifiers passed the joint trials
conducted respectively by several base station manufacturers, namely, Datang Mobile Communications
Equipment Co., Ltd, China Putian and TD Tech Ltd, with
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">satisfactory results. We participated in the formulation of TD-SCDMA repeater standard by
China Telecommunication Technology Labs, or CTTL, and wireless coverage network management standard
by China Mobile group. In March&nbsp;2007, we were among the first PRC enterprises to obtain relevant
government approvals for the development and production of TD-SCDMA repeaters and trunk. We have
been selected to build wireless coverage systems for the 2008 Beijing Olympics, which we expect
will further enhance our brand image and strengthen our business relationship with China Mobile
group.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We use our wireless coverage products in three principal function areas: indoor distribution,
outdoor coverage and base station coverage extension. We provide a customized solution for each
project, taking into account factors such as existing coverage of the base stations, target
coverage requirements, unique geographic and topographic features of the vicinity and other
project-specific conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Indoor Coverage. </I>In order to achieve effective coverage and distribution in indoor
environments, such as high-rise buildings, underground areas and elevators, we use antennas,
couplers, trunk amplifiers, repeaters and other accessories to construct a complete indoor coverage
distribution system that enables evenly distributed emissions of radio signals from the base
stations to cover the entire facility. Our indoor coverage products support various transmission
protocols, such as CDMA and GSM networks (1,800 MHz and 900 MHz), PHS, TD-SCDMA and other networks.
We also provide point of interface, or POI, products that are capable of supporting multiple
protocols simultaneously, which offers effective coverage platform solutions in subways, indoor
stadiums and other large indoor facilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Outdoor Coverage. </I>We design our outdoor coverage products to provide wireless coverage in
specified geographic and topographic regions. Depending on the particular coverage requirements,
our outdoor coverage products may consist of antennas and repeaters and other accessories to
transmit and extend radio signals from base stations to blind and weak spots or areas where network
coverage does not exist or is weak. Our outdoor coverage products are typically used in areas such
as highways, railways, subways and tunnels.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Base Station Coverage Extension. </I>Our base station coverage extension products are typically
attached to base stations. We use base station amplifiers and tower amplifiers to extend a base
station&#146;s coverage in all its surrounding directions or to increase its coverage distance in
designated directions. Our base station coverage extensions are typically used in remote outdoor
environments, such as rural regions, seashores and mountainous areas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Our Services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our integrated design, engineering and production processes allow us to provide wireless
coverage services to our customers. The services we provide include:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Design Services. </I>At the outset of each project, our design team implements a series of tests
to evaluate our customer&#146;s specific network coverage on the project site and identify any network
deficiencies. These tests include magnetic environment, base station signals and coverage tests.
Once the testing is complete, our design team, working closely with our sales and marketing team,
which is familiar with the customer and its needs, prepares and submits a detailed design plan to
our customer for the proposed wireless coverage products and services. This process allows us to
develop solutions that are tailored to each specific customer&#146;s requirements. Upon finalization of
our design plan, our customer confirms their instructions to proceed with the product development,
engineering and installation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Installation of Wireless Coverage Products. </I>Once we receive confirmation for the design plan
from our customer, we proceed with product development and engineering, and begin discussions with
the property owner or the manager of the building, in collaboration with our customer, to arrange
the installation of the wireless coverage products. After we engineer, produce and assemble the
products, we deliver them from our production facility to the project site. In general, we hire
third-party contractors to carry out the initial installation under the supervision of our project
design and technical service team. We use more than 100 contractors across China, all of whom are
independent third parties. After completion of the initial installation process and the connection
of our products to the customers&#146; base stations, we test the system to evaluate its performance and
make adjustments to optimize its functionality. We test the products at the customer&#146;s premises to
ensure that they function properly before our customer issues the completion certificate. After the
issuance of the completion certificate, the inspection of our installed wireless coverage products
begins with further testing of our products by our customer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Project Warranties. </I>We provide service warranties to our wireless coverage customers for a
period typically ranging from one to three years following the final inspection of our wireless
coverage products. During the warranty period, we agree to repair or replace defectively installed
products and to provide other warranty services to our customers, such as a centralized
Internet-based system to monitor the performance of our wireless coverage products and regular
on-site inspections of our installed wireless coverage products. In addition, we provide other
warranty services such as online technical support and telephone hotline support to our customers.
Our objective is to respond to our customers within 24 hours after receipt of any technical support
request.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Our Sales Cycle</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The sales cycle for our wireless coverage products can be divided into the following phases:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Bidding Process. </I>Our nationwide sales and marketing team actively pursues business
opportunities across all provinces and municipalities in China. The process begins when a wireless
operator requests proposals from us for wireless coverage products and services. After we complete
a preliminary evaluation of the project, including its feasibility and profitability, we submit
bids to the potential customer. In this bidding process, we typically compete with a number of
national, regional and local wireless coverage product and service providers. Historically, our
bids include price quotations with detailed breakdowns by equipment components and service
components. Warranty and maintenance are directly related to the equipment components.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China Mobile group, in an effort to shift to a more centralized procurement model in order to
encourage more competitive pricing, announced during the fourth quarter of 2006 that it was going
to adopt a new procurement policy whereby the bidding processes for wireless coverage equipment and
for services will be separately conducted, and procurement decisions made by the parent company and
local affiliates, respectively. Under the new policy, providers of wireless coverage products such
as ourselves may not win the bid for the servicing contracts even after winning the bid for
equipment contracts, or vice versa. This change in China Mobile&#146;s overall procurement policy may
cause us to lose revenue with respect to any single wireless coverage project if we cannot win both
equipment contract and service contract for the project.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Wireless operators in China select the winning bid based on a number of factors and
considerations, including:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>pricing;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>overall financial strength and operational scale;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>research and development capabilities;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>quality of products in terms of performance, functionality and reliability;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>proposed payment schedule; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>range and standards of services to be provided, including after-sale services.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Typically, wireless operators in China request that bids also include the following terms:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>specifications contained in customers&#146; bid invitations;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>quality control and random inspection of products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>operational manuals and staff training; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>other commercial terms, such as delivery, packaging, insurance and spare parts.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we win the bid, the operator generally issues a written letter of acceptance. Occasionally,
the operator gives us verbal notice only. The design, engineering, implementation and installation
stages begin after the operator confirms our winning bid. Despite our industry practice, according
to the PRC Law on Invitation and Submission of Bids and the PRC Contract Law, a letter of
acceptance issued by the bid-inviting party or a verbal confirmation of acceptance by the
bid-inviting party, together with its bid invitation materials and our bid-tendering materials,
constitutes a legally binding contract between the bid-inviting party and the winning bidder. We
believe that, upon the acceptance of our bid by our customers, we have a legally enforceable right
against our customers as a matter of contract law. However, we have not had any disputes to date
with our customers in respect of any of our successful bids confirmed verbally or in writing by our
customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Initial Inspection of Installed Wireless Coverage Products. </I>After completion of the
installation process, we test the system to evaluate its performance and make adjustments to
optimize its functionality. Upon completion of the installation of our wireless coverage products
for a project, we require our customer to issue a completion certificate to confirm completion of
the initial installation. We are often engaged in a number of projects with one customer at the
same time. To reduce the administrative burden of managing multiple projects, our customers often
group projects together and issue completion certificates for all the projects at the same time,
resulting in the delay of receipt of completion certificates until the completion of the last
project.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Contract Signing. </I>The current industry practice in China is to formally sign a sale and
purchase contract after the initial installation of wireless coverage products on a project, with
confirmation of completion of the initial installation evidenced through the issuance of a
completion certificate by our customer. Although the design plan sets out the number and details of
products to be used for a specific project, the actual number of products used in general varies
due to the actual circumstances
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->22<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">encountered and can only be confirmed after the completion of the initial installation. Our
sale and purchase contracts, which do not follow a single form, specify, among other things, the
specific type of wireless products used, pricing terms, product warranty terms, quality
specifications, penalty provisions for late delivery and payment terms. While our contracts with
particular customer groups typically contain similar terms, contractual terms vary significantly
from customer group to customer group.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Additional Inspection and Warranty Period. </I>After the issuance of the completion certificate,
the inspection of our installed wireless coverage products starts, by which our customer performs a
further testing of our wireless coverage products for a project. Often, our contracts do not
specify the date by which an inspection must be performed. Sometimes, the inspection may be delayed
by as long as six to 12&nbsp;months after issuance of the completion certificate. When our project
passes the inspection, our warranty period begins. Most of our customers conduct two inspections
prior to the beginning of the warranty period. The second inspection usually occurs six to 12
months after the initial inspection. Some of our customers conduct one inspection before the
warranty period begins.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Payment. </I>Our sale and purchase contracts generally provide for a fixed price and permit our
customers to pay in installments upon the occurrence of contractually stipulated payment events
during the sales cycle. Contractual terms for the installment payments vary between our customers.
Typical payment events include delivery of our products, signing of the sale and purchase contract,
satisfactory preliminary inspection, satisfactory final inspection and expiration of our warranty
period. At the occurrence of each payment event, customers are generally required to pay a
percentage of the contract price. Although the typical payment terms are up to 30&nbsp;days after the
occurrence of each payment event, customers may not promptly pay the installment and generally take
longer to make the payment. For more details on payment from our customers, please see &#147;Item&nbsp;5.
Operating and Financial Review and Prospectus&#151;Liquidity and Capital Resources&#151;Accounts Receivable
and Receivable Selling.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Selected Completed Projects</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We completed 8,413 projects in 2004, 9,429 projects in 2005 and 10,539 projects in 2006. The
following list represents select wireless coverage projects for the three years ended December&nbsp;31,
2006. These projects demonstrate different applications of our wireless coverage products, such as
for office buildings, shopping centers, hotels, airports, highways, tunnels and scenic areas, as
well as different geographic locations.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Project</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Location</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Customer</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Completion date</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><I>Indoor coverage</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Shangri-La Hotel Chengdu
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chengdu
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Unicom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">September&nbsp;2006</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Jiangbei District Court
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Jiangbei District
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Telecom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">September&nbsp;2006</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Hulunbei&#146;er Hospital</DIV></TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Hulunbei&#146;er</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Mobile group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">April&nbsp;2006</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">ER Hill Rest Home
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Inner Mongolia
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Mobile group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">December&nbsp;2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">East Asia Sports Meet Stadium
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Macau
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Unicom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">August&nbsp;2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">The People&#146;s Bank of China Building
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Beijing
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Telecom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">November&nbsp;2004</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Shanghai World Trade Shopping Mall
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Shanghai
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Telecom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">October&nbsp;2004</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">China Mobile group&#146;s Beijing Communication Center
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Beijing
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Mobile group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">May&nbsp;2004</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><I>Outdoor coverage</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Haila&#146;er Airport
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Hulunbeier
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Mobile Group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">October&nbsp;2006</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Vanke City Garden Residential Area
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Dalian
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Unicom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">December&nbsp;2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><I>Base station coverage extension</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Wenzhou Nanlu Island Seafront coverage
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Zhejiang
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Mobile group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">August&nbsp;2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Wantoubu Ocean
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Guangxi
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Unicom group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">June&nbsp;2004</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Jinding Lake
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Beijing
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">China Mobile group
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">May&nbsp;2004</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Our RF Parts and Components</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to the provision of wireless coverage products and services, we also develop,
manufacture and supply RF parts and components for base stations and repeaters. RF parts and
components are essential building blocks for all forms of wireless communication products. They
provide the fundamental channel for transmitting and receiving radio signals. RF parts and
components can be classified into active and passive modules. Active modules contain electronic
components such as transistors and diodes and require external power to operate. Their principal
functions are to amplify and alter radio signals. Passive modules do not contain any electronic
components. They rely on a combination of integrated circuits and magnetic fields emitted by their
components to function. Their principal functions are to filter, combine and split RF signals. We
produce both active and passive modules.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our active modules include high-linear RF power amplifiers, low-noise amplifiers,
frequency-hopping modules and high-stability/low-phase noise vibrators. Among our active modules,
we believe that our RF power amplifiers are distinguished by their high linearity and power
efficiency standards.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our passive modules include filters, duplexers, multi-frequency splitters, combiners and
couplers and antenna. Compared to traditional filters, our patented filters are able to generate a
more powerful electromagnetic force with which to transmit
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->23<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">microwave signals and are capable of significantly reducing the level of external and internal
interference that disrupts wireless transmissions.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Base Station RF Parts and Components</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since the fourth quarter of 2005, we have focused on developing base station RF parts and
components. RF parts and components are major building blocks of base station and also the most
crucial step in the manufacturing of base stations. Its costs account for more than 50% of the
overall production costs of base stations. We believe the shifting of procurement for base station
RF parts and components to China has become a trend and will accelerate the demand for base station
RF parts and components in China, from which we expect to benefit. Since 2006 we have begun
supplying base station RF modules to Alcatel Shanghai Bell Co., Ltd, ZTE Corporation and Siemens AG
Communications in bulk quantities. We expect that revenues from base station RF modules to become a
major revenue contributor for us in coming periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Production of RF parts and components is a complex process which involves the following
procedures:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We first go through stringent certification processes to become a certified supplier of
base station equipment manufacturers. Each equipment manufacturer has its unique
certification process, the principal conditions of which include production capacity,
management efficacy, quality control, environment protection, and overall reputation. To
date we have been certified by six major base station equipment manufacturers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We next obtain technology certification from our equipment manufacturer customers and
conduct product development according to the customer specifications. All of our RF
products and components are customized for each client&#146;s unique specifications.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We then provide samples for certification by our base station equipment manufacturer
customers. We have to date developed more than 20 types of RF modules and RF subsystem
products for various equipment manufacturer customers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Finally, we obtain purchase orders with trial quantities and if our customers are
satisfied with the trials, we will proceed to bulk production.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Repeater RF Parts and Components</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The majority of the repeater RF parts and components that we produce are used in the
manufacture of our own repeaters. In 2003, we began to sell a portion of our repeater RF parts and
components to other repeater equipment manufacturers. Our RF parts and components support a wide
range of communication protocols including CDMA, GSM, PHS, TD-SCDMA, WCDM and other wireless
communication protocols.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Production</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Production Facilities</I></B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have production facilities in Shenzhen and Quanzhou. We plan the utilization of our
production capacity based on projected orders from customers for our wireless coverage products and
RF products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, the production capacity and utilization rate of our Shenzhen and
Quanzhou production facilities were as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="49%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Production facilities</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Type of products</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Capacity</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Utilization</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(sets per month)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(sets per month)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Shenzhen
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Wireless coverage products
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2,400</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2,049</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">RF parts and components
for base stations
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">15,000</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">10,000</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Quanzhou
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">RF parts and components
for repeaters
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">18,000</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">10,700</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Shenzhen Production Facilities. </I>Our facilities in Shenzhen of Guangdong Province have 16
production lines for the manufacture of various wireless coverage products and base station RF
parts and components.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Quanzhou Production Facilities. </I>Our Quanzhou production facilities have six production lines,
which principally produce various components of RF parts and components for repeaters. They are
located in Lake Scientific and Technological Park, Quanzhou, Fujian Province.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Production Process</I></B>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->24<!-- /Folio -->
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our integrated design, engineering, production and quality control capabilities enable us
to customize products to meet specific customer requirements and to increase production
efficiencies. To minimize component costs and enable us to implement our low cost strategy, we
produce our RF parts and components with our own low-cost proprietary production process and rely
on strict control of our production process. In addition, our production personnel are intensively
involved in product design to ensure that production considerations are addressed early in the
design process and to minimize the number of products that fail to meet our quality control
standards.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our production processes may be divided into two primary categories and consist of numerous
individual steps throughout the entire process. The categories include (1)&nbsp;production of our RF
parts and components, and (2)&nbsp;production of wireless coverage products with our own RF parts and
components. The production process for our RF parts and components may be generally divided into
the following steps:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>integrated circuit board processing;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>covering and welding;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>manufacturing and assembly;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>testing; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>quality control.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Most of our completed RF parts and components for repeaters are used in the production of our
wireless coverage products. We sell our base station RF module directly to equipment
manufacturers. The general steps for the production of our wireless coverage products are wiring,
assembly, functional testing and quality control. After the completion of the wireless coverage
products, we install the products according to the design plans approved by our customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Production is highly labor intensive as it involves manual labor to assemble the modules and
products. In order to produce high-quality and precise products that meet our customers&#146;
specifications, we employ highly skilled labor. We combine various production equipment, such as
spectrum analyzers, signal generators and vector network analyzers, according to our manufacturing
process technologies to produce our modules and products. Only a small portion of our production
processes, including integrated circuit board processing and covering and welding, is automated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Quality Control</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We place considerable emphasis on quality control. We adhere to a strict system of quality
control over our operations, from sourcing of raw materials to production, packaging and inventory
storage to sale, delivery and installation. We have established various quality-control checkpoints
at different stages of our production process to closely monitor the quality of our production and
to ensure that our products meet all our internal benchmarks and customers&#146; specifications. In
2000, we were ISO9001-certified for our research and development, production and quality control
processes at our research and development facilities as well as at our production facilities in
Shenzhen and Quanzhou. We have also developed and now bulk produce base station RF modules that
are in compliance with the European Union&#146;s ROHS national enforcement body, which means that
products that we manufacture contains the agreed levels of lead,
cadmium, mercury and
other chemicals.
These RF modules are incorporated into base stations that are sold in Europe.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Quality Control for Raw Materials. </I>We purchase raw materials only from suppliers on our
approved vendor list and only those suppliers that pass our assessment are admitted to our approved
vendor list. Our staff in the purchasing department assess various aspects of a supplier, including
its overall ability, technical capability, quality control over its production process and its
financial health. In some cases, our customers require us to purchase raw materials from their
approved list of suppliers. In such event, suppliers designated by our customers are also subject
to our assessment and approval. Raw materials, upon delivery, are subject to incoming inspection by
our quality control team. Raw materials that fail to pass our incoming inspection are returned to
the suppliers. Suppliers who experience repeated returns are removed from our approved vendor list.
Raw materials provided by our customers&#146; designated suppliers are also subject to the same incoming
inspection procedures.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Quality Control During Production. </I>At various stages of the production process, semi-finished
products are tested to ensure their quality and compliance with all internal production benchmarks
before proceeding to the next stage of the production process.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Final Testing Before Delivery. </I>Following completion of the production process, our products
are inspected and tested thoroughly to ensure that all customers&#146; specifications are met before our
products are delivered.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->25<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Testing at Customer Site. </I>After completion of the installation process, we test the wireless
coverage products to evaluate its performance and make adjustments to optimize its functionality.
Our customers will also perform further testing of our wireless coverage products after
installation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Warranty. </I>For our wireless coverage products, we usually provide warranties for one to three
years following the final inspection by our customers. During the warranty period, we are
responsible for any quality defects in our products. For our RF parts and components, our customers
will examine our products and are entitled to return any RF parts and components that do not comply
with their prescribed specifications at the time of delivery. We also provide warranty ranging
from one to three years during which period we provide free repairs for returned products with
quality defects.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have established a dedicated technical service team that provides after-sale services
principally to our wireless coverage customers. Our goal is to ensure that we deal with inquiries
and complaints of our customers in a prompt and satisfactory manner. In cases where customers
report defects of our products during our warranty period, we send technical staff to our
customers&#146; sites to carry out repairs at no cost to the customers. We do not, however, maintain any
product liability insurance. For a discussion on the risks associated with our lack of product
insurance coverage, please refer to &#147;Item&nbsp;3. Key Information&#151;Risk Factors&#151;Risks Relating to Our
Company&#151;We maintain limited insurance coverage and any significant product liability claim could
have a material and adverse effect on our financial condition.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Research and Development</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have strong in-house RF technology research and development capabilities. As of December
31, 2006, our in-house research and development team had 468 engineers and technicians from the
wireless communication industry in China. Our key research and development experts have over 10
years of experience each in the telecommunication industry. We have two research and development
facilities located in Shenzhen and Quanzhou. Our research and development activities focus on new
generation RF core technology, new product development, functionality enhancement and manufacturing
process improvement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>RF Technology</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;RF is the fundamental technology that enables wireless telecommunications products to transmit
and receive signals. Our capabilities span a wide range of RF technologies, covering the complete
radio frequency from 350 MHz to 50 GHz. Our technology allows our RF-based wireless coverage
products to support a wide range of communication protocols including CDMA, GSM, PHS, 3G and
digital trunk communications. We have made significant innovations in a number of core RF
technologies, particularly those relating to filters and power amplifiers. Our filters are able to
generate a more powerful electromagnetic force with which to transmit microwave signals and
significantly reduce the level of external and internal interference that disrupts wireless
transmissions. Our RF power amplifiers are distinguished by their high linearity and power
efficiency standards.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our efforts to commercialize our RF technology, we have formulated several of our own
design and development standards, including those relating to filters, power amplifiers, antennas
and next-generation RF integrated circuits and multiple chip module technologies. In response to
the industry demand for production of small volumes of a large variety of RF parts and components,
we have developed our own production techniques, such as an automatic covering technique, which
manufactures these products in a more efficient manner. Furthermore, we are developing an automatic
testing platform that enables us to conduct various tests throughout our production process. In
addition, in the course of our research and development, we have accumulated a database of basic
testing data, and have established our own integrated circuit board format, design technique, and
testing and adjustment techniques.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We devote substantial resources to the development of RF integrated circuits and multiple chip
module technologies, which are regarded as new generation RF technologies. We believe that the
trend in wireless communications is toward the use of higher frequency bandwidth and compact
multi-functional individual wireless communication devices. In light of this trend, we are actively
conducting research to explore possible ways to miniaturize our RF parts and components by using RF
integrated circuits and multiple chip module technologies. RF integrated circuits products are
integrated circuits that perform the same functions as RF parts and components. RF integrated
circuits will be further integrated into multiple chip module components to produce new generation
RF parts and components. Multiple chip module components are substantially more compact in size as
compared to current forms of RF parts and components.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenditures for each of the three years ended December&nbsp;31, 2006 were
RMB16.3&nbsp;million, RMB30.6&nbsp;million and RMB47.7&nbsp;million (US$6.1&nbsp;million), respectively, representing
approximately 2.9%, 4.3% and 5.7% of our revenues and 13.9%, 18.8% and 22.0% of our total operating
expenses, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Research and Development Facilities</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have two research and development facilities located in Shenzhen and Quanzhou. Our
Shenzhen-based research and development facility primarily focuses on the development of
fundamental RF technologies, wireless network coverage products
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->26<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">and base station RF products. Our Quanzhou-based research and development facility focuses on
the research of RF integrated circuits and multiple chip module technology and repeater RF modules.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Sales, Marketing and Key Customers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Sales and Marketing Team</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, we had 362 sales and marketing professionals located across China in
28 offices covering 30 provinces and municipalities. We require our sales and marketing
professionals to undergo extensive and ongoing training to constantly refresh their product
knowledge and to keep them apprised of the latest trends and developments in the PRC wireless
communication industry. Through the efforts of our sales and marketing team over the past few
years, we became, as reported by Infosage Analysis, the second largest supplier of wireless
coverage products and services in China in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because of the technical nature of our product offerings, we emphasize close collaboration
between our sales and marketing team and our project design and technical service team in order to
provide optimal service to our wireless coverage customers. As of December&nbsp;31, 2006, we had 743
engineers and technicians on our project design and technical service team servicing these
customers. These professionals perform network testing and evaluation, formulation of design plan
and implementation of wireless coverage projects. We also rely on them for after-sale technical
services to our wireless coverage customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also have a dedicated sales and marketing team for equipment manufacturer customers of our
RF parts and components, all 14 members of which have extensive technical knowledge and are
familiar with customer specifications and demands. They are also responsible for providing
after-sale technical services to our equipment manufacturer customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order to encourage our sales and marketing team to pursue new business opportunities, we
offer incentive bonus programs that pay performance-based, year-end cash bonuses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Pricing</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The PRC market for wireless coverage products and services and other RF products is highly
price-sensitive. In our business, prices tend to vary based on a number of factors, including:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>type, quantity and composition of RF products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>internal target gross margin objectives;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>region in which the products are sold; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>current market conditions, including the prevailing prices offered by our competitors.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We typically participate in bidding to win orders for our products. We determine our pricing
primarily on the basis of the above listed factors, with appropriate consideration given to the
size of transaction and the significance of the business opportunity to our growth. We impose
minimum requirements internally for gross profit margins in our bidding processes. We believe that
economies of scale in our operations, coupled with our proprietary RF technologies and our
integrated design, development, engineering and production processes, allow us to price our
products and services competitively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Key Customers</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our two largest customers are the China Unicom group and the China Mobile group. Since 2004,
we have also provided wireless coverage products and services to the China Telecom group and the
China Netcom group. The following table sets forth our revenues attributable to our sales to the
China Unicom group, the China Mobile group, the China Telecom group and the China Netcom group in
absolute terms and as a percentage of our revenues for the periods specified:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="27" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="27"><B>(in millions, except for percentages)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Wireless coverage products:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Unicom group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">345.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">61.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">322.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">45.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">298.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">35.9</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Mobile group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">241.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">277.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33.3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Telecom group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Netcom group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Overseas customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">56.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Subtotal</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">533.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">94.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">694.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">97.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">800.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">96.2</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>RF products:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equipment manufacturers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">5.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.8</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">566.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">832.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->27<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We interact directly with the local operational units of our national customers in our
day-to-day business operations. The current procurement policies and practices of the China Unicom
group, the China Telecom group and the China Netcom group allow their local operational units
considerable autonomy in choosing their wireless coverage products and services. We typically
contract with these local affiliates for the products and services we provide. In our sales and
marketing and contractual negotiation, we treat each of these local affiliates as separate
customers. With the introduction of the centralized procurement policy by China Mobile group,
purchasing decisions for equipment providers will be made by the national headquarters of China
Mobile group, although we will continue to contract directly with its local operational units after
the decisions are made for equipment procurement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although it is our business practice to interact with local affiliates separately, they are,
nevertheless, under the common control of their parent company, and in our customer concentration
analysis, we consider the national group each as a single customer. In some instances, procurement
decisions are made by the parent company, an example of which is the centralized procurement of
wireless coverage equipment by China Mobile group. There have also been instances where decisions
made by one local affiliate affect the decisions of other local affiliates within the national
group.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We intend to further strengthen our relationship with the China Unicom group and the China
Mobile group, and at the same time, further develop relationships with other major
telecommunication operators in China, including the China Telecom group and the China Netcom group.
To accomplish that goal, we have identified specific members of our sales and marketing team as our
dedicated customer relationship contacts to service our existing and potential customers. Our new
marketing efforts began to yield results during the first half of 2004 when we were able to
generate bulk sales from the China Telecom group and the China Netcom group. In that year, we won
an aggregate of approximately 400 PHS network coverage projects from the China Telecom group and
the China Netcom group in over 20 provinces. In 2005, we won an aggregate of 1,149 PHS network
coverage projects from the China Telecom group and the China Netcom group in 24 provinces. In 2006,
we generated approximately RMB89.2&nbsp;million (US$11.4&nbsp;million) and RMB69.2&nbsp;million (US$8.9&nbsp;million)
from the China Telecom group and the China Netcom group, respectively, accounting for approximately
10.7% and 8.3%, respectively, of our revenues in the year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For further information about our reliance on the China Unicom group and the China Mobile
group, please refer to &#147;Item&nbsp;3. Key Information&#151;Risk Factors&#151;Risks Relating to Our Company&#151;We
derive a significant portion of our revenues from the China Unicom group and the China Mobile group
and our revenues could decline significantly if either of them reduces its purchases of, or fails
to pay for, our wireless coverage products and services.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we have become a qualified supplier of RF parts and components to six major
domestic and foreign base station manufacturers, which are ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Huawei Technologies Co., Ltd,
Siemens AG Communications and TD-Tech Ltd. We have begun bulk production for Alcatel Shanghai Bell
Co., Ltd, ZTE Corporation and Siemens AG Communications in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Suppliers and Raw Materials</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The raw materials used to produce our products mainly include various electronic components,
metal cases for modules and wireless coverage products, electronic cables, packaging materials and
other accessories. We source most of our raw materials inside China except for some electronic
components that are purchased from sales agents of foreign companies in China. We procure raw
materials from companies that have satisfied our supplier review and have been selected through a
competitive bidding process. Base on their products supplied to us, our suppliers are divided into
three categories: core suppliers, major suppliers and general suppliers. We have established
different performance criteria and scope of cooperation for each category of suppliers. All of our
suppliers are subject to stringent review procedures by our team of specialists in supplier
certification, which covers the areas of technology, quality, response time, pricing, environmental
protection and social responsibility. We currently have nine core suppliers for our core
manufacturing processes of mechanical processing, electronic plating and modules. All of these
suppliers are leaders in their respective sectors and have a proven track record of supplying to
globally-renowned companies. In the near future we plan to separate source the supplies of our
research and development projects from those for mass production, streamline the existing
organization of suppliers and establish price management systems, in order to build a company-wide
logistics information platform. In some cases, our customers require us to purchase raw materials
from their approved suppliers. Our raw material purchases are paid in Renminbi and typically have a
credit term of 90&nbsp;days. As we have an extensive list of suppliers, we do not rely on any single
supplier or group of suppliers to provide any of our raw materials. In 2004, 2005 and 2006,
purchases from our top five raw material suppliers accounted for approximately 25.8%, 29.1% and
19.3% of our total purchases of raw materials, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Competition</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The wireless coverage market in China is very competitive and is characterized by rapid
technological advancements,
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->28<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">frequent development of new products, and downward pricing trends over the life of a product.
In their requests for proposals, PRC telecommunication operators typically request a complete
analysis and proposal for the design, installation and warranty. The provision of wireless coverage
products and services requires the skills and efforts of a large number of technical personnel to
put together the design plan, to supervise the installation by third parties and to provide
after-sale services. Compared with international providers, PRC domestic providers have the
advantage of having a lower cost base and, as such, currently dominate the market in China.
According to Infosage Analysis, there were more than 70 providers of wireless coverage products and
services in China as of December&nbsp;31, 2006, compared to 150 as of December&nbsp;31, 2005. Competition
among these wireless coverage product and service providers over the past five years has resulted
in the emergence of a few dominant players. According to Infosage Analysis, the top three providers
of wireless coverage products and services in China were all PRC companies and included Comba
Telecom Systems Holdings Limited, or Comba, Wuhan Research Institute of Posts and
Telecommunications, or WRI, and us. Together, we accounted for approximately 50% of the total
market share in 2006, with Comba, us and WRI representing 18.9%, 15.6% and 14.3% of the total
market in terms of the contract amount, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The competitive environment of the PRC wireless coverage market has undergone the following
changes in recent years and, we expect, will continue to experience similar changes:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>steadily increasing market demand;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>increasing technical requirements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>increasing number of transmission protocols, from GSM and CDMA to other protocols such as PHS and TD-SCDMA;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>expanding customer base, beginning with the China Mobile group and the China Unicom
group, and now including new entrants, the China Telecom group, the China Netcom group and
others; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>increasing anticipation and planning for a potential issuance of 3G licenses and the
triggering of expanded market opportunities that are expected to attract new competitors to
enter into the wireless coverage market.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that the key factors considered by customers when choosing a vendor for wireless
coverage products and services include the vendor&#146;s overall capabilities, such as ability to
provide integrated coverage solutions, research and development capability, products quality, scope
and flexibility of product offering, project design and installation capability, after-sale service
capability, pricing, financial strength, as well as the customer&#146;s previous experience and
relationships with the vendor. We believe that our in-house RF technology research and development
capability, our fully integrated production capability and our ability to provide integrated
wireless coverage solutions to our customers give us a competitive advantage over our main
competitors, Comba and WRI. On the other hand, we have a shorter operating history than both Comba
and WRI and, therefore, a shorter historical relationship with the China Unicom group and the China
Mobile group relative to them. In order to remain competitive and grow our business, we must
strengthen our relationships with our existing customers, develop relationships with new customers
and expand into new products and markets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The market for RF parts and components is also competitive in China. We believe the entry
barrier for base station RF modules is higher compared to the entry barrier for wireless coverage
products, because of higher capital requirements, longer development cycles and more stringent
technical requirements. We mainly compete with Andrew Corporation, Radio Frequency Systems,
Powerwave Technologies, Inc., Wuhan Fingu Electronic Technology Co., Ltd. and Mobi Antenna
Technologies (Shenzhen) Co., Ltd. in China.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the mid- to lower-end market for RF parts and components, we and other suppliers tend to
compete on speed of supply largely because customers in this market sector generally require supply
on short notice. Although overseas manufacturers may have more advanced technologies, they often
lack a sales network and/or sufficient technical support in China. Among domestic manufacturers, we
have a competitive edge due to our strength in RF technology, our low production cost and our
relatively strong financial position. To date we have become a qualified supplier of RF parts and
components to six major domestic and foreign base station manufacturers, which are ZTE Corporation,
Datang Mobile Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Huawei
Technologies Co., Ltd, Siemens AG Communications and TD-Tech Ltd. Although these arrangements will
stabilize our market and incentivize our research and development efforts, we do not expect them to
reduce our research and development expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, China has gradually lifted its import restrictions, lowered import tariffs and
relaxed foreign investment restrictions after its entry into the World Trade Organization in
December&nbsp;2001. This has led to increased competition from foreign wireless equipment companies,
such as Andrew Corporation, Sagem Communication, Allgon Mobile Communications, Inc. and Powerwave
Technologies, Inc., which are significantly larger and financially stronger than us. Many of our
foreign competitors have established PRC-based manufacturing facilities to lower production costs,
which has further intensified price competition in the marketplace.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->29<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Property</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Owned Property</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We own the land use rights to the underlying parcel of land for our Quanzhou production
facilities. We own the total site area of approximately 7,591 square meters for a term of 50&nbsp;years
expiring on August&nbsp;25, 2054. The site area consists of a gross floor area of 6,149 square meters
and various ancillary structures located at Lake Scientific and Technological Park in Quanzhou City
of Fujian Province in China. We occupy the property for manufacturing, research and office
purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Currently, our research and development and production facilities in Shenzhen are located on
properties leased from independent third parties. However, we intend to move our research and
development and production facilities onto a property that we will own inside Shenzhen High
Technology Industrial Park with a total site area of approximately 19,570 square meters. We
executed the relevant sale and purchase agreement in January&nbsp;2006 with the Shenzhen land bureau.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Leased Property</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also lease properties for our sales offices as well as for our manufacturing, research and
administrative purposes from time to time. Our leases for the properties shown in the table below
generally have a term of one to four years and are due to expire between July&nbsp;2006 and October
2009. Under most of our leases, we have a right of first refusal to renew them on similar terms and
for similar periods as the previous contracts. The following table sets forth information of our
leased properties in mainland China as of December&nbsp;31, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Use purpose</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Total area</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(square meters)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Production</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,450.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Production/Research and development/Office</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,763.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warehouse</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,245.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,544.6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,503.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our total rental payments in 2006 were RMB16.4&nbsp;million (US$2.1&nbsp;million).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Intellectual Property Rights</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on copyright, patent, trademark and other intellectual property law, nondisclosure
agreements and technical know-how to protect our intellectual property and proprietary rights. We
have entered into confidentiality and licensing agreements with our employees, suppliers and
distributors. Our senior employees and employees who work in our research and development
department and other technical departments are required to sign agreements acknowledging that we
own the rights to all technology, inventions, trade secrets, works of authorship, developments and
other processes generated in connection with their employment with us or their use of our resources
or relating to our business or our property and that they must assign any ownership rights that
they may claim in those works to us. As substantially all of our business is currently conducted in
mainland China, we have not taken any action outside mainland China to protect our intellectual
property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of the date hereof, we have 23 registered patents and 32 pending patent applications with
the Patent Office of the National Intellectual Property Office of China, including our repeaters,
filters and antennas as well as W-LAN technology and products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have five registered trademarks, four registered with China&#146;s Trademark Office of the State
Administration for Industry and Commerce and one registered in Hong Kong. We have also filed
applications for registration of seven trademarks in China. In addition, we are the registered
owner of the domain name, www.grentech.com.cn. We also own the copyright to the computer software
&#147;GrenTech Complete Internet Business Platform v4.1&#148; which is registered in China and relates to our
wireless coverage product monitoring.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2004, 2005 and 2006, we generated revenues of RMB366.4&nbsp;million, RMB453.6&nbsp;million and
RMB441.3&nbsp;million (US$56.5&nbsp;million), respectively, from the sales of our patented products,
representing 64.7%, 63.3% and 53.0% of our revenues, respectively. We are not aware of any
infringement or unauthorized use of our intellectual property rights. We will take appropriate
legal actions to protect our rights if there is any unauthorized use or infringement of our rights
in the future. To date, we have not been sued for infringement of intellectual property rights by
any third party.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Insurance</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have casualty insurance coverage on our property, our goods in transit, and our employees&#146;
personal risks. We do not have insurance coverage on our other assets, inventories, interruption of
business or product liabilities.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->30<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Employees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, we had a total of 2,485 full-time employees. A breakdown of our
employees by function and location as of the same date is set forth below:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Shenzhen</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Quanzhou</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Management and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">349</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">395</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">419</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">468</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Production and quality control</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">194</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">517</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Project design and technical service</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">743</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">743</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">358</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">362</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">293</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,485</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order to maintain quality, knowledge and skill levels of our employees, we place a strong
emphasis on training. We provide training to our employees periodically, ranging from introductory
training for new employees, technical training, performance enhancement training, professional
enhancement training, team-building and communications training.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As required by PRC regulations, we participate in statutory retirement plans organized by the
respective PRC municipal governments in the areas where we operate. We have no obligation beyond
the monthly contributions of 8% to 9% of basic staff salaries. Our contributions to the statutory
retirement plans are charged to the consolidated statement of income as and when incurred. In
addition to the benefits that we are required to provide to our employees pursuant to PRC
regulations, we also provide workplace accident insurance. The total amount of contributions we
made to employee benefit plans in 2004, 2005 and 2006 was RMB4.0&nbsp;million, RMB8.5&nbsp;million and
RMB11.7&nbsp;million (US$1.5&nbsp;million), respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None of our employees are currently unionized, but they have the statutory right under PRC law
to join or organize workers&#146; unions in China. We have not experienced any significant difficulty in
recruiting employees nor have had any significant staff compensation or labor disputes. We consider
our relations with our employees to be good.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We enter into employment contracts with most of our officers, managers and employees, which
contain a non-compete clause both for the period of their employment with our company and generally
for two years thereafter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Legal Proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are not currently a party to any material litigation and are not aware of any pending or
threatened material litigation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Industry Regulation in China</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The PRC government regulates the various aspects of the research, development and production
of radio transmission equipment and installation of wireless coverage equipment in China. MII and
its counterparts in the local governments are the principal regulators of the telecommunication and
related industries in China.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Research, Development and Production of Radio Transmission Equipment</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order to engage in the research and development business for a new type of radio
transmission equipment in China, an entity must file with the Radio Management Bureau of MII In
order to conduct a radio transmission with equipment under research and development, the entity
must set up a temporary station in accordance with relevant regulations for that purpose.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A manufacturer of radio transmission equipment in China must file a product type certificate
and a product type code for its radio transmission equipment with the Radio Management Bureau of
MII. The manufacturer must mark the product type approval code on the labels of its finished
equipment. Without prior authorization from the PRC government, manufacturers may not produce or
sell any model of radio transmission equipment with specifications lower than those required in the
approval certificate. Unless the type of radio transmission equipment has been approved by the
Radio Management Bureau, the manufacturer may not produce, sell, use or advertise such equipment in
China. The manufacturer may, however, produce radio transmission equipment for the export market
without such approval from the Radio Management Bureau.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Connection of Radio Communication Equipment with a Public Telecommunication Network</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China has a network access license system to regulate the connection of radio communication
equipment with a public telecommunication network. Without a network access license issued by MII,
radio communication equipment may not be connected to a public telecommunication network or sold in
China. Network access licenses have a term of three years. A manufacturer that wishes to continue
production and sale of radio communication equipment beyond the three-year term may apply to extend
the license for an additional three-year term. The manufacturer must affix the network access
license marks on its
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->31<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">radio communication equipment as well as on its packaging and advertising materials. The
manufacturer must apply for a new network access license if there is any change to the equipment
that is inconsistent with the scope of the network access license.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Installation of Wireless Coverage Equipment</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Installation of wireless coverage equipment constitutes construction work under the
regulations in China. Construction companies are subject to various on-going qualification
requirements and must obtain a construction enterprise qualification certificate from the relevant
authorities in China.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China classifies construction companies into three categories, namely,
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>lead project contractors,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>specialized contractors, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>service subcontractors.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A lead project contractor may carry out the entire project by itself and may subcontract
ancillary work to specialized contractors or service subcontractors. Specialized contractors may
carry out an entire project undertaking alone and may subcontract labor work to service
subcontractors. Service subcontractors may undertake labor work from lead project contractors and
specialized contractors. The PRC regulations impose different qualifications on lead project
contractors, specialized contractors and service subcontractors. Each qualification is further
divided into various grades in accordance with a set of specific criteria.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Qualification certificates of construction companies are subject to the annual review and
renewal. The administrative authorities have the authority to close down companies that undertake
construction projects without proper qualification certificates and to impose a fine of 2% to 4% of
the contract value so involved. Illegal gains so received are also subject to forfeiture. For
companies undertaking projects beyond the permitted scope of their respective quality grading, the
administrative authorities may stop such illegal activities and impose a fine of 2% to 4% of the
contract value so involved. The government may also order offending companies to suspend and
restructure their operations and downgrade their qualifications. Serious offenders may have their
construction enterprise qualification certificates revoked and any illegal gains forfeited.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Our Compliance with Regulations</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shenzhen GrenTech produces, sells and engages in research and development activities relating
to RF technology and other wireless coverage products. Accordingly, Shenzhen GrenTech is required
to obtain and has obtained product type approval certificate and product type approval code for
radio transmission equipment issued by MII.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shenzhen GrenTech is the only corporate vehicle through which we conduct our business of
wireless coverage products and services. Shenzhen GrenTech has obtained a construction enterprise
qualification certificate and is qualified in China to engage in electronic engineering projects
such as communication and integrated information network projects. We also ensure that all
contractors we select for our installation work have proper construction enterprise qualification
certificates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shenzhen Lingxian primarily produces semi-finished RF products, which are not regarded as
communication equipment under PRC law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Lake Microwave and Lake Communication develop, manufacture and sell RF parts and components,
which are not regarded as communication equipment under PRC law.
</DIV>
<DIV align="left">
<A name="108"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 4A. UNRESOLVED STAFF COMMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>


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<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 5.</b> <b>OPERATING AND FINANCIAL REVIEW AND PROSPECTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our audited consolidated financial statements and related notes
included in this annual report on </I><I>Form 20-F</I><I>. The audited consolidated financial statements have
been prepared in accordance with U.S. GAAP. The following discussion and analysis contain
forward-looking statements that involve risks and uncertainties.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>OVERVIEW</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a leading provider of wireless coverage products and services in China. We believe that
we are also a leading developer of radio frequency, or RF, technology in China. RF is the
fundamental technology that enables wireless communication products to transmit and receive
signals. Our core research and development efforts in RF technology and our integrated design,
engineering and production processes have allowed us to design, develop and produce in-house our
two main product lines, namely, (1)&nbsp;wireless coverage products, which are supplied to
telecommunications operators, and (2)&nbsp;base station RF parts and components, which are supplied to
base station equipment manufacturers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have a strong in-house RF technology research and development capability. Our team of 468
researchers and technicians with extensive experience in the wireless communication industry in
China are based in Shenzhen and Quanzhou. We have 23 registered patents and 36 pending patent
applications with the Patent Office of the National Intellectual Property Office of China. Our RF
expertise has provided a platform from which we intend to further broaden our product offerings.
Our integrated development, engineering and production capabilities provide us with a distinct
competitive advantage over our competitors in
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">China by allowing us to quickly respond to customized
design requests from our customers while keeping down our production costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our wireless coverage products enable telecommunication operators to expand the reach of their
wireless communication networks to areas with little or weak coverage, such as buildings, highways,
railways, tunnels and remote regions. Our wireless coverage products include indoor coverage
products and outdoor coverage products, as well as base station coverage extension products. To
date, we have developed over 200 models of wireless coverage equipment. We provide most of our
wireless coverage products and services to local affiliates of the two leading wireless operators
in China, the China Unicom group and the China Mobile group. Since 2004, we have also provided a
portion of our wireless coverage products and services to the China Netcom group and the China
Telecom group. According to Infosage Analysis, we were the second largest provider of wireless
coverage products and services in China in 2006 with an estimated market share of 15.6%. In recent
years, the wireless coverage market in
China has benefited from increased capital expenditures by PRC wireless operators. Further,
the capital expenditures of the wireless coverage industry in China is expected to reach RMB5.6
billion in 2007, RMB5.9&nbsp;billion in 2008 and RMB6.2&nbsp;billion in 2009, according to Infosage Analysis.
We believe that the increasing capital expenditures will afford us an opportunity to grow our
revenues in the wireless coverage market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our RF parts and components are supplied to base station equipment manufacturers. These
customers use our RF parts and components in their base station manufacturing. To date we have
become a qualified supplier of RF parts and components to six major domestic and foreign base
station manufacturers, which are Huawei Technologies Co., Ltd, ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Siemens AG Communications and
TD-Tech Ltd. We have developed over 20 types of base station RF modules. Since 2006 we have begun
supplying base station RF modules to Alcatel Shanghai Bell Co., Ltd, ZTE Corporation and Siemens AG
Communications in bulk quantities. With rising production costs incurred by base station equipment
manufacturers, more foreign base station equipment manufacturers have chosen to procure base
station RF parts and components mainly in China in order to reduce their costs. We believe the
demand for base station RF parts and components will grow rapidly and our revenues from base
station RF modules will become a major revenue contributor for us in coming periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following are key factors that affect our financial condition and results of operations.
They are important to the understanding of our business:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Expenditures by Wireless Operators and base station equipment manufacturers</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our business is largely dependent on the demand for our wireless coverage products and services
from wireless operators in China. Accordingly, the amount of wireless network capital expenditures
by our customers, especially our two largest customers, the China Unicom group and the China Mobile
group, has had and will continue to have a material impact on our revenues. In addition, revenues
from the sales of our RF parts and components have accounted for an increasing percentage of our
sales in 2005 and 2006. As a result, we expect the growth in the domestic demand for these products
will continue to drive our revenue growth.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Highly Competitive Market</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We operate in a highly competitive and fragmented market. According to Infosage Analysis,
there were over 70 providers of wireless coverage products and services in China as of December&nbsp;31,
2006. The top three players, including us, accounted in aggregate for approximately 50% of the
total market share in 2006. We also face increasing competitive pressure from domestic and foreign
manufacturers of RF parts and components such as Andrew Corporation, Radio Frequency Systems,
Powerwave Technologies, Inc., Wuhan Fingu Electronic Technology Co., Ltd. and Mobi Antenna
Technologies (Shenzhen) Co., Ltd. We expect competition to intensify as new competitors enter our
markets. In our industry, most of the contracts are awarded through a bidding process and customers
tend to be very price-sensitive. Accordingly, the pricing decisions of our competitors directly
impact our ability to secure contracts to grow our business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Our Business Practice with Wireless Operators and Its Implication on Our Financial Condition
and Results of Operations</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We generally begin working on a wireless coverage project upon winning a bid but before
signing a formal contract. Our customers are not required to pay for our products and installation
services until after the signing of the formal contract, which typically takes place when we
complete the initial installation of the wireless coverage products and our customer issues a
completion certificate. Furthermore, our contracts with wireless operators generally provide a
fixed price and permit them to pay the purchase price in installments upon the occurrence of
various payment events, such as the signing of the contract, issuance of the preliminary and final
inspection certificates and expiration of the warranty period. Our arrangements with our wireless
operator customers are consistent with industry practices in China. As a result of these practices,
an understanding of our revenue recognition policy and accounts receivable cycle is critical to the
understanding of our results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Revenue Recognition Policy and Accounts Receivable Cycle</I></B>
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We derive revenues principally from the provision and sale of wireless coverage products and
services and, to a lesser extent, from the sale of RF parts and components.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recognize revenues when:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the risk and rewards are transferred;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>delivery has occurred;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persuasive evidence of an arrangement exists;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>price to the buyer is fixed and determinable;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>collectibility is reasonably assured; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our wireless coverage product and service contracts each involve multiple service elements,
consisting of delivery of wireless coverage products and installation services. As a result, we
allocate revenues to each element based on the relative fair values of the individual elements,
such as the sale price for the element when it is regularly sold on a stand-alone basis or
third-party price for similar element. We recognize revenues attributable to the delivery of the
wireless coverage products when:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our customer has executed and signed a sales and purchase contract;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our customer has issued a completion certificate to indicate its acceptance of our products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have delivered and completed the initial installation of the wireless coverage products at our customer&#146;s premises;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have an enforceable legal right to receive the amount attributable to the delivered
products and such right is not contingent upon our customer&#146;s issuances of the preliminary
and final acceptance of the installation service; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the risk and reward of ownership and title of the delivered products have been
transferred to our customer.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues attributable to the installation service element of our wireless coverage product and
service contracts is initially deferred and we recognize them only when:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have rendered the services;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our customer has issued a preliminary inspection certificate to indicate its preliminary
acceptance of the installation services we have provided;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have an enforceable legal right to receive the amount attributable to the installation
service element of the contract and such right is not contingent upon the issuance by our
customers of the final inspection certificate of the installation service; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our remaining obligation relating to our customer&#146;s final inspection and acceptance of
the installation services is considered inconsequential or perfunctory.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the payment terms of our contracts and as a customary practice of the wireless coverage
industry in China, we allow our customers to pay the contract amount in installments upon the
occurrence of certain events, such as the signing of the sale and purchase contract and the
issuance of the completion certificate, the issuance of the preliminary inspection certificate, the
issuance of the final inspection certificate, and the expiration of the warranty period. The
installment terms of our contracts range from six months to three years. On a weighted average
basis, under our contracts, we receive approximately 43% of the contract value upon the signing of
the contract and the issuance of the completion certificate, approximately 38% upon the issuance of
the preliminary inspection certificate, approximately 16% upon the issuance of the final inspection
certificate and approximately 3% upon the expiration of the warranty period. To the extent revenue
recognized under a contract is not yet paid, we record it as an account receivable. We record the
portion of the amounts due under our contract payment terms in excess of the revenue recognized as
deferred income, which is included in other payables. We classify amounts due under our contracts
beyond one year as long term accounts receivable and we discount them at the prevailing interest
rate as published by the People&#146;s Bank of China, the PRC central bank. We have not experienced any
material credit losses on our wireless coverage product and service contracts. We make provisions
for estimated settlement discounts we may provide to our customers and record them as a reduction
in revenues in the same period when we recognize such revenues. We base our provisioning for
estimated settlement discounts on our best estimate of
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">the amount of discounts we may provide to
customers as an incentive to them to promptly settle the contract amounts in light of historical
settlement experience. In addition, we will review our settlement discounts periodically to
ascertain that these settlement discounts are sufficient but not excessive.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our settlement discounts amounted to RMB1.4&nbsp;million in 2004. We wrote back RMB6.8&nbsp;million and
RMB5.1&nbsp;million (US$0.7&nbsp;million) in 2005 and 2006 respectively. We sold an aggregate of RMB117.7
million (US$15.1&nbsp;million) of our accounts receivable to banks in 2006. Our sale of accounts
receivable was with limited-recourse where we receive 100% of the
face value of accounts receivable sold, net of bank fees.
We must, however, keep at the bank a time deposit as a pledge in the amount of 20% of the aggregate
accounts receivable we sold to the bank that remain unsettled by our customers at all times. See &#147;&#151;
Liquidity and Capital Resources &#151; Accounts Receivable and Receivable Selling&#148; for additional
information on our accounts receivable position and our receivable selling arrangements. See &#147;&#151;
Revenues &#151; Provision of Wireless Coverage Products and Services&#148; for additional discussions on our
policy of recognizing wireless coverage products and services revenues. The gap of time between our
recognition of revenues and the occurrence of various payment events has created a long accounts
receivable cycle. The time difference between payment events
typically ranges from six months to three years. In addition, our accounts receivable cycle
can be further lengthened if our customers do not promptly make installment payments upon the
occurrence of the related payment events.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recognize revenues from the sale of stand-alone RF parts and components when the risk and
reward of ownership and title of these parts and components and products have been transferred to
our customers, which typically coincides with delivery and acceptance of these parts and components
and products by our customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Liquidity Concern Arising out of Our Accounts Receivable Cycle and Revenue Cycle</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our contract practice described above has resulted in a significant working capital demand for
the operation of our business. This includes, among other things, a substantial build-up of
inventories, in particular, finished goods, and long accounts receivable cycle. Our revenue cycle
also impacts our liquidity needs. We tend to recognize more revenues and collect most of them
during the fourth quarter of the year. In 2004, 2005 and 2006, our collections in the fourth
quarter constituted 54.5%, 53.0% and 53.8% of our total collections during the respective years.
However, we commence our production and arrange installation of products for a significant number
of projects beginning in the second quarter of a year and typically deliver and install much more
during the third and fourth quarters. As a result of our revenue cycle and our long accounts
receivable cycle, we tend to have more working capital toward the end of the year and the first
part of the subsequent year and tend to have less working capital during the middle part of the
year, especially the third quarter. Our ability to rely on cash generated from our operations to
finance our working capital and other needs of our operations is therefore substantially limited.
Accordingly, we are highly dependent on bank financing and the sale of accounts receivable to fund
our working capital requirements and to support our liquidity. Historically, we have principally
relied on short-term bank loans to finance our working capital needs. As of December&nbsp;31, 2004,
2005 and 2006, we had an aggregate of RMB164.8&nbsp;million, RMB160.6&nbsp;million and RMB336.1&nbsp;million
(US$43.1&nbsp;million), respectively, of short-term bank loans outstanding. As of December&nbsp;31, 2006, we
had an aggregate of RMB479.4&nbsp;million (US$61.4&nbsp;million) in short-term bank loans and bills payable
facilities, of which RMB336.1&nbsp;million (US$43.1&nbsp;million) in bank loans had been drawn and RMB50.4
million (US$6.5&nbsp;million) in bills payable had been utilized. As of December&nbsp;31, 2006, RMB52.8
million (US$6.7&nbsp;million) in bank loans and RMB40.1&nbsp;million (US$5.1&nbsp;million) in bills payable
remained committed but not yet drawn or utilized. In addition, as of the same date, we had accounts
receivable selling arrangements in the aggregate of RMB420.0&nbsp;million (US$53.8&nbsp;million), of which
RMB161.8&nbsp;million (US$20.7&nbsp;million) had been drawn and RMB258.2&nbsp;million (US$33.1&nbsp;million) remained
committed but not yet utilized. Utilization of the unutilized bill payables facilities and account
receivable selling arrangements requires pledge of bank deposit in an amount equal to 30% and 20%
respectively of the amount to be utilized. We expect to continue to rely on bank loans, including
bills payable, and the sale of our accounts receivable to finance our working capital needs as we
grow our business. See &#147;&#151; Liquidity and Capital Resources &#151; Accounts Receivable and Receivable
Selling&#148; for a discussion on our accounts receivable position and our bank borrowing and receivable
selling arrangements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Significant Quarterly Fluctuations of Our Results of Operations</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have historically generated substantially less revenues in the first quarter of a year. Our
customers usually perform completion inspections, issue completion certificates and sign sale and
purchase contracts with us for the vast majority of our projects in the last two weeks of June and
December each year. This is because our customers generally use the same team to manage different
aspects of a project, including bidding, contracting and payment, and their work is performed in
accordance with their internal annual and semi-annual project management processes. As a result,
our customers prefer performing completion inspections and signing contracts for all installed
projects at the same time. Our principal customers are publicly traded companies and their project
management process is also influenced by their semi-annual reporting obligations. As a result, our
revenues in the first quarter are much less than the second quarter, and our revenues in the third
quarter are much less than the fourth quarter. We have therefore historically reported net losses
in the first and third quarters, reflecting a combination of (1)&nbsp;the increased costs of performing
our ongoing wireless coverage contracts as a result of the growth in volume of contracts and (2)
lower levels of revenues generated during the first and third quarters. In 2004, 1.5%, 41.1%, 8.3%
and 49.1% of our annual revenues were generated in the first, second, third and fourth quarters,
respectively, and we reported net losses of RMB20.7&nbsp;million and RMB7.7&nbsp;million in the first and
third quarters, respectively. In 2005, 1.2%, 24.3%, 21.8% and 52.7% of our annual revenues were
generated in the first, second, third and fourth quarters, respectively, and we reported a net loss
of RMB32.3&nbsp;million in the first quarter. In 2006, 1.8%, 21.6%,
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->36<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">22.5% and 54.1% of our annual
revenues were generated in the first, second, third and fourth quarters, respectively, and we
reported a net loss of RMB35.7&nbsp;million (US$4.6&nbsp;million) in the first quarter. As the volume of our
contracts grows, we expect to continue to generate losses, particularly in the first quarter when
revenue levels have been historically low. You should read &#147;Item&nbsp;3. Key Information&#151;Risk
Factors&#151;Risks Relating to Our Company&#151;We historically recognized significantly lower revenues in
the first quarter, which sometimes resulted in net losses in the first quarter, and our revenues
may fluctuate significantly from quarter to quarter in the future, resulting in quarterly net
losses&#148; for additional disclosure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth our unaudited consolidated statements of income data for each
of the 12 quarters ended December&nbsp;31, 2006:
</DIV>



<DIV align="center">
<TABLE style="font-size: 8pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="16%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 7pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="47" style="border-bottom: 1px double #000000"><B>Three months ended</B></TD>
</TR>
<TR style="font-size: 7pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">March 31,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">June 30,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">Sept. 30,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">Dec. 31,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">March 31,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">June 30,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">Sept. 30,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">Dec. 31,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">March 31,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">June 30,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">Sept. 30,</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B><Font  style="border-bottom: 1px double #000000">Dec. 31,</font></B></TD>
</TR>
<TR style="font-size: 7pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2004</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2004</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2004</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2004</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2005</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2005</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2005</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2005</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2006</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2006</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2006</font></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B><Font  style="border-bottom: 1px double #000000">2006</font></B></TD>
</TR>
<TR style="font-size: 7pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="11"><B>(in
thousands of RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,624</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233,089</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,814</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">277,977</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,272</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,888</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">156,042</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378,068</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,796</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">187,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">450,294</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,144</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(95,693</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(19,850</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(122,243</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,871</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(73,807</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(75,915</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(174,471</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,787</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(90,505</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(98,659</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(241,089</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,480</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">137,396</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,964</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,734</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100,081</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">203,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,471</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">209,205</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and
development costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,325</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,468</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,842</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,691</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,820</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,935</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,455</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,406</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,393</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,306</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(13,882</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(17,090</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and
distribution expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(13,003</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(16,324</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(18,594</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(23,114</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(19,566</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(23,078</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25,980</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(22,865</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(24,138</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(26,606</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25,905</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(36,299</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and
administrative
expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,847</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,397</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,920</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,580</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,846</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,015</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,407</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,789</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,109</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,967</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,377</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(22,491</TD>
        <TD nowrap>)</TD>
</TR>
<TR style="font-size: 0px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating
expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(24,175</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(27,189</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(30,356</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(35,385</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(35,232</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(39,028</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(43,842</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(45,060</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(43,640</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(45,879</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(51,164</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(75,880</TD>
        <TD nowrap>)</TD>
</TR>
<TR style="font-size: 0px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(19,695</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110,207</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,392</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,349</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(30,831</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">61,053</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,285</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,537</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(35,631</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,592</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">133,325</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other (expense)/income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">463</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,008</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">924</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,611</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">583</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">371</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,761</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,458</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,300</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(13,016</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,029</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(13,047</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,438</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,253</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,104</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,310</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,897</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,369</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,063</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,697</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investment income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">894</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency
exchange gain/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,333</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,643</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Grant income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,443</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 0px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total other
(expense)/income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,682</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,114</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,005</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,970</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,855</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,867</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,483</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,788</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,571</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(508</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,288</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,439</TD>
        <TD nowrap>)</TD>
</TR>
<TR style="font-size: 0px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income/(loss) before
income tax
benefit/(expense) and
minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25,377</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">99,093</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,397</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,379</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(35,686</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,802</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">172,325</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(42,202</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,618</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">131,885</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax
(expense)/benefit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,188</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,629</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(18,130</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,728</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,449</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,093</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(14,283</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,931</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,583</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,043</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(15,582</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income/(loss) before
minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(21,189</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,846</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(32,958</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,737</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,042</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(36,271</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,501</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,575</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116,303</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interests,
net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,379</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,312</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">655</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,276</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,443</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,022</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(68</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,894</TD>
        <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(20,742</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90,085</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,719</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">84,937</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(32,303</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,461</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(35,738</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,433</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,737</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114,410</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends, accretion
to redemption value
and of foreign
currency rate
movements on
mandatorily redeemable
convertible preference
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(877</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(878</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(877</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(877</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(904</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(903</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">166</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(787</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(909</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income/(loss)
available to ordinary
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(21,619</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,207</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,596</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">84,060</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(33,207</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">154,233</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(36,647</TD>
        <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,737</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114,410</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We anticipate that we will continue to experience significant fluctuations in revenues,
cost of revenues and other results of operations from quarter to quarter during any year if our
wireless communication operator customers continue their current contract practice in the future.
This quarterly fluctuation of revenues and operating results has affected and is likely to continue
to affect our cash flow and working capital positions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Revenues</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We derive our revenues from the provision of wireless coverage products and services and, to a
lesser extent, the sale of RF parts and components. We expect that our revenues attributable to
our RF parts and components will continue to increase in the future as we continue to launch new
products and modules and as we expect the market demand for our parts and components to continue to
grow.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->37<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth our revenue contribution by revenue source and as a percentage
of our revenues for the periods indicated:
</DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="55%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="27" style="border-bottom: 1px double #000000"><B>Year
ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px double #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px double #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="11" style="border-bottom: 1px double #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>RMB</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>%</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>RMB</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>%</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>RMB</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>US$</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>%</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="15"><B>(in
millions, except for percentages)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Wireless
coverage solutions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Sale
of wireless coverage products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">503.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">88.9</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">614.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">85.8</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">679.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">87.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">81.6</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Installation
services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">30.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">69.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">9.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">108.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">14.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">13.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">RF
parts and components</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">32.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">22.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">3.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">32.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">4.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">3.8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">(Provision)/write
back for settlement discounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">(1.4</TD>

<TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">(0.2</TD>

<TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">6.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">1.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">3.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">7.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">566.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">716.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">832.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">106.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Provision of Wireless Coverage Products and Services. </I></B>The provision of wireless coverage
products and services has historically been the single largest contributor to our revenues, and we
expect this trend to continue in the near future. Our wireless coverage products and services
contracts each involve multiple service elements, consisting of delivery of wireless coverage
products and installation services. Our wireless coverage products include repeaters, trunk
amplifiers, base station amplifiers and tower amplifiers, all of which we develop and manufacture
in-house. Our wireless coverage products also include various accessories such as coaxial cables
and antennas for installation. These accessories are purchased from third-party vendors. In 2004,
2005 and 2006, accessories included as a part of our product sales accounted for approximately
29.8%, 26.4% and 33.9% of our revenues, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide most of our wireless coverage products and services to two major customer groups,
the China Unicom group and the China Mobile group. Since 2004, we have also provided wireless
coverage products and services to PHS networks of the China Telecom group and the China Netcom
group. Despite our efforts to diversify our customer base, we expect the China Mobile group and the
China Netcom group will continue to be our largest revenue contributors in the near future.
Although we do not believe that the telecommunication operators in China will significantly reduce
their investments in wireless coverage products and services in the near future under normal
circumstances, the much reported potential restructurings of the PRC telecommunication industry,
however, could materially disrupt or slow down investment plans of the operators subject to such
restructurings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Sale of RF Parts and Components. </I></B>Our RF parts and components include RF parts and components
for base stations and repeaters. We consume a substantial portion of our repeater RF parts and
components internally for incorporation into our wireless coverage products. In 2003, we began
selling a portion of our repeater RF parts and components to third-party customers, such as
wireless coverage equipment manufacturers and wireless operators. During the fourth quarter of
2005, we begun to develop base station RF parts and components. We are the qualified supplier of
base station RF parts and components to six major domestic and foreign base station manufacturers,
which are ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., Alcatel Shanghai Bell
Co., Ltd, Huawei Technologies Co., Ltd, Siemens AG Communications and TD-Tech Ltd. We have begun
bulk production for ZTE Corporation, Alcatel Shanghai Bell Co., Ltd and Siemens AG Communications
in 2006. Our sales of RF parts and components amounted to RMB32.9&nbsp;million in 2004, RMB22.0&nbsp;million
in 2005 and RMB32.0&nbsp;million (US$4.1&nbsp;million) in 2006. We recognize revenues from the sale of RF
parts and components at the time of transfer of the risks and rewards of ownership of these
products, which coincides with our delivery of the products and transfer of title.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Cost of Revenues</B></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our cost of revenues consists of our cost of hardware and cost of related services. Our cost
of revenues increased from RMB241.9&nbsp;million in 2004 to RMB328.1&nbsp;million in 2005 and RMB437.0
million (US$56.0&nbsp;million) in 2006. Our cost of revenues as a percentage of revenues was 42.7%,
45.8% and 52.5% in 2004, 2005 and 2006, respectively. Although we expect unit production cost to
continue to decrease in the future, we expect our cost of revenues as a percentage of revenues to
continue to increase in the near future primarily because we expect that the unit pricing of our
products will decrease as a result of intense market competition, a downward pricing trend over the
life of our maturing products, and an increasing percentage of the lower-margin products in our
overall product mix.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth our cost of revenues contribution by category and as a
percentage of total cost of revenues for the periods indicated:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="26%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>Year
ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="6" style="border-bottom: 1px double #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px double #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="11" style="border-bottom: 1px double #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>RMB</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>%</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>RMB</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>%</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>RMB</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>US$</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>%</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="19"><B>(in
millions, except for percentages)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Cost
of hardware</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">220.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">91.1</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">277.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">84.5</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">352.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">45.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">80.7</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Cost
of services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">21.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">8.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">50.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">15.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">84.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">10.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">19.3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">241.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">328.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">437.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">56.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Cost of Hardware. </I></B>Cost of hardware includes our direct cost in manufacturing our wireless
coverage products and RF parts and components, depreciation and amortization, purchase costs of raw
materials and outsourced ancillary products from suppliers and manufacturers, as well as overhead
such as compensation, bonuses and travel expenses of our own engineers and technicians engaged in
the production process of our wireless products. Our cost of hardware also includes allowance for
warranties. We accrue estimated warranty costs that we expect to incur during the warranty periods
when we are required to provide free repair and replacement for defectively installed products. Our
warranties generally extend for a period of 12&nbsp;months to three years. We determine our allowance
for warranties
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->38<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">charged to expense in 2004, 2005 and 2006 amounted to 1.4%, 1.3% and 0.9%of our revenues,
respectively. Our actual warranty expenditures in 2004, 2005 and 2006 were RMB5.7&nbsp;million, RMB9.5
million and RMB7.7&nbsp;million (US$1.0&nbsp;million), respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Cost of Services. </I></B>Our cost of services primarily includes costs that we incur to hire third
parties to install our wireless coverage products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Operating Expenses</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating expenses consist of research and development costs, sales and distribution
expenses and general and administrative expenses. In anticipation of our increased selling efforts,
our increased research and development during the next few years for our base station RF parts and
components, 3G-related products and services and our additional requirements as a public reporting
issuer in the United States, we expect our operating expenses to increase, but we cannot accurately
quantify these increases at this time. The following table sets forth our operating expenses
contribution by category and as a percentage of our total operating expenses for the periods
indicated:
</DIV>
<DIV align="center">

<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>Year
ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="5" style="border-bottom: 1px double #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="5" style="border-bottom: 1px double #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="9" style="border-bottom: 1px double #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>US$</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2"><B>%</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="26"><B>(in millions, except for percentages)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and development costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">13.9</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">18.8</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">22.0</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sales and distribution expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">71.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">56.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52.2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">General and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">163.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">216.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>

<TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Research and Development Costs. </I></B>These include the remuneration of our research and
development staff, depreciation and maintenance expenses for research and development equipment,
raw material costs and rental costs for premises used for our research and development activities.
Our research and development costs are expensed as incurred. We incur research and development
costs primarily in connection with the development of RF parts and components and wireless coverage
products, including 3G-related products and RF technology. Our research and development costs
accounted for 2.9%, 4.3% and 5.7% of our revenues in 2004, 2005 and 2006, respectively. We expect
our research and development costs to continue to increase as a percentage of revenues in the near
future as we plan to hire additional research and development staff and purchase additional
equipment primarily to develop RF technology and new products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Sales and Distribution Expenses. </I></B>These include marketing and promotion expenses, remuneration
and expenses of our sales staff, the operational expenses of our marketing offices and a portion of
our freight costs. Our sales and distribution expenses accounted for 12.5%, 12.8% and 13.6% of our
revenues in 2004, 2005 and 2006, respectively. We expect our sales and distribution expenses as a
percentage of our revenues to increase in the near future because we intend to develop and expand
our base station RF parts and components, 3G and other new product markets and to extend our market
reach overseas. Our current sales and marketing plans continue to focus on the PRC wireless
operators, especially those expected to use our 3G wireless coverage product offerings. We are also
expending a portion of our marketing resources, including hiring of additional marketing staff, to
increase our sales of RF parts and components to base station equipment manufacturers. We intend to
carefully evaluate the cost and benefit associated with any of our overseas market expansion
activities and do not currently expect any material increases in our sales and distribution
expenses as a result of our overseas expansion plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>General and Administrative Expenses. </I></B>This expense category includes the remuneration of
administrative staff, daily operational expenses, depreciation of fixed assets and allowance for
accounts receivable. Our general and administrative expenses accounted for 5.2%, 5.7% and 6.7% of
our revenues in 2004, 2005 and 2006, respectively. We make allowance for accounts receivable to the
extent that we consider the collection of such accounts receivable to be doubtful. Our accumulated
allowance for doubtful accounts as of each of December&nbsp;31, 2004, 2005 and 2006 accounted for 0.6%
of our gross accounts receivable. We expect our general and administrative expenses to increase
moderately as a percentage of our revenues in the near future as we hire additional personnel and
incur additional costs in connection with the expansion of our business. We intend to carefully
evaluate the cost and benefit associated with any of our overseas expansion activities and do not
currently expect any material increases in our general and administrative expenses as a result of
our overseas expansion plan. Furthermore, as a public reporting issuer in the United States, we
incurred approximately RMB8.6&nbsp;million (US$1.1&nbsp;million) in expenses relating to the improvements to
our internal control procedures in order to achieve compliance with requirements of the
Sarbanes-Oxley Act.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Interest Expense</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our interest expense primarily consists of (1)&nbsp;interest that we incur in bank borrowings, (2)
fees and discount charges incurred in connection with the sale of our accounts receivable, (3)
finance charges we incur on bills financing and (4)&nbsp;interest payable under the exchangeable bonds
issued by several of our ordinary shareholders to our preference shareholders with us as the
guarantor of such bonds. We incurred less interest expense in 2006 compared to 2004 and 2005
because we used a portion of our net proceeds of our initial public offering to fund our working
capital needs. In addition, we were no longer required to accrue interest expense with respect to
the exchangeable bonds as those bonds were exchanged into existing ordinary shares held by our
ordinary shareholders
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->39<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">upon the completion of our initial global offering.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our bills financing include bills payable issued by us and acceptance drafts issued by our
financing banks in favor of our vendors and suppliers as payments for goods and services we
purchase from them, and bills receivable discount facilities. Our bills payable allow our vendors
and suppliers to receive payments in cash from our banks upon presentation in 30 to 180&nbsp;days.
Pursuant to our financing arrangements with banks in China, we must pay the amount outstanding
under each bill payable to the bank on or prior to the stipulated presentation date. The aggregate
amount of bills payable that may be outstanding to our credit from time to time is subject to the
total line of credit established in our credit facility agreements with our banks. We negotiate and
renew our bank credit facility agreements with our banks on an annual basis in line with the
current banking industry practice in China.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The table below sets forth the components of our interest expense for the periods indicated:
</DIV>
<DIV align="center">

<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Year
ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="14"><B>(in thousands)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:15px; text-indent:-15px">Bank loan interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,757</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px">Receivable
discounting fee</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,076</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,110</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:15px; text-indent:-15px">Financial
charges on bills financing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,590</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,082</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">139</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px">Interest
on exchangeable
bonds<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,706</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,341</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">428</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:15px; text-indent:-15px">Others<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">596</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">579</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,392</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,026</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,591</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>In 2003, several of our ordinary shareholders, including Guoren Industrial, HXY Investments
and Drag Investments, issued an aggregate of US$20.7&nbsp;million of 5% exchangeable bonds to our
preference shareholders, Actis China, Standard Chartered Private Equity and JAFCO, which bonds
are exchangeable into our ordinary shares held by these ordinary shareholders. These
exchangeable bonds are redeemable at an amount equal to their principal amount plus 8%
interest. Because we guarantee the bonds, we have accounted for the interest payment
obligation on the exchangeable bonds as our obligation. These exchangeable bonds were
exchanged into ordinary shares held by our ordinary shareholders upon the completion of our
initial global offering in 2006.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Others mainly consist of bank fees.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Income Tax Expense</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In general, our subsidiaries established in the Shenzhen Special Economic Zone were subject to
an income tax rate of 15% while our subsidiaries established in other areas of China were subject
to an income tax rate of 27% or 33% during the three years ended December&nbsp;31, 2006. Shenzhen
GrenTech, our principal operating subsidiary, was exempted from the PRC income tax for two years
starting from its first profit-making year after offsetting available tax losses carried forward
from prior years. After the two years of tax exemption, it received a 50% reduction of its regular
income tax liabilities in the three years thereafter. The Shenzhen tax authorities determined that
the first profit-making year of Shenzhen GrenTech was 2001. For the year ended December&nbsp;31, 2006,
the income tax rate applicable to Shenzhen GrenTech was 7.5%. For more details, see &#147;Item&nbsp;3. Key
Information&#151;Risk Factors&#151;Risks Relating to Our Company&#151;If we lose certain government tax
concessions, our profitability may be materially and adversely affected.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Minority Interests, Net of Tax</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Minority interests, net of tax, represent the portion of our income that is attributable to
the shareholding in our consolidated subsidiaries that we do not own. These subsidiaries include
Shenzhen Lingxian, Lake Communication and Lake Microwave.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Critical Accounting Policies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We prepare financial statements in accordance with U.S. GAAP, which requires us to make
estimates and assumptions that affect the reported amounts of our assets and liabilities, to
disclose contingent assets and liabilities on the date of the financial statements, and to disclose
the reported amounts of revenues and expenses incurred during the financial reporting period. We
continue to evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we believe to be
reasonable under the circumstances. We rely on these evaluations as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies discussed below to
be critical to an understanding of our financial statements as their application assists management
in making their business decisions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Revenue Recognition. </I></B>We derive revenues from the provision of wireless coverage products and
installation services, and, to a
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->40<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">lesser extent, the sale of RF parts and components. We recognize
revenues when we consider the following criteria met:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the risk and rewards are transferred;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>delivery has occurred;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persuasive evidence of an arrangement exists;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>price to the buyer is fixed and determinable;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>collectibility is reasonably assured; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our sale of wireless coverage products is accounted for as a unit of accounting that is
separate from our provision of installation services. Our installation services include initial
installation, connection of the products to the customers&#146; base stations and subsequent testing of
the connection. We recognize revenues from provision of installation services when we have rendered
the services in full and received the preliminary inspection certificate. We generally use our
contracts to determine the existence of an arrangement. We regard our products to be rendered and
accepted upon issuance of the completion certificate, and regard our installation services to be
delivered and accepted upon issuance of the preliminary inspection certificate. Our sale and
purchase contracts are generally fixed-fee arrangements although they permit our customers to
settle the contract sum in installments upon occurrence of various payment events. We assess
collectibility based primarily on the creditworthiness of the customer as determined by our credit
checks and analysis as well as by the customer&#146;s payment history.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A wireless coverage product and service contract involves multiple service elements consisting
of delivery of wireless coverage products and the provision of installation services. We allocate
the entire fee from the arrangement to each element based on objectively determined fair value,
such as sale price for the component when it is regularly sold on a stand-alone basis or
third-party price for similar component. In addition, our sale and purchase contracts for wireless
coverage products and services typically contain separate pricing for our products and our
installation services. Changes in the elements of an arrangement and our ability to establish
vendor-specific objective evidence for those elements could affect the timing of our revenue
recognition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;When we recognize our revenues from the provision of wireless coverage products and services,
we also deduct an estimated settlement discount that we may give to our customers in the future.
The settlement discount is based on our past billing and collection experience with our customers
and our negotiation with customers. We determine such discount separately on a contract by contract
basis. If actual settlement discounts made differ from our estimates, an additional provision or
write back is made upon settlement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2004, our settlement discounts amounted to RMB1.4&nbsp;million. In 2005 and 2006, we wrote back
RMB6.8&nbsp;million and RMB5.1&nbsp;million (US$0.7&nbsp;million), respectively, as our customers did not make
earlier settlements in response to our offer of settlement discounts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Allowance for Doubtful Accounts. </I></B>Our wireless coverage customers pay by installments,
creating long accounts receivable cycles. We provide for an allowance for doubtful accounts based
on our best estimate of the amount of losses that could result from the inability or intention of
our existing customers not to make the required payments. We generally review the allowance by
taking into account factors such as historical experience, age of the accounts receivable balances
and economic conditions. We have not written off any significant bad debts since our inception in
1999 largely due to the strong credits of our wireless operator customers as well as our close
monitoring and management of our accounts receivable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Inventories. </I></B>Our inventories comprise raw materials, work in progress and finished goods. We
state our inventories at the lower of cost or market value. We determine the cost of our
inventories by using the weighted average cost method. Cost of work in progress and finished goods
consists of direct materials, direct production cost and a proportional allocation of our
production overhead. We determine the net realizable value of our inventories on the basis of
anticipated sales proceeds less estimated selling expenses. At each balance sheet date, we identify
inventories that are worth less than cost and write them down to their net realizable value and the
difference is charged to our cost of revenues of that year. The amounts of write-down of
inventories to net realizable value as of December&nbsp;31, 2005 and 2006 were RMB0.5&nbsp;million and RMB0.7
million (US$0.1&nbsp;million), respectively. These write-downs related to RF parts and components in our
inventory. We did not make any inventory write-downs in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Finished goods make up the majority of our inventories. Our high level of finished goods is
primarily the result of the way we recognize our revenues from our provision of wireless coverage
products and services. Our revenue recognition policy requires us to expense our finished goods in
inventory at the point when the sale of products has been recognized as revenue. As a result, a
considerable portion of our finished goods represents products that were delivered to our
customers&#146; sites pending initial installation or that were installed pending the issuance of
completion certificates and the signing of the sale and purchase contracts. These finished goods
amounted to RMB156.8&nbsp;million, RMB186.7&nbsp;million and RMB233.9&nbsp;million (US$30.0&nbsp;million) as of
December&nbsp;31,
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->41<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">2004, 2005 and 2006, respectively. Also included in finished goods are deferred
installation costs related to wireless coverage products delivered and installed for which the
related preliminary inspection certificates have not been issued at the respective
year-end dates. We deliver our finished goods to our customers&#146; sites in accordance with the
bids we won and the project designs approved by our customers. You should read &#147;Business &#151; Our
Wireless Coverage Products and Services &#151; Our Sales Cycle &#151; Contract Signing&#148; for additional
information and analysis on our bidding and contracting practice. In addition, we control our
installation costs by entering into fixed-price contracts with our installation contractors for
wireless coverage products.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Allowance for Warranties. </I></B>We account for estimated warranty cost as part of our cost of
revenues at the time we recognize related revenues. We accrue estimated warranty costs that we may
incur during the warranty periods when we are required to provide free repair and replacement for
defectively installed products. Our warranties generally extend for a period of 12&nbsp;months to three
years. We determine our allowance for warranties primarily based on historical trends of warranty
costs adjusted for specific conditions that may arise under each contract and the number of
contracts under warranty at each financial year-end. Although we believe that the level of our
allowance for warranties is appropriate, actual claims incurred in the future could differ from our
estimates.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Valuation of Long-lived Assets. </I></B>We review periodically the carrying amounts of long-lived
assets, including property, plant and equipment and intangible assets with finite useful lives, to
assess whether they are impaired. We test these assets for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable, such as change of
business plan, obsolescence, and continuous loss suffered. When such a decline has occurred, we
adjust the carrying amount to the estimated fair value. We measure the recoverability of assets by
comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected
to be generated by the asset, or, for identifiable intangibles with finite useful lives, by
determining whether the amortization of the intangible asset balance in the remaining life can be
recovered through undiscounted future cash flows. In determining estimates of future cash flows,
significant judgment in terms of projection of future cash flows and assumptions is required. If
the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Fair value is measured by discounting forecasted operating cash flow or market value if
readily determinable. Changes in estimates could have a major impact on the assessment of the value
of our assets and could require us to book additional impairments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Results of Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth our results of operations as a percentage of our revenues for
the periods indicated:</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom" style="padding-bottom: 3px">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="9" style="border-bottom: 1px solid #000000"><B>Year
ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Cost
of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(42.7</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(45.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(52.5</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4.3</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.7</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and distribution expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12.5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13.6</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.7</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6.7</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20.6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(26.0</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other (expense)/ income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.4</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investment income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency exchange gain/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.2</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Grant income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total other (expense)/income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.3</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income tax expense and minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20.2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.2</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interests, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">(2.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.2</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends, accretion to redemption values and foreign
exchange rate movements on mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.1</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income available to ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">25.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">24.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">17.8</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>2006 compared to 2005</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Revenues. </I>Our revenues increased by RMB116.5&nbsp;million, or 16.3%, to RMB832.8&nbsp;million (US$106.7
million) from RMB716.3&nbsp;million in 2005. The increase in 2006 was primarily attributable to
increased sales of wireless coverage products to the China Mobile group, the China Telecom group
and the China Netcom group. Our sales to the China Mobile group in 2006 increased by RMB35.5
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->42<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">million (US$4.5&nbsp;million), or 14.7%, over our sales to that group in 2005; our sales to the China
Telecom group in 2006 increased by RMB19.7&nbsp;million (US$2.5&nbsp;million), or 28.3%, over our sales to
that group in 2005; and our sales to the China Netcom group in 2006 increased by RMB32.4&nbsp;million
(US$4.2&nbsp;million), or 88.0%, over our sales to that group in 2005. During the same period, our sales
to the China Unicom group in 2006 decreased by RMB24.2&nbsp;million (US$3.1&nbsp;million), or 7.5%. Our
sales of wireless coverage products to the China Telecom group and the China Netcom group consisted
of PHS products. These two fixed-line telecommunication operators have not been licensed to own or
operate any GSM or other wireless networks. In addition, our sales of RF parts and components in
2006 increased by RMB10.0&nbsp;million (US$1.3&nbsp;million), or 45.5%, compared to 2005. Revenues from
overseas sales of wireless coverage products in the amount of RMB10.0&nbsp;million (US$1.3&nbsp;million)
further contributed to our overall revenue growth.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of Revenues. </I>Cost of revenues increased by RMB108.9&nbsp;million (US$14.0&nbsp;million), or 33.2%,
to RMB437.0&nbsp;million (US$56.0&nbsp;million) in 2006 from RMB328.1&nbsp;million in 2005, compared to an
increase of 16.3% in our overall revenues. The increase in cost of revenues was primarily
attributable to an increase of RMB75.5&nbsp;million, or 27.2%, in our cost of hardware during this
period. Our cost of service also increased by RMB33.4&nbsp;million (US$4.3&nbsp;million), or 65.7%, from
RMB50.8&nbsp;million in 2005 to RMB84.2&nbsp;million (US$10.8&nbsp;million) in 2006. The increase in our overall
cost of revenues primarily reflects the increase in the total number of units sold.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Gross Profit. </I>As a result of the foregoing, gross profit increased by 1.9% to RMB395.8&nbsp;million
(US$50.7&nbsp;million) in 2006 from RMB388.2&nbsp;million in 2005. Gross profit margin in 2006 decreased to
47.5% from 54.2% in 2005, primarily reflecting a decrease in the average selling price of our
products, which was in turn attributable to (1)&nbsp;the declining unit price of certain of our maturing
products and (2)&nbsp;an increasing percentage of lower-margined products such as PHS products and RF
parts in our overall product offerings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Research and Development Costs. </I>Our research and development costs increased by RMB17.1
million, or 55.7%, to RMB47.7&nbsp;million (US$6.1&nbsp;million) in 2006 from RMB30.6&nbsp;million in 2005,
principally reflecting an increase of RMB11.7&nbsp;million (US$1.5&nbsp;million) in salary and compensation
for our research staff. We added additional personnel to our research team in 2006 to focus on the
development of RF parts and components and 3G products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Sales and Distribution Expenses. </I>Sales and distribution expenses increased by RMB21.4
million, or 23.5%, to RMB112.9&nbsp;million (US$14.5&nbsp;million) in 2006 from RMB91.5&nbsp;million in 2005. The
increase was primarily attributable to an increase in remuneration for our sales and marketing
staff of RMB10.3&nbsp;million (US$1.4&nbsp;million), which principally reflects the additional sales
personnel that were hired in 2006 and increases in the remuneration for certain sales personnel in
order for us to better attract and retain talents. Marketing expenses increased by RMB3.6&nbsp;million
(US$0.5&nbsp;million) and telecommunications costs increased by RMB3.2&nbsp;million (US$0.4&nbsp;million) in 2006,
also reflecting the hire of additional sales personnel and the expansion of our business volume.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General and Administrative Expenses. </I>General and administrative expenses increased by 36.3%
to RMB55.9&nbsp;million (US$7.2&nbsp;million) in 2006 from RMB41.1&nbsp;million in 2005. The increase in general
and administrative expenses was primarily attributable to expenses relating to the enhancement in
our internal control system over financial reporting, as well as increases in legal, auditing,
consulting and other logistical expenses related to our initial public offering in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Operating Income. </I>As a result of the foregoing, our operating income decreased by 20.4% to
RMB179.2&nbsp;million (US$23.0&nbsp;million) in 2006 from RMB225.0&nbsp;million in 2005. Our operating margin in
2006 was 21.5% compared to 31.4% in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other Expense/Income. </I>Our interest income increased to RMB19.2&nbsp;million (US$2.5&nbsp;million) in
2006 from RMB3.2&nbsp;million in 2005 primarily due to the increased amount of deposit and increases in
interest rates. Our interest expense decreased to RMB28.0&nbsp;million (US$3.6&nbsp;million) in 2006 from
RMB36.1&nbsp;million in 2005 primarily resulting from the conversion of our exchangeable bonds to equity
at the time of our initial public offering in March&nbsp;2006. We also reported a foreign currency
exchange loss of RMB9.9&nbsp;million (US$1.3&nbsp;million) primarily due to appreciation of the Renminbi in
2006. Our other income included the net investment income from our equity investments of
approximately 4.7% in Quanzhou Commercial Bank. Our investment income increased by RMB0.1&nbsp;million
(US$0.01&nbsp;million) during this period. Grant income decreased to RMB7.7&nbsp;million (US$1.0&nbsp;million) in
2006 from RMB16.7&nbsp;million in 2005 as the number of our projects eligible for government subsidies
decreased in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Income Tax Expense. </I>In 2006, we recognized an income tax expense of RMB18.3&nbsp;million (US$2.3
million) as compared to RMB26.1&nbsp;million in 2005. Our income tax expense decreased by RMB7.8&nbsp;million
(US$1.0&nbsp;million) from 2005 to 2006 in part due to a decrease in our profit before tax and, to a
smaller extent, a decrease in the profit before tax of certain of our subsidiaries that were
subject to an income tax rate ranging from 27% to 33%. As a result, our effective tax rate reduced
to 10.9% in 2006 from 12.2% in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Minority Interests. </I>Minority interests were RMB1.3&nbsp;million (US$0.2&nbsp;million) in 2006, as
compared to RMB7.1&nbsp;million in 2005. This decrease was due to a decrease in profit before tax of
certain subsidiaries as well as a decrease in equity interest from 10% to 1% held by the minority
shareholder in Shenzhen Lingxian since 2005.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->43<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Net Income. </I>As a result of the foregoing, our net income decreased by 18.0% to RMB148.8
million (US$19.1&nbsp;million) in 2006 from RMB181.4&nbsp;million in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Dividends, Accretions to Redemption Values and Foreign Exchange Rate Movements on Mandatorily
Redeemable Convertible
Preference Shares. </I>In April&nbsp;2006, our directors declared dividends totaling RMB0.5&nbsp;million
(US$0.1&nbsp;million) to holders of our mandatorily redeemable convertible preference shares. In
addition, accretion of our mandatorily redeemable convertible preference shares to redemption value
was RMB0.4&nbsp;million (US$0.05&nbsp;million) up to the conversion of the shares in April&nbsp;2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>2005 compared to 2004</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Revenues. </I>Our revenues increased by 26.4% to RMB716.3&nbsp;million (US$88.8&nbsp;million) in 2005 from
RMB566.5&nbsp;million in 2004. The increase in 2005 was primarily attributable to our increased sales of
wireless coverage products as a result of sales and marketing efforts targeted at the China Mobile
group, the China Telecom group and the China Netcom group in 2005. Our sales to the China Mobile
group in 2005 increased by RMB84.3&nbsp;million (US$10.4&nbsp;million), or 53.6%, over our sales to that
group in 2004; our sales to the China Telecom group in 2005 increased by RMB50.2&nbsp;million (US$6.2
million), or 260.1%, over our sales to that group in 2004; and our sales to the China Netcom group
in 2005 increased by RMB28.6&nbsp;million (US$3.5&nbsp;million), or 348.8%, over our sales to that group in
2004. Our sales of wireless coverage products to the China Telecom group and the China Netcom group
consisted of PHS products. These two fixed-line telecommunication operators have not been licensed
to own or operate any GSM or other wireless networks. Our sales to the China Unicom group in 2005
decreased by RMB22.9&nbsp;million (US$2.8&nbsp;million), or 6.6%, from our sales to that group in 2004
largely due to slow-down in investments by the China Unicom group in wireless coverage products. In
addition, our sales of RF-based wireless access products in 2005 increased by RMB2.7&nbsp;million
(US$0.3&nbsp;million), or 270.0%, over our sales of those products in 2004. Our sales of RF parts and
components in 2005 decreased by RMB10.9&nbsp;million (US$1.4&nbsp;million), or 33.1%, from our sales of those
products in 2004. However, this decrease in sales of RF parts and components was partially offset
by an increase of RMB9.7&nbsp;million (US$1.2&nbsp;million) in our sales of additional wireless coverage
products to other suppliers of wireless coverage products and services in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of Revenues. </I>Cost of revenues increased by RMB86.1&nbsp;million (US$10.7&nbsp;million) or 35.6% to
RMB328.1&nbsp;million (US$40.7&nbsp;million) in 2005 from RMB241.9&nbsp;million in 2004. Our cost of revenues
increased primarily because of our increase in sales volume. Our cost of service increased by
RMB29.3&nbsp;million (US$3.6&nbsp;million), or 136.3%, from RMB21.5&nbsp;million in 2004 to RMB50.8&nbsp;million
(US$6.3&nbsp;million) in 2005. In 2005, we experienced a substantial increase in our sales of our PHS
wireless coverage products to the China Telecom group and the China Netcom group. In addition to
this increase in sales, our cost of revenues in 2005 also increased substantially as we had to
employ additional installation teams to install more products sold to the China Telecom group and
the China Netcom group, and our cost of hardware increased by RMB56.9&nbsp;million (US$7.1&nbsp;million), or
25.8%, from RMB220.4&nbsp;million in 2004 to RMB277.3&nbsp;million (US$34.4&nbsp;million) in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Gross Profit. </I>Gross profit increased by 19.6% to RMB388.2&nbsp;million (US$48.1&nbsp;million) in 2005
from RMB324.6&nbsp;million in 2004. Gross profit margin in 2005 decreased to 54.2% from 57.3% in 2004
primarily because we had a significant increase in 2005 in sales of our lower-priced PHS wireless
coverage products to the China Telecom group and the China Netcom group as compared to our overall
increase in 2005 in sales of our higher-priced GSM and CDMA products. The increase in our cost of
service in 2005 also contributed to the decrease in our gross profit margin.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Research and Development Costs. </I>Our research and development costs increased by 87.5% to
RMB30.6&nbsp;million (US$3.8&nbsp;million) in 2005 from RMB16.3&nbsp;million in 2004 primarily due to increases in
salary and other compensation as a result of an increase in the number of our research and
development personnel. A significant portion of our increase in research and development costs
resulted from our efforts to develop RF parts and components for use in base stations of two major
domestic equipment manufacturers, which are ZTE Corporation and Datang Mobile Communications
Equipment Co., Ltd, as well as our research and development of 3G products. We spent approximately
RMB10.2&nbsp;million (US$1.3&nbsp;million) in materials and equipment for research and development in 2005
and our increase in salary and compensation for research and development accounted for
approximately RMB3.0&nbsp;million (US$0.4&nbsp;million) in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Sales and Distribution Expenses. </I>Sales and distribution expenses increased by 28.8% to
RMB91.5&nbsp;million (US$11.3&nbsp;million) in 2005 from RMB71.0&nbsp;million in 2004. The increase was primarily
attributable to the expansion of our sales force. In 2005, we increased our marketing to the China
Mobile group, the China Telecom group and the China Netcom group. We also increased our overseas
expansion efforts. Remuneration for our sales and marketing staff increased by RMB7.9&nbsp;million
(US$1.0&nbsp;million), additional office rental and utilities increased by RMB1.7&nbsp;million (US$2.0
million), telecommunication and delivery costs increased by RMB3.1&nbsp;million (US$0.4&nbsp;million) and
travel related costs increased by RMB2.5&nbsp;million (US$0.3&nbsp;million) in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General and Administrative Expenses. </I>General and administrative expenses increased by 38.0%
to RMB41.1&nbsp;million (US$5.1&nbsp;million) in 2005 from RMB29.7&nbsp;million in 2004. The increase in general
and administrative expenses was primarily attributable to an increase in salaries and other
remuneration by RMB3.7&nbsp;million (US$0.5&nbsp;million) as a result of our hiring of additional
administrative staff, an increase in office rental and related utilities by RMB2.0&nbsp;million (US$0.2
million) as a result of additional office space we rented, and an increase in our provision for
doubtful accounts by RMB1.9&nbsp;million (US$0.2&nbsp;million) due to an increase in our accounts receivable
in 2005.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->44<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Operating Income. </I>Our operating income increased by 8.5% to RMB225.0&nbsp;million (US$27.9
million) in 2005 from RMB207.5&nbsp;million in 2004. Our operating margin in 2005 was 31.4% compared to
36.6% in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other Expense/Income. </I>Interest income decreased to RMB3.2&nbsp;million (US$0.4&nbsp;million) in 2005
from RMB4.0&nbsp;million in 2004
primarily due to a decrease in interest income by RMB0.8&nbsp;million (US$0.1&nbsp;million) from our
bank deposits. Interest expense decreased to RMB36.1&nbsp;million (US$4.5&nbsp;million) in 2005 from RMB39.4
million in 2004 primarily due to a decrease of RMB2.8&nbsp;million (US$0.3&nbsp;million) in receivable
selling expenses in 2005. We also had a foreign currency exchange gain of RMB5.6&nbsp;million (US$0.7
million) associated with our exchangeable bonds primarily due to appreciation of the Renminbi in
2005. We received a one-time nonrefundable grant from the Shenzhen government of RMB16.7&nbsp;million
(US$2.1&nbsp;million) in 2005 as a reward for some of the new wireless products we developed and sold.
Other income included our net investment income from our equity investments of approximately 4.7%
in Quanzhou Commercial Bank. Our investment income decreased by RMB0.7&nbsp;million (US$0.1&nbsp;million)
between 2004 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Income Tax Expense. </I>We had an income tax expense of only RMB16.0&nbsp;million in 2004 as a result
of a tax refund of RMB12.8&nbsp;million we received from the Shenzhen tax authorities in 2004 due to the
revision of our two-year tax exemption period as determined by the tax authorities. In 2005, we
recognized an income tax expense of RMB26.1&nbsp;million (US$3.2&nbsp;million). Our income tax expense
increased by RMB10.1&nbsp;million (US$1.3&nbsp;million) between 2004 and 2005 in part due to an increase in
our profit before tax and the absence of tax refunds in 2005. An increase in our effective tax rate
from 9.2% in 2004 to 12.2% in 2005 further attributed to the increase in our income tax expense
during this period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Minority Interests. </I>Minority interests were RMB7.1&nbsp;million (US$0.9&nbsp;million) in 2005, compared
to RMB11.1&nbsp;million in 2004, primarily due to a decrease in equity interest from 10% to 1% held by
the minority shareholder in Shenzhen Lingxian.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Net Income. </I>Net income increased by 23.7% to RMB181.4&nbsp;million (US$22.5&nbsp;million) in 2005 from
RMB146.6&nbsp;million in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Dividends, Accretions to Redemption Values and Foreign Exchange Rate Movements on Mandatorily
Redeemable Convertible Preference Shares. </I>In December&nbsp;2005, our directors declared a 5% dividend
based on the face value of our mandatorily redeemable convertible preference shares totaling RMB2.1
million (US$0.3&nbsp;million). In addition, in 2005, accretion of our mandatorily redeemable convertible
preference shares to redemption value was RMB1.3&nbsp;million (US$0.2&nbsp;million).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Liquidity and Capital Resources</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In line with the industry practice, we typically have long receivable collection cycle. As a
result, our cash provided by our sales in any given year may not be sufficient to fully meet our
operating cash requirements in that year. We anticipate that our operations may continue to
encounter such timing differences in cash flows in the near term. We used and will continue to use
available financing means, including short-term bank loans and receivable selling arrangements, to
provide sufficient cash inflows to balance such timing differences in our cash flows. We also
anticipate that near-term working capital and other capital requirements will increase due to our
increased sales activities, increased research and development efforts related primarily to 3G
products as well as RF parts and components, and our efforts to comply with the requirements as a
listed company in the United States, including the requirements of the Sarbanes-Oxley Act. We
anticipate meeting such increase in our near-term working capital and other capital requirements
primarily through our internally generated cash and financing means available to us, including
short-term bank loans and sales of accounts of receivable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, we had available undrawn bank borrowing facilities in the aggregate
of RMB52.8&nbsp;million (US$6.8&nbsp;million), unutilized bill payables facilities in the aggregate of
RMB40.1&nbsp;million (US$5.1&nbsp;million) and unutilized accounts receivable selling arrangements in the
aggregate of RMB258.2&nbsp;million (US$33.1&nbsp;million). Utilization of the unutilized bill payables
facilities and amount receivable selling arrangements requires pledge of bank deposit in an amount
equal to 30% and 20%, respectively, of the amount to be utilized.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event that we may be required to raise additional funds to meet any currently
unanticipated working capital or capital expenditure requirements, we expect to rely on the same
sources of funding, together with capital markets financings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes our cash flows for the periods indicated:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom" style="padding-bottom: 3px">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px Double #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px Double #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px Double #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px Double #000000"><B>2006</B></TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px Double #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px Double #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px Double #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px Double #000000"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(in thousands)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash/provided by/ (used in) operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">218,244</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">(112,611</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(114,778</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,707</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash used in investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(74,337</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,900</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(243,150</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(31,157</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash (used in)/provided by financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22,963</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,813</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">708,514</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90,787</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at the end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">302,932</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">467,423</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">59,895</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->45<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash of RMB114.8&nbsp;million (US$14.7&nbsp;million) was used in operating activities in 2006, as
compared to net cash used in operating activities of
RMB112.6&nbsp;million in 2005 and net cash provided by operating
activities of RMB218.2&nbsp;million in 2004. Our net income in 2004, 2005 and 2006 was RMB146.6&nbsp;million,
RMB181.4&nbsp;million and RMB148.8&nbsp;million (US$19.1&nbsp;million), respectively. The slight increase in the
outflow of cash used in operating activities in 2006 primarily
reflects the net effect of (1)&nbsp;an
increase of RMB142.2 in collections from customers from RMB345.6&nbsp;million in 2005 to RMB487.8
million in 2006; (2)&nbsp;a decrease of RMB62.4 in sales of account receivables from RMB180.1&nbsp;million in
2005 to RMB117.7&nbsp;million in 2006; and (3)&nbsp;an increase in the cash outlay for our
procurement of materials and research and development projects of RMB81.9&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We had a net investing cash outflow of RMB243.2&nbsp;million (US$31.2&nbsp;million) in 2006 as compared
to RMB20.9&nbsp;million in 2005. The significant increase in net investing cash outflow was due to (1)
an increase of RMB182.0&nbsp;million in pledged time deposits in 2006 compared to 2005; (2)&nbsp;an increase
of RMB30.7&nbsp;million in capital expenditures in 2006 compared to 2005, primarily reflecting purchase
of additional plant and equipment for production and development of base station RF products and
capital expenditures in the amount of RMB9.2&nbsp;million relating to the purchase of land for the
construction of our new research and manufacturing facilities in Shenzhen.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We had a net cash inflow of RMB708.5&nbsp;million (US$90.8&nbsp;million) from financing activities in
2006 as compared to RMB40.8&nbsp;million of net financing cash outflow in 2005, reflecting the net
effect of (1)&nbsp;proceeds from our initial global offering after deducting our expenses in the amount
of RMB649.0&nbsp;million; (2)&nbsp;increased short-term borrowing in 2006 in the amount of RMB237.9&nbsp;million;
(3)&nbsp;an increase of RMB51.0&nbsp;million in the amount of dividends paid; and (4)&nbsp;an increase of RMB58.2
million in the principal payments of short-term bank loans.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Accounts Receivable and Receivable Selling</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We generally begin working on a wireless coverage project upon winning a bid but before the
signing of a formal contract. Our sale and purchase contracts generally permit our customers to pay
their purchase price in installments upon the occurrence of stipulated payment events, such as the
signing of the sale and purchase contract, preliminary inspection, final inspection and the
expiration of our warranty period under the sale and purchase contract. To the extent revenue
recognized under a contract is not yet paid, we record it as an account receivable, net of any
accounts receivable we sold to third parties. As a result, a long accounts receivable cycle results
from the length of time between our recognition of revenues and the occurrence of various payment
events. The period between each payment installment varies and typically ranges from six months to
three years and the portion of the purchase price in each installment also varies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table describes the concentration of our gross accounts receivable by customers
and as a percentage of our gross accounts receivable balance as of December&nbsp;31, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom" style="padding-bottom: 3px">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>As
of December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="10"><B>(in
millions, except for percentages)</B></TD>
    <TD>&nbsp;</TD>
</TR>


<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">China
Unicom group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">406.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">52.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">40.4</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">China
Mobile group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">303.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">38.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">30.2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">China
Telecom group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">99.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">12.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">9.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">China
Netcom group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">66.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">8.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">6.6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">129.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">16.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">12.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">1,005.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">128.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth an aging analysis for our gross accounts receivable balances,
determined from the time that the revenue is recognized, as of the dates indicated.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom" style="padding-bottom: 3px">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>As
of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="26"><B>(in
millions, except for percentages)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Less
than one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">262.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">69.7</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">526.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">75.1</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">700.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">89.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">69.7</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Between
one to two years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">100.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">26.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">154.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">22.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">231.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">29.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">23.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Between
two to three years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">12.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">3.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">17.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">2.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">68.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">8.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">6.8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Over
three years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">1.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">3.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">4.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">0.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">376.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">701.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">1,005.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">128.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>

<TD align="right">100.0</TD>

<TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent revenues recognized under a contract are not yet paid, they are recorded as
accounts receivable in our balance sheet, net of amounts sold to third parties. Out of our gross
accounts receivable of RMB376.1&nbsp;million, RMB701.6&nbsp;million and RMB1,005.0&nbsp;million (US$128.8&nbsp;million)
outstanding as of December&nbsp;31, 2004, 2005 and 2006, respectively, RMB118.2&nbsp;million, RMB246.1
million and RMB353.5&nbsp;million (US$45.3&nbsp;million), or 31.4%, 35.1% and 35.2% of our gross accounts
receivable, represented gross accounts receivable that had passed the contractual payment dates in
the respective periods and were subject to payment by our customers. We made allowances for the
doubtful accounts representing 100% of our accounts receivable
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->46<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">contractually due had an age of not more than 6&nbsp;months as of December&nbsp;31, 2006. Our gross
accounts receivable that had not passed the relevant payment events represented 68.6%, 64.9% and
64.8% of our gross accounts receivable outstanding as of December&nbsp;31, 2004, 2005 and 2006,
respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We calculate our accounts receivable days as the average beginning and ending accounts
receivable balance for the year, divided by the revenues during the year, multiplied by 360. Our
accounts receivable days are long in absolute terms, approximately 260&nbsp;days, 271&nbsp;days and 369&nbsp;days
for 2004, 2005 and 2006, respectively. We believe that they are typical of industry standards with
respect to wireless coverage projects in the PRC market. During the early stages of our company, we
were restrained from aggressive collection efforts in order to remain competitive with the
incumbents in the market. Since the beginning of 2004, however, we have taken measures, including
expansion of our sales team, to facilitate our accounts receivable collection process. While these
measures taken by us has improved our receivable collections, our accounts receivable days in 2006
still increased by 98&nbsp;days to 369&nbsp;days primarily as a result of (1)&nbsp;an increased proportion of our
yearly revenues being generated in the third and fourth quarters of 2006, (2)&nbsp;a 16.3% increase in
our total revenues from 2005 to 2006 and (3)&nbsp;reduced sales of our accounts receivable to receivable
purchasing banks in 2006 as compared to 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Within our sales team, we have also established monitoring procedures on our accounts
receivable. Compensation of sales personnel has also been linked to collection efforts, with strong
collection efforts rewarded and poor collection efforts penalized. As a result of our enhanced
collection efforts, our customers settled RMB403.1&nbsp;million, RMB345.6&nbsp;million and RMB487.8&nbsp;million
(US$62.5&nbsp;million) in accounts receivable due to us in 2004, 2005 and 2006, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With regard to our contract terms, we have taken a more aggressive role in negotiating with
our customers by requiring a higher percentage of contract value paid upon the completion of the
preliminary inspection by our customers. For example, we were allowed in 2006 to collect 82% of
our total contract value when preliminary inspection certificate is issued, compared to 80.0% in
2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a measure to further reduce our level of accounts receivable and to alleviate the
associated risks, we have sold some of our accounts receivable to PRC domestic banks in China. We
expect to continue to sell our accounts receivable in the future at terms acceptable to us to meet
our working capital needs and to improve our liquidity. As of December&nbsp;31, 2006, we had accounts
receivable selling facilities in the aggregate of RMB258.2&nbsp;million (US$33.1&nbsp;million) that were
committed but not yet utilized.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2004, we entered into our first limited recourse receivable selling agreement with an
independent PRC domestic bank for the sale of our accounts receivable. Subsequently, we entered
into additional limited-recourse receivable selling agreements with one other independent PRC
domestic bank. Most of these agreements had a term of no more than one year. Pursuant to these
limited recourse receivable selling agreements, we agreed to use our reasonable efforts to persuade
our customers to settle the accounts receivable we sold to these banks. In addition, we were
responsible for servicing the accounts receivable sold until the maturity of these accounts
receivable, which in general was 12&nbsp;months from their sale under the receivable selling agreements.
We were also required to place with the banks a pledged time deposit in an amount of not less than
20% of the accounts receivable sold as security for payment of the relevant accounts receivable by
our customers. The banks were entitled to offset from our pledged time deposits up to 20% of any
uncollectible accounts receivable that we sold to the banks. The banks would refund any balance of
our pledged time deposits to us upon expiration of the receivable selling agreement or upon
settlement of the accounts receivable that we sold to the banks. For accounts receivable sold under
these receivable selling agreements, we were required to pay discount charges, commission fees or
interest calculated on a monthly basis and a one-time handling or service fee. The monthly discount
charges represent the interest calculated on a daily basis in respect of the balance of accounts
receivable we sold to the banks by reference to the base rate published by the People&#146;s Bank of
China, the PRC central bank, on the date of the receivable selling agreement. The one-time handling
or service fees ranged from 0.4% to 1% of the amount of accounts receivable that we sold to the
banks. Our banks did not encounter any significant default in repayments by customers on the
account receivables that we sold to the banks in the past recent years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Inventories</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our inventories comprise raw materials, work in progress and finished goods. Finished goods
make up the majority of our inventories. Our high level of finished goods results primarily from
the way we recognize revenues from the provision of wireless coverage products and services.
Because we recognize our revenues only after satisfaction of relevant revenue recognition criteria,
such as signing of sale and purchase contracts and issuance of completion certificates, we do not
expense our finished goods in our inventory until we recognize the relevant revenues. Our work in
progress inventory is generally minimal as we typically have a short production lead time. We use
raw materials primarily in the production of our wireless coverage products and RF parts and
components. We manage raw materials according to our production plan.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->47<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth an inventory balance breakdown by category as of the dates
indicated:
</DIV>



<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="15" style="border-bottom: 1px solid #000000"><B>As
of December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(US$)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="15"><B>(in
thousands)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:15px; text-indent:-15px">Raw
materials</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">43,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">55,572</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">65,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">8,380</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Work
in progress</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">4,991</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">4,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">658</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:15px; text-indent:-15px">Finished
goods</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">247,614</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">310,507</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">363,876</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">46,626</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">296,404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">370,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">434,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,664</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A considerable portion of our finished goods consists of finished goods and their related
installation costs delivered to our customers&#146; sites that are not yet installed or have been
installed but for which formal contracts are yet to be signed and/or completion certificates are
yet to be issued. These finished goods and their related installation costs amounted to RMB156.8
million, RMB186.7&nbsp;million and RMB233.9&nbsp;million (US$30.0&nbsp;million) as of December&nbsp;31, 2004, 2005 and
2006, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table describes an aging analysis of our inventory by major category as of
December&nbsp;31, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 6pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom" style="padding-bottom: 3px">
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 6pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Finished
goods</B></TD>
    <TD>&nbsp;</TD>
        <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Work
in progress</B></TD>
    <TD>&nbsp;</TD>
        <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Raw
materials</B></TD>
    <TD>&nbsp;</TD>
        <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
</TR>
<TR style="font-size: 6pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(%)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(%)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>(%)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(RMB)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3"><B>(%)</B></TD>
</TR>
<TR style="font-size: 6pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="47"><B>(in
thousands, except for percentages)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Age
</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Less
than one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">357,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">45,801</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">98.2</TD>

<TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">65,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">8,380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">427,965</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">54,839</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">98.5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">One
to two years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">6,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">825</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">1.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">6,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">825</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">1.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">363,876</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">46,626</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">5,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">65,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">8,380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">434,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">55,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We did not have inventories over two years old as of December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Borrowings</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, we had total short-term credit facilities of RMB479.6&nbsp;million
(US$61.4&nbsp;million) from eight domestic banks, of which we had drawn RMB336.1&nbsp;million (US$43.1
million) in bank loans and RMB50.4&nbsp;million (US$6.5&nbsp;million) in bills payable. As of December&nbsp;31,
2006, we had available undrawn bank- committed facilities in the aggregate of RMB92.9&nbsp;million
(US$11.9&nbsp;million) and unutilized accounts receivable selling arrangements in the aggregate of
RMB258.2&nbsp;million (US$33.1&nbsp;million). Our bills payable allow our vendors and suppliers to receive
payment in cash from our banks upon presentation in 30 to 180&nbsp;days. Pursuant to our financing
arrangements with banks in China, we must pay the amount under each bill payable to the bank on or
prior to the stipulated presentation date. We negotiate and renew our bank credit facility
agreements with our banks on an annual basis in line with the current banking industry practice in
China. The weighted average interest rate for our bank borrowings was 5.6% as of December&nbsp;31, 2006.
Of the total outstanding amount of RMB336.1&nbsp;million (US$43.1&nbsp;million) drawn in bank loans under
these facilities, RMB176.1&nbsp;million (US$22.6&nbsp;million) was unsecured and RMB160.0&nbsp;million (US$20.5
million) was secured by a pledge of part of our bank deposits and accounts receivable. The total
outstanding amount of RMB50.4&nbsp;million (US$6.5&nbsp;million) used in bills payable under these facilities
was secured by RMB22.0&nbsp;million (US$2.8&nbsp;million) as pledged time deposits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Part of our short-term loans are revolving facilities with a term of one year, which may be
extended for terms of one year each with lender consent.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Apart from the above, we have not granted any security interest or entered into any guarantees
or similar commitments to secure or guarantee payment obligations of any third parties. In
addition, we do not have any other written options on financial or non-financial assets. We expect
to continue to rely on bank loan financing and receivable selling arrangements to finance our
capital expenditure and working capital needs as we grow our business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Capital Expenditures and Contractual Commitments</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our capital expenditures consist of purchases of property, plant and equipment, such as
equipment and machinery, motor vehicles and office equipment. In 2004, 2005 and 2006, our capital
expenditures were RMB46.1&nbsp;million, RMB41.0&nbsp;million and RMB80.8&nbsp;million (US$10.3&nbsp;million),
respectively. The significant increase in capital expenditures in 2006 primarily related to
purchase of additional machinery and equipment for the production and development of base station
RF parts and components as well as aggregate expenditures in the amount of RMB9.2&nbsp;million relating
to the purchase of land for our new research and manufacturing facilities in Shenzhen. We expect
to continue to increase our planned capital expenditures in order to expand our production capacity
and to acquire additional research and development equipment. We intend to fund such expenditures
with cash from our operations, bank loans and accounts receivable selling arrangements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth our obligations and commitments to make future payments under
contracts and commitments as of December&nbsp;31, 2006:
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->48<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="30" style="border-bottom: 0px solid #000000"><B>As of December 31, 2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="30" style="border-bottom: 1px Double #000000"><B>Payment Due by Period</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 0px solid #000000"><B>Less than</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px Double #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px Double #000000"><B>1 Year</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px Double #000000"><B>1-3 Years</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px Double #000000"><B>After 3 Years</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>US$</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>US$</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>US$</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>RMB</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px Double #000000"><B>US$</B></TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="31" style="border-bottom: 0px Double #000000"><B>(in millions)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Short-term bank loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">336.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">336.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Bills payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating lease commitments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other capital commitments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">219.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">219.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total contractual obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">644.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">82.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">641.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">82.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Off-Balance Sheet Arrangements and Contingent Liabilities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, our accounts receivable sold to banks but not yet settled by our
customers amounted to RMB144.0&nbsp;million (US$18.5&nbsp;million). We were subject to a limited recourse
for these accounts receivable pursuant to which we pledged to the banks deposit of not less than
20% of the accounts receivable sold as guarantee for payment by our customers. As of December&nbsp;31,
2006, the pledged deposit amounted to RMB32.3&nbsp;million (US$4.1&nbsp;million).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, our commitments under operating leases for operating premises
amounted to RMB10.0&nbsp;million (US$1.3&nbsp;million), of which RMB6.9&nbsp;million, RMB1.9&nbsp;million and RMB1.2
million is due for payment in 2007, 2008 and 2009.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, our commitments for future purchase of property, plant and equipment
amounted to RMB219.6&nbsp;million (US$28.1&nbsp;million), which is predominately related to the construction
of our new facilities in Shenzhen.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not have any other off-balance sheet guarantees, any other outstanding derivative
financial instruments, interest rate swap transactions or foreign currency forward contracts. We do
not engage in trading activities involving non-exchange traded contracts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Inflation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inflation in China has not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in the consumer price index in
China was 3.9% in 2004, 1.8% in 2005 and 1.5% in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Quantitative and Qualitative Disclosure about Market Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Foreign Exchange Risk. </I></B>Virtually all of our revenues and expenses are denominated in
Renminbi. However, a portion of the proceeds from our initial public offering has been placed in
U.S. dollar deposit accounts. Any appreciation in Renminbi exchange rate against U.S. dollars
would result in a foreign exchange loss to us. For the year ended December&nbsp;31, 2006, we recorded a
foreign exchange loss of RMB9.9&nbsp;million (US$1.3&nbsp;million) predominately related to such U.S. dollar
bank deposits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Interest Rate Risk. </I></B>All of our indebtedness accrues interest at fixed rates of interest. As a
result, we believe we have no significant exposure to fluctuations in interest rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Credit Risk. </I></B>Since we commenced our operations in 1999, we have not had to write off any
significant bad debts. However, we have long accounts receivable cycles and long collection
periods. For a further discussion of these issues, please refer to &#147;Item&nbsp;3. Key Information&#151;Risk
Factors&#151;Risks Relating to Our Company&#151;We often begin work on a project before we have a contract
for our products and services, which may materially and adversely affect our cash flows from
operating activities and liquidity&#148; and &#147;&#151;We have long accounts receivable cycles and long
collection periods and our liquidity and cash flows from operations will deteriorate if our
accounts receivable cycles or collection periods continue to lengthen.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Corporate Structure</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a holding company, and we rely principally on dividends and other distributions on
equity paid by our PRC operating subsidiaries for our cash requirements, including the funds
necessary to service any debt we may incur, financing we may need for operations other than through
our PRC subsidiaries and the payment of dividends by us. Under the PRC laws, Shenzhen GrenTech, as
a wholly foreign-owned enterprise, and Shenzhen Lingxian and Lake Communication, both as domestic
limited liability companies in China, must allocate at least 10% of their after-tax profit to their
statutory general reserve fund until the balance of the fund has reached 50% of their registered
capital. In addition, Shenzhen Lingxian and Lake Communication, as domestic limited liability
companies, were required to transfer between 5% and 10% of their after-tax profit to the statutory
public welfare reserve fund. Beginning January&nbsp;1, 2006, however, Shenzhen Lingxian and Lake
Communication are no longer subject to such public welfare reserve requirement due to the amendment
of PRC Company Law which became effective on January&nbsp;1, 2006. Shenzhen GrenTech, as a wholly
foreign owned enterprise, has complete discretion in allocating its after-tax profit to its
employee welfare reserve fund. Lake Microwave, as a sino-foreign joint venture, has discretion in
allocating any portion of its after-tax profits to its
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->49<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">statutory general reserve fund, enterprise
development reserve fund and employee welfare reserve fund. These reserve funds are not
distributable as cash dividends. Any limitation on the payment of dividends by our PRC subsidiaries
could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends, and otherwise fund and conduct our businesses, as we have disclosed in
&#147;Item&nbsp;3. Key Information&#151;Risk Factors&#151;Risks Relating to Our Company&#151;Our primary source of funds
for dividend and other distributions from our operating subsidiary in China is subject to various
legal and contractual restrictions and uncertainties, and our ability to pay dividends or make
other distributions to our shareholders is negatively affected by those restrictions and
uncertainties.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the current laws of the Cayman Islands, we are not subject to Cayman Islands tax on
income or capital gain. We derived almost all of our revenues in 2006 from our principal PRC
operating subsidiary, Shenzhen GrenTech.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because Shenzhen GrenTech was recognized by Shenzhen municipal government as an advanced
technology enterprise in December&nbsp;2004, Shenzhen GrenTech applied for and was granted on December
13, 2005 an extension of its 50% relief from income tax for an additional three-year period
commencing from January&nbsp;1, 2006. Shenzhen Lingxian is currently applying for recognition as an
advanced technology enterprise. If we receive the government approval, Shenzhen Lingxian will be
subject to the 50% reduced corporate income tax rate of 7.5% for the three financial years from
January&nbsp;1, 2007 to December&nbsp;31, 2009.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;16, 2007, the National People&#146;s Congress of the PRC passed the Enterprise Income Tax
Law, which law will take effect as of January&nbsp;1, 2008. In accordance with the enterprise income
tax law, a unified enterprise income tax rate of 25%, a unified deduction measure and standard and
unified tax preferential treatment will be applied to both foreign invested and domestic
enterprises and an income tax rate of 15% will be provided to advanced technology enterprises
recognized by the government authorities. The new law also provides for transitional measures for
enterprises established prior to the promulgation of the new law and eligible for lower tax rate
preferential treatment in accordance with the then prevailing tax laws and administrative
regulations. These enterprises will gradually become subject to the new, unified tax rate over a
five-year period; enterprises eligible for regular tax reductions or exemptions may continue to
enjoy tax preferential treatments after the implementation of the new law and until their
preferential treatment expire. The preferential treatment period of enterprises which have not
enjoyed any preferential treatments for the reason of not having made any profits, however, shall
be deemed as starting from the implementation of the new law. In addition, foreign companies
headquartered in China may be classified as PRC resident enterprises and their worldwide income may
be subject to tax under the new law. Given that the new law has been promulgated only recently,
its implementation has yet to be further clarified in practice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Upon expiration of these tax benefits, both Shenzhen GrenTech and Shenzhen Lingxian will be
subject to the then current corporate income tax rate applicable to enterprises established in the
Shenzhen Special Economic Zone. For more details, please see &#147;Item&nbsp;3. Key Information&#151;Risk
Factors&#151;Risks Relating to Our Company&#151;If we lose certain government tax concessions, our
profitability may be materially and adversely affected.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Recent Accounting Pronouncements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>FASB Interpretation No.&nbsp;48 (&#147;FIN 48&#148;), Accounting for Uncertainty in Income Taxes</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In June&nbsp;2006, the FASB issued FIN 48, <I>Accounting for Uncertainty in Income Taxes</I>. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in our financial statements in accordance
with SFAS No.&nbsp;109, <I>Accounting for Income Taxes</I>. FIN 48 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the
fiscal years beginning after December&nbsp;15, 2006. We are in the process of evaluating the impact of
adopting this Interpretation on our financial condition, results of operations and cash flows.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Staff Accounting Bulletin No.&nbsp;108 (&#147;SAB 108&#148;), Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In September&nbsp;2006, the Securities and Exchange Commission issued SAB 108, <I>Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements</I>.
SAB 108 provides guidance on how prior year misstatements should be taken into consideration when
quantifying misstatements in current year financial statements for purposes of determining whether
the current year&#146;s financial statements are materially misstated. SAB 108 requires registrants to
apply the new quantification guidance to errors in existence at the beginning of the fiscal year
ending after November&nbsp;15, 2006 by correcting errors determined to be material under this new
quantification method through a one-time cumulative effect adjustment to beginning-of-year retained
earnings. We adopted SAB 108 in our consolidated financial statements as of October&nbsp;31, 2006. No
material adjustment was recorded by us upon adoption of SAB 108.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>SFAS No.&nbsp;156, Accounting for Servicing of Financial Assets &#150; an amendment of SFAS No.&nbsp;140</I>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->50<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In March&nbsp;2006, the FASB issued SFAS No.&nbsp;156, <I>Accounting for Servicing of Financial Assets &#150; an
amendment of SFAS No.&nbsp;140. </I>This Statement amends SFAS No.&nbsp;140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting
for separately recognized servicing assets and servicing liabilities. This Statement
requires an entity to, among other things, recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a servicing contract
under certain specific situation(s). This Statement is effective in years beginning after
September&nbsp;15, 2006. We are in the process of evaluating the impact of adopting this Statement on
our financial condition, results of operations and cash flows.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>SFAS No.&nbsp;157, Fair value measurements</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In September&nbsp;2006, the FASB issued SFAS No.&nbsp;157, <I>Fair Value Measurements</I>. This Statement defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. This Statement applies to other accounting pronouncements that require fair
value measurements and does not require any new fair value measurements. This Statement will be
effect in years beginning after November&nbsp;15, 2007. We are in the process of evaluating the impact
of adopting this statement on our financial condition results of operations and cash flows.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>SFAS No.&nbsp;159, The Fair Value Option for Financial Assets and Financial Liabilities &#150; Including an
amendment of SFAS No.&nbsp;115</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In February&nbsp;2007, the FASB issued SFAS No.&nbsp;159, <I>The Fair Value Option for Financial Assets and
Financial Liabilities &#150; Including an amendment of SFAS No.&nbsp;115. </I>This Statement permits entities to
choose to measure many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. This Statement is effective in years beginning after
November&nbsp;15, 2007. We are in the process of evaluating the impact of adopting this Statement on
our financial condition, results or operations and cash flows.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>EITF Issue. 04-14, Accounting for Purchases and Sales of Inventory with the Same Counterparty</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In September&nbsp;2005, the FASB Emerging Issues Task Force (&#147;EITF&#148;) issued EITF Issue No.&nbsp;04-13,
<I>Accounting for Purchases and Sales of Inventory with the Same Counterparty. </I>EITF 04-13 provides
guidance as to when purchases and sales of inventory with the same counterparty should be accounted
for as a single exchange transaction. EITF 04-13 also provides guidance as to when a nonmonetary
exchange of inventory should be accounted for at fair value. EITF 04-13 will be applied to new
arrangements entered into, and modification or renewals of existing arrangements occurring after
January&nbsp;1, 2007. The adoption of EITE 04-13 is not expected to have a material effect on our
consolidated financial statements.
</DIV>


<DIV align="left">
<A name="110"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Directors and Executive Officers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth information regarding our directors and executive officers as
of the date hereof.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="19%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="68%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">

<TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>Directors
and Executive Officers</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>Age</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>Position</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Yingjie Gao
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">51</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Chairman
of the Board and Chief Executive Officer</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Kunjie Zhuang
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">70</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Director
and Chief Technology Officer</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Rong Yu
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">42</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director, Chief Financial Officer and Principal
Accounting Officer</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Liping Mao
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">41</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Director
and Vice President</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Cuiming Shi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">66</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Independent
Director</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Xiaohu You
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">44</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Independent
Director</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Kin Kwong Mak
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">45</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Independent
Director (Audit Committee financial expert)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Tianwen Ding
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">50</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Vice
President</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Qi Wang
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">41</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Vice
President</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Qingchang Liu
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">39</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Vice
President</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Guanyu Huang
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">41</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">Vice
President</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Directors</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Yingjie Gao </I>has served as the chairman of our board of directors and our chief executive
officer since our inception in 1999. Mr.&nbsp;Gao has over seven years of experience in management in
the wireless communication network coverage industry and has over 14&nbsp;years of experience in
corporate operations and management in China. Prior to co-founding Shenzhen GrenTech in 1999, Mr.
Gao was the chairman and general manager of Shenzhen Tomorrow Image Design Company Limited, a
company that provides corporate image consultancy services to corporations, from 1993 to 1999. Mr.
Gao graduated from Jilin Correspondence College in 1983.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Kunjie Zhuang </I>has served as a director and our chief technology officer since our inception in
1999. Professor Zhuang has over 46&nbsp;years of experience in RF technology research and development
and over 14&nbsp;years of experience in the commercialization of RF technology. He is a well-recognized
expert in RF technology in China. Prior to co-founding Shenzhen GrenTech in 1999,
Professor
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Zhuang
was the director of Microwave Technology Discipline since 1973 at Southeast University in China.
Professor Zhuang received his bachelor&#146;s degree in radio technology from Southeast University in
1958.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Rong Yu </I>has served as a director of our company since December&nbsp;2001. Ms.&nbsp;Yu was our manager of
our finance and accounting
department when she joined our company in 1999. In 2003, she became our financial controller
and vice president in charge of our financial management and accounting matters. In August&nbsp;2005,
she became our chief financial officer. Before joining us in 1999, Ms.&nbsp;Yu taught industrial
accounting at Anhui Textiles School after receiving a bachelor&#146;s degree in industrial accounting
from Anhui College of Trade and Finance in 1987, and she also served as a finance manager for two
other companies in her previous career.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Liping Mao </I>has served as a director of our company since January&nbsp;2007. He has also served as
our Vice President since June&nbsp;2004, responsible for overseeing sales and marketing. Mr.&nbsp;Mao has 17
years of experience in sales and marketing in electronics and telecommunication products. Mr.&nbsp;Mao
joined our company in August&nbsp;2000. He graduated from People&#146;s University of China in 1987 with a
bachelor&#146;s degree in law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cuiming Shi </I>has served as a director of our company since March&nbsp;2006. Mr.&nbsp;Shi graduated in
1963 from the Department of Management Engineering at the Beijing University of Posts and
Telecommunications. From 1981 to 1987, Mr.&nbsp;Shi served as Deputy Director of the Department of
Postal Economic Research and as Deputy Director General of the Bureau of Finance of the Ministry of
Posts and Telecommunications. From 1987 to 1997, he was Director General of the Bureau of Finance,
Director General of the Department of Operations and Finance and Director General of the Department
of Finance of the Ministry of Posts and Telecommunications. He was previously the Chairman of the
board of directors and the chief executive officer of China Mobile (Hong Kong) Limited, a company
listed on The Stock Exchange of Hong Kong Limited and the New York Stock Exchange, and an executive
director and executive vice-president of China Unicom Limited, a company listed on The Stock
Exchange of Hong Kong Limited and the New York Stock Exchange. He is currently a consultant to
CITIC Pacific Limited and the chairman of CITIC Telecom 1616 Ltd.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Xiaohu You </I>has served as a director of our company since November&nbsp;2004. He has been the
director of the radio engineering department of Southeast University since 1996. Mr.&nbsp;You currently
also serves as the head of National 3G Mobile Communications General Group, the head of National
Fourth Generation Mobile Communications General Research Group and Director of Mobile
Communications Laboratory, each at Southeast University in China. Professor You received his
bachelor&#146;s, master&#146;s and doctorate degrees from Southeast University in 1982, 1985 and 1988,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Kin Kwong Mak </I>has served as a director of our company since November&nbsp;2004. Mr.&nbsp;Mak is a fellow
member of the Association of Chartered Certified Accountants and a fellow of the Hong Kong
Institute of Certified Public Accountants. He is also a managing director of venFUND Investment
Management (Shenzhen) Limited. Mr.&nbsp;Mak was previously a partner of Arthur Andersen and a managing
partner of Arthur Andersen&#146;s offices in Shenzhen and Guangzhou, China from 1992 to 2001.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Executive Officers</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Tianwen Ding </I>is a vice president of our company, responsible for overseeing our manufacturing,
quality control and supply lines departments. Mr.&nbsp;Ding was a director at the microwave research
division of the no. 54 division of the former PRC Ministry of Electronics Industry and the general
manager of Shenzhen Sed Communications Company Limited before he joined our company in April&nbsp;2000.
Mr.&nbsp;Ding graduated from the Radio and Electronics department of Tsinghua University in 1982 with a
bachelor&#146;s degree in engineering and received his master&#146;s degree in engineering from China
Communication Inspection and Control Research Institute in 1985.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Qi Wang </I>is a vice president of our company, responsible for overseeing the operation of our
human resources department and our head office general affairs department. Between 1988 and 1999,
Mr.&nbsp;Wang was a department head of China Shenzhen Foreign Trade Group Corp. Ltd. and an assistant to
the general manager of Shenzhen Baoren Marketing Co., Ltd. He joined our company in July&nbsp;1999. Mr.
Wang graduated with a bachelor&#146;s degree in economics from Beijing University of International
Economics and Business in 1988.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Qingchang Liu </I>is a vice president of our company, responsible for our corporate finance
activities. Mr.&nbsp;Liu has 14&nbsp;years of experience in finance, securities trading and corporate
reorganizations and was involved in the corporate restructuring of, and capital raisings of, a
number of companies listed on the PRC domestic stock exchanges and the Hong Kong Stock Exchange.
Mr.&nbsp;Liu graduated from China College of Finance in July&nbsp;1991 with a bachelor&#146;s degree in economics.
He obtained a master&#146;s degree in economics from the Shenzhen University in June&nbsp;2003. Mr.&nbsp;Liu
joined our company in June&nbsp;2000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Guanyu Huang </I>is a vice president of our company responsible for base station RF business
operations. Mr.&nbsp;Huang joined us in October&nbsp;2000 and served as Marketing Manager, Technical Support
Manager and Assistant to President previously. He studied at Harbin Maritime Engineering College
and graduated from The Open University of Hong Kong in December&nbsp;2001 with a Master degree in
Business Administration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The business address of our directors and executive officers is 16th Floor, Zhongyin Tower,
Caitian North Road, Futian District, Shenzhen, People&#146;s Republic of China, 518026.
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Board of Directors</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board of directors currently consists of seven directors. A director is not required to
hold any shares in our company by way
of qualification. Following a declaration of interests pursuant to the provisions of our
amended and restated articles of association, any separate requirement for audit committee approval
under the applicable law or the relevant Nasdaq National Market rules, a director may vote with
respect to any contract, proposed contract or arrangement in which he or she is interested unless
he or she is disqualified by the chairman of the relevant board meeting. A director may exercise
all the powers of our company to borrow money, mortgage its undertaking, property and uncalled
capital, and issue debentures or other securities whenever money is borrowed or as security for any
obligation of our company or of any third party. We approved the establishment of three committees
of the board of directors: the audit committee, the compensation committee and the corporate
governance and nominating committee. We have also adopted a charter for each committee in
compliance with the Sarbanes-Oxley Act of 2002 and the Nasdaq corporate governance rules. Each
committee&#146;s members and functions are described below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Audit Committee</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our audit committee consists of our three independent non-executive directors, namely Mr.&nbsp;Kin
Kwong Mak, Mr.&nbsp;Cuiming Shi and Professor Xiaohu You. All of them satisfy the &#147;independence&#148;
requirements of the Nasdaq Marketplace Rules and meet the criteria for independence set forth in
Section&nbsp;10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by
our board of directors by reference to similarly situated issuers and is in line with Rule 4350(d)
of the Nasdaq Marketplace Rules that requires the audit committees of U.S. companies to have a
minimum of three independent directors. There are, however, no specific requirements under Cayman
Islands law on the composition of our audit committee. The audit committee will oversee our
accounting and financial reporting processes and the audits of our financial statements. The audit
committee will be responsible for, among other things:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>selecting the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent auditors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing and
approving all proposed related-party transactions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>discussing the
annual audited financial statements with management and the
independent auditors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>annually
reviewing and reassessing the adequacy of our audit committee
charter;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>meeting
separately and periodically with management and the independent
auditors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing such other matters that are specifically delegated to our audit committee by
our board of directors from time to time; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reporting
regularly to the full board of directors.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Compensation Committee</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our compensation committee consists of Mr.&nbsp;Yingjie Gao, Professor Kunjie Zhuang, Mr.&nbsp;Kin Kwong
Mak, Mr.&nbsp;Cuiming Shi and Professor Xiaohu You. Mr.&nbsp;Mak, Mr.&nbsp;Shi and Professor You satisfy the
&#147;independence&#148; requirements of the Nasdaq Marketplace Rules and meet the criteria for independence
set forth in Section&nbsp;10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was
established by our board of directors by reference to similarly situated issuers and differs from
Rule&nbsp;4350(c)(3)(A)(ii) and (B)(ii) of the Nasdaq Marketplace Rules that requires the compensation
committees of U.S. companies to be comprised solely of independent directors. There are, however,
no specific requirements under Cayman Islands law on the composition of our compensation committee.
Our compensation committee assists our board in reviewing and approving the compensation structure
of our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. The compensation committee will be responsible for, among other
things:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing and
determining the compensation package for our senior executives;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing and
making recommendations to our board with respect to the compensation
of our directors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing and
approving officer and director indemnification and insurance
matters;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing and
approving any employee loan in an amount equal to or greater than
RMB100,000; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare
benefit plans.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->53<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Corporate Governance and Nominating Committee</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our corporate governance and nominating committee consists of Mr.&nbsp;Yingjie Gao, Ms.&nbsp;Rong Yu,
Mr.&nbsp;Kin Kwong Mak, Mr.&nbsp;Cuiming Shi and Professor Xiaohu You. Mr.&nbsp;Mak, Mr.&nbsp;Shi and Professor You
satisfy the &#147;independence&#148; requirements of the
Nasdaq Marketplace Rules and meet the criteria for independence set forth in Section
10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by our
board of directors by reference to similarly situated issuers and differs from Rule
4350(c)(4)(A)(ii) and (B)(ii) of the Nasdaq Marketplace Rules that requires the nominating
committees of U.S. companies be comprised solely of independent directors. There are, however, no
specific requirements under Cayman Islands law on the composition of our corporate governance and
nominating committee. The corporate governance and nominating committee will assist the board in
identifying individuals qualified to become our directors and in determining the composition of the
board and its committees. The corporate governance and nominating committee will be responsible
for, among other things:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>identifying
and recommending to the board nominees for election or re-election to
the board;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>making
appointments to fill any vacancy on our board;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and
availability of service to us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>identifying and recommending to the board any director to serve as a member of the
board&#146;s committees;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate governance
and on any corrective action to be taken; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>monitoring compliance with our code of business conduct and ethics, including reviewing
the adequacy and effectiveness of our procedures to ensure proper
compliance.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Duties of Directors</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under Cayman Islands law, our directors have a common law duty of loyalty to act honestly in
good faith with a view to our best interests. Our directors also have a duty to exercise the skill
they possess and such care and diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association. A shareholder has the right to seek
damages if a duty owed by our directors is breached. You should refer to &#147;Description of Share
Capital &#151; Corporate Governance&#148; for additional information on our standard of corporate governance
under Cayman Islands law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Employment and Service Agreements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each of our executive directors has entered into an employment agreement and a service
agreement with us for an initial term of three years. The employment agreement relates to the
relevant executive position and the service agreement relates to the directorship. Each agreement
will continue after the initial term from year to year until terminated by such director or removed
by our shareholders as to the directorship or by our board of directors as to the relevant
executive position with three to six months&#146; notice in writing served on the other party. Our
employment agreements with our executive management members also prohibit our management members
from illegally trading securities, restrict their use of our confidential information to their
employment with us and require them not to compete with us within two years after their employment
terminates. Our employment agreements also provide that any intellectual property created by our
management members during their employment belong to us and remain the property of our company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each independent director is appointed for an initial term of three years commencing from his
or her date of appointment and will continue after the initial term from year to year until
terminated by such director or removed by our shareholders with three to six months&#146; notice in
writing served on the other party.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Officers are appointed by and serve at the discretion of our board of directors. Each
executive officer has entered into an employment agreement with us without a fixed term. Such
employment will continue in force until terminated by either party with three to six months&#146; notice
in writing served on the other party.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Compensation of Directors and Executive Officers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All directors receive reimbursements from us for expenses which are necessarily and reasonably
incurred by them for providing services to us or in the performance of their duties. Our directors
who are also our employees receive compensation in the form of
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">salaries, housing allowances, other
allowances and benefits in kind in their capacity as our employees. Our executive directors do not
receive any compensation in their capacity as directors apart from their salaries and other
remunerations as members of our management team. We pay their expenses related to attending board
meetings and participating in board functions. Our independent directors receive HK$250,000 per
person each year in office as compensation, plus reimbursement of all reasonable out-of-pocket
expenses incurred in discharging their duties, including attending board meetings and participating
in board functions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate cash compensation and benefits that we paid to our directors and executive
officers for each of the three years
ended December&nbsp;31, 2006 were approximately RMB1,977,000, RMB3,384,989 and RMB3,247,008
(US$416,064), respectively. Under our current arrangements, the aggregate remuneration and benefits
in kind which our directors and executive officers are entitled to receive in 2007 is expected to
be approximately RMB5,170,248&nbsp;million, excluding any discretionary bonuses which may be paid to our
directors. No executive officer is entitled to any severance benefits upon termination of his or
her employment with our company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Indemnification</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cayman Islands law does not limit the extent to which a company&#146;s articles of association may
provide for indemnification of officers and directors, except to the extent any such provision may
be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Pursuant to our
memorandum and articles of association, our directors and officers, as well as any liquidator or
trustee for the time being acting in relation to our affairs, will be indemnified and secured
harmless out of our assets and profits from and against all actions, costs, charges, losses,
damages and expenses that any of them or any of their heirs, executors or administrators may incur
or sustain by reason of any act done, concurred in or omitted in or about the execution of their
duties in their respective offices or trusts. Accordingly, none of these indemnified persons will
be answerable for the acts, receipts, neglects or defaults of each other; neither will they be
answerable for joining in any receipts for the sake of conformity, or for any bankers or other
persons with whom any moneys or effects belonging to us may have been lodged or deposited for safe
custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging
to us may be placed out or invested, or for any other loss, misfortune or damage which may happen
in the execution of their respective offices or trusts. This indemnity will not, however, extend to
any fraud or dishonesty which may attach to any of said persons.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been
informed that the SEC views such indemnification against public policy as expressed in the
Securities Act and is therefore unenforceable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Share Option Scheme</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our share option scheme is a share incentive scheme which was adopted by our board of
directors and approved by our shareholders on August&nbsp;25, 2005. We have not granted any share option
under our share option scheme. The purpose of this share option scheme is to recognize and
acknowledge the contributions the eligible participants had or may have made to our company. The
share option scheme will provide the eligible participants an opportunity to have a personal stake
in our company with the view to achieving the following objectives:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>motivate the eligible participants to optimize their performance efficiency for the
benefit of our company; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>attract and retain or otherwise maintain an on-going business relationship with the
eligible participants whose contributions are or will be beneficial
to our long-term growth.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Eligible Participants</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under this share option scheme, our board of directors may, at its discretion, offer to grant
an option to subscribe for such number of our ordinary shares at an exercise price as our directors
may determine to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any full-time
or part-time employees, executives or officers of our company or any
of our subsidiaries;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any
directors, including non-executive directors and independent
directors, of our company or any of our subsidiaries;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any advisers,
consultants and agents to us or any of our subsidiaries; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>such other persons who, in the sole opinion of our board of directors, will contribute or
have contributed to our development and operations and our quality of work, have shown
initiative and commitment in performing his/her duties, or have provided service or
contribution to our company for a specified length of time.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Maximum Number of Shares</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The maximum number of ordinary shares in respect of which options may be granted (including
ordinary shares in respect of
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->55<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">which options, whether exercised or still outstanding, have already
been granted) under this share option scheme must not in aggregate exceed 10% of the total number
of ordinary shares in issue immediately following the completion of our initial public offering,
being 625,000,000 ordinary shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, the total number of ordinary shares issued and which may be issued upon exercise
of the options granted under this share option scheme and any other share option schemes of ours
(including both exercised and outstanding options) to each individual eligible participant in any
12-month period up to the date of grant may not exceed 1% of our shares in issue as of the date of
grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board of directors may, subject to the approval of our shareholders in a general meeting,
(i)&nbsp;renew this limit at any time, and/or (ii)&nbsp;grant options beyond the limit to eligible
participant(s) specifically identified by our board of directors. A share option scheme circular
distributed to participants will contain a generic description of the specified eligible
participant(s) who may be granted such options, the number and terms of the options to be granted,
the purpose of granting options to the specified eligible participant(s) with an explanation as to
how the options serve such purpose. However, no options may be granted under any schemes (including
this share option scheme) if the number of our shares issuable upon exercise of all outstanding
options will exceed 30% of our shares in issue from time to time.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Price of Shares</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board of directors may, in its discretion, determine the subscription price of an ordinary
share in respect of any particular option granted under this share option scheme. However, such
subscription price cannot be less than the highest of (i)&nbsp;the closing price of the shares as quoted
in the Nasdaq National Market on the date of grant, (ii)&nbsp;the average of the closing prices of the
shares as quoted in the Nasdaq National Market for five business days immediately preceding the
date of grant, and (iii)&nbsp;the nominal value of a share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Restrictions on the Times of Grant of Options</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A grant of options may not be made after a price sensitive event has occurred or a price
sensitive matter has been the subject of a decision until such price sensitive information has been
disclosed to the public. In particular, no options may be granted during the one-month period
before (i)&nbsp;the date of the board meeting for the approval of our results for any year, half-year,
quarterly or other interim period, and (ii)&nbsp;our deadline to publish our results for any year, or
half-year, or quarterly or other interim period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Transferability</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An option is personal to the grantee and may be exercised or treated as exercised, as the case
may be, in whole or in part. Under the share option scheme, no grantee may, in any way, sell,
transfer, charge, mortgage, encumber or create any interest (legal or beneficial) in favor of any
third party over or in relation to any option or attempt so to do.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Exercise of Option and Duration of the Share Option Scheme</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The period during which an option may be exercised will be determined by our board of
directors, in its absolute discretion. However, no option may be exercised more than 10&nbsp;years after
it has been granted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, a grantee may be required to achieve any performance targets, as our board of
directors may then specify in the grant, before any options granted under the share option scheme
can be exercised.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Rights on Ceasing Employment or Death of an Employee</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">If the grantee of an option ceases to be an employee of our company or any of our subsidiaries
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>by any reason other than death or termination of his employment on the grounds specified
in paragraph &#147;Right on Dismissal&#148; in the scheme, the grantee may exercise the option up to
the entitlement of the grantee as of the date of cessation (to the extent not already
exercised) within a period of one month from such cessation; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>by reason of death, his personal representative(s) may exercise the option within a
period of 12&nbsp;months from such cessation, which date shall be the last actual working day
with us or our subsidiary whether salary is paid in lieu of notice or not, failing which it
will lapse.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<B><I>Rights on Takeover/Winding-Up</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a general offer is made to all of our shareholders and such offer becomes or is declared
unconditional during the option period of the relevant option, then the grantee of an option is
entitled to exercise the option in full (to the extent not already exercised)
at any
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->56<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">time within 14
days after the date on which the offer becomes or is declared unconditional.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event of a voluntary winding-up of our company, we will give notice to all grantees
before a general meeting of the shareholders, and each grantee is entitled to exercise all or any
of his/her options (to the extent not already exercised), at any time not later than two business
days prior to the proposed general meeting, by giving a written notice to us together with a
remittance for the full amount of the aggregate subscription price for the shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<B><I>Alteration of the Share Option Scheme</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board has the authority to amend, suspend or terminate the share option scheme subject to
our shareholders&#146; approval of amendments to the extent necessary to comply with applicable laws and
provided no such action may affect awards previously granted under the scheme.
</DIV>

<DIV align="left">
<A name="111"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>MAJOR SHAREHOLDERS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of the date of this annual report, we had 625,000,000 shares outstanding. The table below
sets forth information as of the date of this annual report regarding the beneficial ownership of
our ordinary shares by each person known by us to beneficially own 5% or more of our outstanding
ordinary shares. Except as otherwise indicated, we believe each shareholder named in this table
has sole voting and investment power with respect to the shares shown as beneficially owned. None
of our shareholders listed below has voting rights that are different from any of our other
shareholders.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" cellpadding="0" border="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Shares
beneficially owned</B></TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">

<TD nowrap align="left" style="border-bottom: 0px solid #000000"><FONT style="border-bottom: 1px double #000000"><B>Name</B></font></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>%</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Guoren
Industrial<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">150,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">24.0</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">HXY
Investments<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">114,587,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">18.3</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Actis
China<SUP style="font-size: 85%; vertical-align: text-top">(3)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">61,730,925</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">9.9</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Drag
Investments<SUP style="font-size: 85%; vertical-align: text-top">(4)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">64,290,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">10.3</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff; padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Standard
Chartered Private
Equity<SUP style="font-size: 85%; vertical-align: text-top">(5)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">48,355,425</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">7.7</TD>

<TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">Wells
Fargo &#038; Company
<SUP style="font-size: 85%; vertical-align: text-top">(6)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">46,014,950</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>

<TD align="right">7.4</TD>

<TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px double #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">

<TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Guoren Industrial is 65% owned by Mr.&nbsp;Yingjie Gao and 35% owned by Mr.&nbsp;Fan Zhang. Mr.&nbsp;Zhang
is not related to or otherwise affiliated with Mr.&nbsp;Gao.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">

<TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Represents 120,710,000 ordinary shares owned by HXY Investments. HXY Investments is a British
Virgin Islands company 27.78% owned by Mr.&nbsp;Guang Shi, 18.055% by Ms.&nbsp;Yin Huang, 18.055% by Ms.
Rong Yu, 18.055% by Mr.&nbsp;Qi Wang and 18.055% by Mr.&nbsp;Jin
Wan.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">

<TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>Represents 61,730,925 ordinary shares owned by Actis China. Actis China is a wholly owned
subsidiary of Actis China Fund 2, L.P., which is a limited partnership registered in England.
Its limited partners have no voting or investment control over its investments (including the
shares held by Actis China Fund 2, L.P.). Investment and voting decisions are made by Actis
China Fund 2, L.P.&#146;s manager Actis Capital LLP through unanimous decision at meetings of Actis
Capital LLP&#146;s investment committee for Actis China Fund LLP. Actis China has entered into a
declaration of trust with Actis Executive Co- Investment Plan L.P. pursuant to which Actis
Executive Co-Investment Plan L.P. is the beneficial owner of 1.9% of the shares held by Actis
China.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>Drag Investments is a British Virgin Islands company wholly owned by
Professor Kunjie Zhuang.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">

<TD nowrap align="left">(5)</TD>
    <TD>&nbsp;</TD>
    <TD>Represents 48,355,425 ordinary shares owned by Standard Chartered Private Equity. Standard
Chartered Private Equity is incorporated in Hong Kong and is indirectly wholly owned by
Standard Chartered PLC, a company incorporated in the United Kingdom. Standard Chartered PLC
is a widely held public company listed on the London Stock Exchange and the Hong Kong Stock
Exchange.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">

<TD nowrap align="left">(6)</TD>
    <TD>&nbsp;</TD>
    <TD>Wells Fargo &#038; Company is a Delaware corporation with a diversified financial services in
banking, insurance, investments, mortgage and consumer finance.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>RELATED PARTY TRANSACTIONS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our Related-Party Transaction Policies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have conducted our related-party transactions on normal commercial terms that are fair and
reasonable and in the interests
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->57<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">of our shareholders as a whole. We believe that the terms of our
related-party transactions are comparable to the terms we could obtain from independent third
parties. Our related-party transactions are subject to the review and approval of the audit
committee of our board of directors. The charter of our audit committee as adopted by our board of
directors provides that we may not enter into any related-party transaction unless and until it has
been approved by the audit committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Acquisitions of Equity Interests in Lake Microwave and Lake Communication</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2004, GrenTech BVI, one of our consolidated subsidiaries, acquired an additional 29%
equity interest in Lake Microwave from Lake HK and, Shenzhen GrenTech
repurchased
an 8% equity interest in Lake Communication from Mr.&nbsp;Haifan Zhuang, for a lump sum cash
consideration of RMB1.1&nbsp;million. As a result of these transactions, we indirectly own 80% and 80%
equity interests in Lake Microwave and Lake Communication, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Lease with Shenzhen Fang Sheng</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have occupied certain premises in an office building in Shenzhen owned by Shenzhen Fang
Sheng AutoBig World Management Co. Ltd., or Shenzhen Fang Sheng, which is managed by directors of
our company. The term of our lease with Shenzhen Fang Sheng is for one year, which has been
renewed each year with the current term to expire on December&nbsp;31, 2007. Our yearly lease payment
paid to Shenzhen Fang Sheng is RMB1.0&nbsp;million.
</DIV>

<DIV align="left">
<A name="112"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 8. FINANCIAL INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our audited consolidated financial statements are set forth beginning on page F-1. Other than
as disclosed elsewhere in this annual report, no significant change has occurred since the date of
the annual financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Legal Proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are involved in legal proceedings in the ordinary course of our business. We are not
involved in any litigation, arbitration or administrative proceedings that could have a material
adverse effect on our financial condition or results of operations, taken as a whole. So far as we
are aware, no such material litigation, arbitration or administrative proceedings are threatened.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Dividend Policy</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not intend to pay any cash dividends on our ordinary shares in the foreseeable future.
We intend to retain most, if not all, of our available funds and any future earnings for use in the
operation and expansion of our business. Our board of directors has complete discretion as to
whether we will pay dividends in the future, subject to the approval of our shareholders. Any
future dividend declaration will be subject to various factors, including:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the level of
our cash and retained earnings;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our expected
financial performance;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our projected
levels of capital expenditure and other investment plans;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the adequacy
of our working capital; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the dividend yield of similarly listed companies with similar growth prospects as well as
comparable providers of wireless coverage products and services
globally.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we are a holding company, and our cash flow depends on dividends from our
operating subsidiaries in China. The ability of our subsidiaries in China to pay dividends to us is
subject to various restrictions, including legal restrictions in China that permit payment of
dividends only out of net income determined in accordance with PRC accounting standards and
regulations. Under PRC law, Shenzhen GrenTech, as a wholly foreign owned enterprise, and Shenzhen
Lingxian and Quanzhou Lake Communication Co., Ltd., or Lake Communication, both as domestic limited
liability companies in China, must allocate at least 10% of their after-tax profit to their
statutory general reserve fund until the balance of the fund has reached 50% of their registered
capital. In addition, Shenzhen Lingxian and Lake Communication, as domestic limited liability
companies, were required to transfer between 5% and 10% of their after-tax profit to the statutory
public welfare reserve fund. As of January&nbsp;1, 2006, however, Shenzhen
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->58<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Lingxian and Lake
Communication are no longer subject to such public welfare reserve requirement due to the amendment
of the PRC Company Law, which became effective on January&nbsp;1, 2006. Shenzhen GrenTech, as a wholly
foreign owned enterprise, has complete discretion in allocating its after-tax profit to its
statutory welfare reserve fund. Lake Microwave, as a sino-foreign joint venture, has discretion in
allocating any portion of its after-tax profits to its statutory general reserve fund, enterprise
development reserve fund and employee welfare reserve fund. These reserve funds are not
distributable as cash dividends. You should read &#147;Item&nbsp;3. Key Information&#151;Risk Factors&#151;Risks
Relating to Our Company&#151;Our primary source of funds for dividend and other distributions from our
operating subsidiary in China is subject to various legal and contractual restrictions and
uncertainties, and our ability to pay dividends or make other distributions to our shareholders is
negatively affected by those restrictions and uncertainties&#148; for additional information on our
dividend and distribution restrictions.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">
The depositary has agreed to distribute to the holders of our ADSs any dividend we declare and
pay on our ordinary shares that are evidenced by ADSs to the holders of our ADSs, subject to the
terms of the deposit agreement, to the same extent as holders of our ordinary shares, less its fees
and expenses payable under the deposit agreement. The depositary may send to you anything else we
distribute on deposited securities by means it considers lawful and reasonably practical. If it
cannot make the distribution that way, the depositary may decide to sell what we distributed and
distribute the net proceeds in the same way as it does with cash or hold what we distributed if it
cannot be sold. Cash dividends on our ordinary shares will be paid in U.S. dollars.
</DIV>

<DIV align="left">
<A name="113"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 9. THE OFFER AND LISTING</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with our initial public offering, our American depositary shares, or ADSs, each
representing 25 ordinary shares, were listed and commenced trading on the NASDASQ National Market
on March&nbsp;29, 2006 under the symbol &#147;GRRF.&#148; Prior to our initial public offering, there was no
public market for our equity securities. The NASDAQ National Market is the principal trading
markets for our ADSs and ordinary shares, which are not listed on any other exchanges in or outside
the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, there were 425,799,000 ordinary shares issued and outstanding and 1
registered holders of American depositary receipts evidencing 7,968,040 ADSs. As of the date
hereof, there were 398,115,500 ordinary shares issued and outstanding and 1 registered holders of
American depositary receipts evidencing 9,075,380 ADSs. Since certain of the ADSs are held by
nominees, the above number may not be representative of the actual number of U.S. beneficial
holders of ADSs or the number of ADSs beneficially held by U.S. persons. The depositary for the
ADSs is Citibank, N.A.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">The high and low marketing prices of the ADSs on the NASDAQ National Market for the periods
indicated are as follows.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Price
per ADS (US$)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>Annual</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">2006 (from listing date)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">22.50</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">8.21</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>Quarterly</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">First Quarter, 2006 (from listing date)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">22.50</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">16.88</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">Second Quarter, 2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">18.30</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">10.50</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">Third Quarter, 2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">14.60</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">8.21</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">Fourth Quarter, 2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">19.81</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">10.11</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>Monthly</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">November&nbsp;2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">17.85</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">12.75</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">December&nbsp;2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">19.81</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">15.17</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">January&nbsp;2007
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">19.00</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">13.68</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">February&nbsp;2007
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">14.23</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">11.71</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">March&nbsp;2007
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">12.30</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">9.06</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-0px">April&nbsp;2007
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">11.81</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">9.76</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 10. ADDITIONAL INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>SHARE CAPITAL</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>MEMORANDUM AND ARTICLES OF ASSOCIATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The section entitled &#147;Description of Share Capital&#148; contained in our registration statement on
Form F-1 (File No.&nbsp;333-132381) filed with the Security and Exchange Commission is hereby
incorporated by reference.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>MATERIAL CONTRACTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not entered into any material contracts other than in the ordinary course of business
and other than those described in this annual report on Form 20-F.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->59<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>EXCHANGE CONTROLS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We receive substantially all of our revenues in Renminbi, which is not a freely convertible
currency. Although central government&#146;s policies were introduced in 1996 to reduce restrictions on
the convertibility of Renminbi into foreign currency for current account items, conversion of
Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or
security, requires the approval of the State Administration of Foreign Exchange and other relevant
authorities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The People&#146;s Bank of China, or PBOC, sets and publishes daily a base exchange rate with
reference primarily to the supply and demand of Renminbi against a basket of currencies in the
market during the prior day. The PBOC also takes into account other factors, such as the general
conditions existing in the international foreign exchange markets. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based
on rates set by the PBOC, which are set daily based on the previous day&#146;s interbank foreign
exchange market rates and current exchange rates in the world financial markets. From 1994 to July
20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally
stable. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on
the convertibility of Renminbi into foreign currency for current account items, conversion of
Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or
securities, requires the approval of the State Administration for Foreign Exchange and other
relevant authorities. On July&nbsp;21, 2005, the PRC government introduced a managed floating exchange
rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market
supply and demand and by reference to a basket of currencies. As a result, as of May&nbsp;1, 2007, the
Renminbi has appreciated approximately 7.4% against the U.S. dollar since July&nbsp;2005. The PRC
government in the future may make further adjustments to the exchange rate system.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>TAXATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following summary of the material Cayman Islands and United States federal income tax
consequences relevant to the purchase, ownership or sale of our ADSs is based upon laws and
relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. The summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to any particular investor depending on its individual
circumstances. Accordingly beneficial owners of shares should consult their own tax advisors
regarding the application of the considerations discussed below to their particular situations and
the consequences, including U.S. federal estate or gift tax laws, foreign, state, or local laws,
and tax treaties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Cayman Islands Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Cayman Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or
estate duty. There are no other taxes likely to be material to us levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to
any double tax treaties. There are no exchange control regulations or currency restrictions in the
Cayman Islands.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>United States Federal Income Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of the principal United States federal income tax consequences
under present law of an investment in the shares or ADSs. This summary is based upon existing
United States federal income tax law, which is subject to differing interpretations or change,
possibly with retroactive effect. This summary applies only to investors that hold the shares or
ADSs as capital assets and that have the U.S. dollar as their functional currency.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion does not deal with the tax consequences to any particular investor or
to persons in special tax situations such as
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>

    <TD>banks;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>insurance companies;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>broker dealers;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>traders in securities that elect to mark to market;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>partnerships and their partners;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>tax-exempt entities;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>holders who are not U.S. Holders;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons liable for alternative minimum tax;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons holding a share or ADS as part of a straddle, constructive sale, hedging,
conversion or integrated transaction; or</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>holders that actually or constructively own 10% or more of our voting stock.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>* * * * * * * * * * * * * * * * * * * * *</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Prospective purchasers are urged to consult their tax advisors about the United States federal,
state and local tax consequences to them of the purchase, ownership and disposition of shares or
ADSs.</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>* * * * * * * * * * * * * * * * * * * * *</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The discussion below of the United States federal income tax consequences to &#147;U.S. Holders&#148;
will apply if you are the beneficial owner of shares or ADSs and you are for United States federal
income tax purposes:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an individual citizen or resident of the United States;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a corporation (or other entity treated as a corporation for United States federal
income tax purposes) organized in or under the laws of the United States, any state thereof
or the District of Columbia;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an estate whose income is subject to United States federal income taxation regardless
of its source;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a trust that is subject to the primary supervision of a court within the United States
and the control of one or more United States persons; or</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a trust that has a valid election in effect under applicable U.S. Treasury regulations
to be treated as a United States person.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a partnership holds shares or ADSs, the tax treatment of a partner will generally depend
upon the status of the partner and the activities of the partnership. If you are a partner of a
partnership holding shares or ADSs, you should consult your tax advisors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The discussion below is written on the basis that the representations contained in the deposit
agreement are true and that the obligations in the deposit agreement and any related agreement will
be performed in accordance with the terms. If you hold ADSs, you generally will be treated as the
owner of the underlying ordinary shares represented by those ADSs for United States federal income
tax purposes. Accordingly, deposits or withdrawal of shares for ADSs will not be subject to United
States federal income tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>U.S. Holders</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Taxation of Dividends and Other Distributions on the Shares or ADSs</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to the passive foreign investment company rules discussed below, all our distributions
to you with respect to the shares or ADSs, other than certain pro rata distributions of our shares
or ADSs, will be includible in your gross income as ordinary dividend income when you, in the case
of shares, or the depositary, in the case of ADSs, receive the distribution, but only to the extent
that the distribution is paid out of our current or accumulated earnings and profits as determined
under United States federal income tax principles. Because we do not intend to determine our
earnings and profits on the basis of United States federal income tax principles, any distribution
paid will generally be treated as a &#147;dividend&#148; for United States federal income tax purposes. The
dividends will not be eligible for the dividends-received deduction allowed to corporations. To the
extent that the amount of the distribution exceeds our current and accumulated earnings and
profits, it will be treated first as a tax-free return of your tax basis in your shares or ADSs,
and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed
as capital gain.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends may be taxed at the lower applicable capital gains rate provided that (1)&nbsp;the ADS or
ordinary shares, as applicable, are readily tradable on an established securities market in the
United States, (2)&nbsp;we are not a passive foreign investment company (as discussed below) for either
our taxable year in which the dividend was paid or the preceding taxable year, and (3)&nbsp;certain
holding period requirements are met. Under recently published Internal Revenue Service authority,
common or ordinary shares, or ADSs representing such shares, are considered for purposes of clause
(1)&nbsp;above to be readily tradable on an established securities market in the United States if they
are listed on the Nasdaq National Market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign
tax credit in respect of any foreign withholding taxes imposed on dividends received on the shares
or ADSs. A U.S. Holder who does not elect to claim a foreign tax credit for foreign income tax
withheld, may instead claim a deduction, for United States federal income tax purposes, in respect
of such withholdings, but only for a year in which such holder elects to do so for all creditable
foreign income taxes. Dividends will constitute foreign source income for foreign tax credit
limitation purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Taxation of Disposition of Shares or ADSs</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to the passive foreign investment company rules discussed below, you will recognize
taxable gain or loss on any sale or exchange of a share or ADS in an amount equal to the difference
between the amount realized (in U.S. dollars) for the share or ADS and your tax basis (in U.S.
dollars) in the share or ADS. The gain or loss will generally be capital gain or loss and will be
long-term capital gain or loss if you are an individual who has held the share or ADS for more than
one year. The deductibility of a capital loss maybe subject to limitations. Any gain or loss that
you recognize will generally be treated as United States source gain or loss.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Passive Foreign Investment Company</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on our current and projected income and assets, we do not believe that we should be
classified as a passive foreign investment company for United Sates federal income tax purposes and
do not expect to become a passive foreign investment company in the future. A company is considered a passive
foreign investment company for any taxable year if either:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>at least 75% of its gross income is passive income, or</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>at least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held for
the production of passive income.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For this purpose, cash is categorized as a passive asset and the Company&#146;s unbooked
intangibles are taken into account. We will be treated as owning our proportionate share of the
assets and earning our proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25% (by value) of the stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In calculating the value of our goodwill and other unbooked intangibles, we have valued our
total assets based on our total market value determined using the lowest selling price of the
shares for the past year and have made a number of assumptions regarding the amount of this value
allocable to goodwill. We believe our valuation approach is reasonable. However, it is possible
that the Internal Revenue Service will challenge the valuation of our goodwill, which may also
result in us being classified as a passive foreign investment company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The determination of whether will be classified as a passive foreign investment company is
made annually. As a result, our passive foreign investment company status may change. In
particular, as we have valued our goodwill based on the market value of our shares or ADSs, a
decrease in the price of our shares or ADSs below the lowest trading price of the shares or ADSs
for the preceding year may result in us becoming a passive foreign investment company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we are a passive foreign investment company for any taxable year during which you hold
shares or ADSs, you will be subject to special tax rules with respect to any &#147;excess distribution&#148;
that you receive and any gain you realize from a sale or other disposition (including a pledge) of
the shares or ADSs. Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three preceding taxable years
or your holding period for the shares or ADSs will be treated as an excess distribution. Under
these special tax rules:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the excess distribution or gain will be allocated ratably over your holding period for
the shares or ADSs,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we were a passive foreign investment company, will be treated
as ordinary income, and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="3" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>

<TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the amount allocated to each other year will be subject to tax at the highest tax rate
in effect for that year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends
received from us, if we are a passive foreign investment company in the taxable year in which such
dividends are paid or in the preceding taxable year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>DIVIDENDS AND PAYING AGENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>STATEMENT BY EXPERTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>DOCUMENTS ON DISPLAY</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;You can read and copy documents referred to in this annual report that have been filed with
the SEC at the SEC&#146;s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and
their copy charges. The SEC also maintains a website at http://www.sec.gov that contains reports
and other information that we have filed electronically with the SEC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SUBSIDIARY INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->60<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See &#147;Item&nbsp;5. Operating and Financial Review and Prospects&#151;Market Risk and Risk Management.&#148;
</DIV>

<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART
II</B>
</DIV>


<DIV align="left">
<A name="118"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>

<DIV align="left">
<A name="119"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>USE OF PROCEEDS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following &#147;Use of Proceeds&#148; information relates to the registration statement on Form F-1
(File No.&nbsp;333-132381) (the &#147;IPO Registration Statement&#148;) for our initial public offering, including
an offering of 5,000,000 ADSs by us for an aggregate offering price of US$90&nbsp;million and an
offering of 1,250,000 ADSs by our selling shareholders for an aggregate offering price of
US$22,500,000. The IPO Registration Statement was declared effective by the SEC on March&nbsp;29, 2006.
Our initial public offering was terminated after all of the registered securities were sold.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Bear Stearns &#038; Co. Inc., Piper Jaffray &#038; Co. and WR Hambrecht &#043; Co., LLC were the underwriters
for our initial public offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We received net proceeds of approximately US$83.7&nbsp;million from our initial public offering,
after deducting approximately US$7.2&nbsp;million for underwriting discounts and commissions, and
approximately US$2.5&nbsp;million for other expenses. None of the payments were direct or indirect
payments to our directors, officers, general partners of our associates, persons owning 10% or more
of any class of our shares, or any of our affiliates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have used the net proceeds from our initial public offering for (1)&nbsp;research and
development on RF technology and our new product offerings, (2)&nbsp;expansion of and further
penetration by our sales and marketing distribution network, (3)&nbsp;construction of new research and
production facilities in Shenzhen High Technology Industrial Park, and (4)&nbsp;other general corporate
purposes.
</DIV>


<DIV align="left">
<A name="120"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 15. CONTROLS AND PROCEDURES</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Evalution
of Disclosure Controls and Procedures</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal executive officers and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures as defined in Rules&nbsp;13a-15(e) and
15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the &#147;Exchange Act&#148;) as of the end
of the period covered by this annual report, have concluded that, as of such date, our disclosure
controls and procedures were effective to ensure that material information relating to us and our
consolidated subsidiaries was made known to them by others within our company and our consolidated
subsidiaries on a timely basis and that the information required to be disclosed by us in the
report that we file and furnish under the Exchange Act was recorded, processed, summarized and
reported, within the time periods specified in by the SEC&#146;s rules and regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Changes
in Internal Controls over Financial Reporting</b>
</div>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
were no adverse changes in our internal controls over financial
reporting that occurred during the period covered by this annual
report on Form 20-F that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.</div>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, under the supervision and with the participation of our senior management, including our chief
executive officer and chief financial officer, we are in the process of conducting further evaluation of our internal controls over financial reporting for compliance with the requirements of
Section 404 under the Sarbanes-Oxley Act. In this regard, we have engaged an advisor to assist us in evaluating, designing, implementing and testing internal controls over financial reporting intended
to comply with the requirements of Section 404. As we are still in the evaluation process, we may identify material weaknesses or significant deficiencies in the future. Should we discover such
conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
</div>
<DIV align="left">
<A name="121"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board of directors has determined that Mr.&nbsp;Kin Kwong Mak qualifies as an audit committee
financial expert in accordance with the terms of Item&nbsp;16.A of Form 20-F. For Mr.&nbsp;Mak&#146;s
biographical information, see &#147;Item&nbsp;6. Directors, Senior Management and Employees&#151;Directors and
Senior Management.&#148;
</DIV>

<DIV align="left">
<A name="122"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 16B CODE OF ETHICS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial
Officer, and other designated members of senior management of the Company. We have filed this code
of ethics as an exhibit to this annual report.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->61<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="123"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our
principal accountants and all other fees billed for products and services provided by our principal
accountants other than the audit fees, audit-related fees and tax fees for such of the two years
ended December&nbsp;31, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="3" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Audit
Fees</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Audit-Related
Fees</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Tax
Fees</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Other
Fees</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="15">(in
millions of RMB)</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">4.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">

<TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">2.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Before our principal accountants were engaged by our company or our subsidiaries to render
audit or non-audit services, the engagement was approved by our audit committee as required by
applicable rules and regulations of the U.S. Securities and Exchange Commission.
</DIV>

<DIV align="left">
<A name="124"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM
16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left">
<A name="125"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM
16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>

<DIV align="left">
<A name="126"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 17. FINANCIAL STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have elected to provide the financial statements and related information specified in Item&nbsp;18 in lieu of Item&nbsp;17.
</DIV>

<DIV align="left">
<A name="127"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 18. FINANCIAL STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Index to Financial Statements for a list of all financial statements filed as part of this annual report.
</DIV>

<DIV align="left">
<A name="128"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 19. EXHIBITS</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">

<TD nowrap align="center" colspan="3"><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" style="border-bottom: 0px solid #000000">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt; padding-bottom: 3px" valign="bottom">

<TD nowrap align="center" colspan="3"  style="border-bottom: 1px solid #000000"><B>No.</B></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Description
of Exhibit</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">1.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Amended
and Restated Memorandum and Articles of Association of the
Registrant<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">2.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Form
of share
certificate<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">2.2</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Form
of deposit agreement, including form of American Depositary
Receipt<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">11.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Code
of Ethics</DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">12.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">302
CEO
Certification</DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">12.2</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">CEO
Certification</DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">12.5</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">302 CFO
Certification</DIV></TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD nowrap align="right" valign="top">&nbsp;</TD>

<TD align="right" valign="top">13.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">906 Certification
by the CEO and the CFO</DIV></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top" style="padding-bottom: 3px">

<TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to our Registration Statement on Form F-1 (File No.&nbsp;333-132381)
filed with the SEC in connection with our global offering in
November&nbsp;2004.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top" style="padding-bottom: 3px">

<TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to our Registration Statement on Form F-6 (File No.&nbsp;333-132385)
filed with the SEC with respect to American Depositary Shares representing our ordinary
shares.</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->62<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">






<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SIGNATURE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
</DIV>

<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">China GrenTech Corporation Limited<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px double #000000" align="left">/s/ Yingjie Gao
<BR>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="left">&nbsp;</TD>

<TD valign="top">Name:&nbsp;&nbsp;</TD>

<TD colspan="2" align="left">Yingjie
Gao</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-bottom: 3px">
    <TD align="left">&nbsp;</TD>

<TD valign="top">Title:&nbsp;&nbsp;&nbsp;&nbsp;</TD>

<TD colspan="2" align="left">Chief
Executive Officer</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Date: May 4, 2007
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->63<!-- /Folio -->
</DIV>



<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>INDEX
TO THE FINANCIAL STATEMENTS</B>
</DIV>

<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#300">Report of Independent Registered Public Accounting Firm</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#301">Consolidated Balance Sheets as of December&nbsp;31, 2005 and 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#302">Consolidated Statements of Income for the years ended December&nbsp;31, 2004, 2005
and 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#303">Consolidated Statements of Shareholders&#146; Equity for the years ended December&nbsp;31,
2004, 2005 and 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#304">Consolidated Statements of Cash Flows for the years ended December&nbsp;31, 2004,
2005 and 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#305">Notes to the Consolidated Financial Statements</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-8</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="300"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Report of Independent Registered Public Accounting Firm</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Board of Directors and Shareholders of<BR>
China GrenTech Corporation Limited:

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have audited the accompanying consolidated balance sheets of China GrenTech Corporation Limited
and subsidiaries as of December&nbsp;31, 2005 and 2006, and the related consolidated statements of
income, shareholders&#146; equity and cash flows for each of the years in the three-year period ended
December&nbsp;31, 2006, all expressed in Renminbi. These consolidated financial statements are the
responsibility of the Company&#146;s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China GrenTech Corporation Limited and subsidiaries as
of December&nbsp;31, 2005 and 2006, and the results of their operations and their cash flows for each of
the years in the three-year period ended December&nbsp;31, 2006, in conformity with U.S. generally
accepted accounting principles.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The accompanying consolidated financial statements as of and for the year ended December&nbsp;31, 2006,
have been translated into United States dollars solely for the convenience of the reader. We have
audited the translation and, in our opinion, such consolidated financial statements expressed in
Renminbi have been translated into United States dollars on the basis set forth in Note 2(b) to the
consolidated financial statements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">KPMG<BR>
Hong Kong, China<BR>
April&nbsp;20, 2007

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-1<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries</B>
</DIV>

<DIV align="left">
<A name="301"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>Consolidated Balance Sheets<BR>
as of December&nbsp;31 2005 and 2006</B></DIV>


<DIV align="center" style="font-size: 10pt">(RMB and US$ expressed in thousands)</DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Note</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">US$</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Assets</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Current assets</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">467,423</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">59,895</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pledged time deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238,618</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts
receivable, net of allowances for estimated settlement discounts and
doubtful debts of RMB 24,204 and RMB 21,159 respectively as of December&nbsp;31, 2005 and 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">537,321</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">747,859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,829</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">370,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">434,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,664</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prepaid expenses and other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,635</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,744</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred income taxes and deferred tax
charges</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,466</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">957</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,172,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,948,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">249,665</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property, plant and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,604</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Lease prepayments, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,736</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,746</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Investment securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,944</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,944</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,018</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,053</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term accounts receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">162,032</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">268,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,464</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,475,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,415,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">309,560</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Liabilities</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Current liabilities</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Short-term bank loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">160,614</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">336,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,061</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,367</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,221</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Bills payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,069</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued expenses and other payables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">263,331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">208,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amounts due to related parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,920</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,344</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,582</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividend payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,996</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,331</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">738,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">866,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,023</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167,053</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">905,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">866,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,023</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Commitments and contingencies</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Minority interests</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,704</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,431</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Mandatorily redeemable convertible preference shares
US$0.00002 par value; 33,634,500 shares authorized, issued
and outstanding as of December&nbsp;31, 2005; fully converted
into ordinary shares and nil outstanding as of
of December&nbsp;31, 2006</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Shareholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Ordinary shares US$0.00002 par value; 2,500,000,000 shares
authorized, 466,365,500 and 625,000,000 issued and outstanding
as of December&nbsp;31, 2005 and 2006
respectively</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Contributed surplus</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">853,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,363</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,092</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">132,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,966</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Retained earnings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">231,017</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">544,446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,764</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">506,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,530,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">196,106</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total liabilities and shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,475,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,415,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">309,560</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to the consolidated financial statements
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-2<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries</B>
</DIV>

<DIV align="left">
<A name="302"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>Consolidated
Statements of Income<BR>
for the years ended December&nbsp;31, 2004, 2005 and 2006</B></DIV>


<DIV align="center" style="font-size: 10pt">(RMB and US$ expressed in thousands, except per share data)</DIV>






<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Note</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">US$</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">566,504</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">832,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(241,930</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(328,064</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(437,040</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(56,001</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">324,574</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">388,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">395,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,711</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(16,326</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(30,616</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(47,671</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,108</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and distribution expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(71,035</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(91,489</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(112,948</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(14,473</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and administrative
expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(29,744</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(41,057</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(55,944</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,169</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(117,105</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(163,162</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(216,563</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(27,750</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">207,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">225,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income/(expense)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,458</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(39,392</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(36,105</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(28,026</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,591</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investment income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency exchange
gain/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,875</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,265</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Grant income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,732</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">983</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total other expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(33,771</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,417</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,807</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,385</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income tax expense and
minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,698</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">214,627</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(16,020</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(26,097</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(18,277</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,342</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">188,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,234</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interests, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,117</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,086</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,267</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(162</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends, accretion to redemption value
and of foreign currency rate movements
on mandatorily redeemable convertible
preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,509</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,428</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(549</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(70</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income available to ordinary
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,002</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income per share available to ordinary
shareholders:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#150; Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.31</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#150; Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.29</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average number of ordinary
shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#150; Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#150; Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">593,150,684</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">593,150,684</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to the consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-3<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries</B>
</DIV>

<DIV align="left">
<A name="303"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>Consolidated
Statements of Shareholder&#146;s Equity<BR>
for the years ended December&nbsp;31, 2004, 2005 and 2006</B></DIV>


<DIV align="center" style="font-size: 10pt">(RMB and US$ expressed in thousands, except per share data)</DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">Ordinary shares</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Total</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Number of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Contributed</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Statutory</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Retained</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">shareholders&#146;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Note</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">shares</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">surplus</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">reserves</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">earnings</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">equity</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of January&nbsp;1, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,289</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260,149</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,561</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Appropriation to statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,721</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25,721</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends declared on ordinary
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(54,411</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(54,411</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends declared on mandatorily
redeemable convertible
preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,193</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,193</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion to redemption value on
mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,316</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,316</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">82,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107,209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">348,790</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,444</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest on long-term debt paid by
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,567</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Appropriation to statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(34,122</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends declared on ordinary
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(29,653</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(29,653</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends declared on mandatorily
redeemable convertible
preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,139</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,139</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion to redemption value on
mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,385</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,385</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of foreign currency rate
movement on mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,096</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,092</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">231,017</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">506,720</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-4<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Consolidated Statements of Shareholder&#146;s Equity<BR>
for the years ended December&nbsp;31, 2004, 2005 and 2006 (Continued)</B><BR>
(RMB and US$ expressed in thousands, except per share data)
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">Ordinary shares</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Total</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Number of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Contributed</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Statutory</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Retained</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">shareholders&#146;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Note</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">shares</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">surplus</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">reserves</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">earnings</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">equity</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of January&nbsp;1, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,092</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">231,017</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">506,720</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,841</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest on long-term debt paid by
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,345</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Appropriation to statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(15,311</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends declared on ordinary
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,609</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,609</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividends declared on mandatorily
redeemable convertible
preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(548</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(548</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion to redemption value on
mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(360</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(360</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of foreign currency rate
movement on mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issue of new shares, net of related
offering costs of RMB 71,534</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">125,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">649,002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">649,022</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of mandatorily redeemable
convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,634,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,940</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,946</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Extinguishment of obligations in respect
of long-term debt and related
interest payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,712</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">625,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">853,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">132,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">544,446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,530,428</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31,
2006 &#150; US$
  </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
 <TD>&nbsp;</TD>
     <TD align="right">625,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,363</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,764</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">196,106</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to the consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-5<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries</B>
</DIV>

<DIV align="left">
<A name="304"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>Consolidated
Statements of Cash Flows<BR>
for the years ended December&nbsp;31, 2004, 2005 and 2006</B></DIV>


<DIV align="center" style="font-size: 10pt">(RMB and US$ expressed in thousand)</DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Note</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">RMB</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">US$</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Cash flow from operating activities</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Loss on disposal of property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,297</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">166</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation of property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,622</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,707</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,826</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization of lease prepayments and intangible
assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">131</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">145</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">330</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense on Exchangeable Bonds</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,706</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,340</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">428</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,267</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">162</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Allowance for doubtful accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred income taxes and deferred tax charges</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,353</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">130</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency exchange (gain)/loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,584</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,080</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Changes in operating assets and liabilities, net of effects
of acquisition of a subsidiary:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(345,954</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(319,493</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(40,939</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(127,278</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(73,732</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(64,270</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,235</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid expenses and other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(39,365</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,556</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,360</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(174</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">84,463</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,722</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">878</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Bills payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,996</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(562</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,509</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued expenses and other payables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,518</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,888</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,549</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income tax payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,416</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">950</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amounts due to related parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,234</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,920</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(246</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by/(used in) operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">218,244</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(112,611</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(114,778</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(14,707</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Cash flow from investing activities</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(46,080</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(40,961</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(71,639</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,180</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of land use rights</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(962</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,188</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,177</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">(Increase)/decrease in pledged time deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(26,694</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(162,368</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(20,806</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of interests in subsidiary, net of cash acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,067</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from sale of property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash used in investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(74,337</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(20,900</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(243,150</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(31,157</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Cash flow from financing activities</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repurchase of registered capital interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(46,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net proceeds from issue of new shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">649,022</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">83,164</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Principal payments of short-term bank loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(646,330</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(283,850</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(342,104</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(43,836</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from short-term bank loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">571,330</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">279,614</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">517,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66,316</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from/(payment for) collection of sold accounts
receivable on behalf of financial institutions, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">98,037</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25,955</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(54,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,961</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Dividends paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,622</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(61,623</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,896</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash (used in)/provided by financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(22,963</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(40,813</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">708,514</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90,787</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of foreign currency exchange rate change on cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11,771</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,508</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net increase/(decrease) in cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,944</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(174,324</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">338,815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,415</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">At beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,988</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">302,932</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,480</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">At end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">302,932</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">467,423</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">59,895</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-6<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Consolidated Statements of Cash Flows<BR>
for the years ended December&nbsp;31, 2004, 2005 and 2006 (Continued)</B><BR>
(RMB and US$ expressed in thousand)
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">RMB</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">RMB</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">RMB</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">US$</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Supplemental Disclosures of Cash Flow Information:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash paid during the year for:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,812</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,001</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,844</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,261</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,693</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,163</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Significant Non-Cash Transactions:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest on long-term debt paid by shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,069</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Extinguishment of obligations in respect of long-term
debt and related interest payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,712</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,028</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of mandatorily redeemable convertible
preference shares into new ordinary shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,946</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,887</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Acquisition on additional equity interest in subsidiary by
transfer and exchange of accounts
receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to the consolidated financial statements.
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->F-7<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries</B>
</DIV>

<DIV align="left">
<A name="305"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 0pt"><B>Notes to the Consolidated Financial Statements</B>
</DIV>

<DIV align="center" style="font-size: 10pt"><B>December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)</DIV>



<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(1)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Principal Activities, Basis of Presentation and Organization</B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><I>Principal Activities</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">China GrenTech Corporation Limited (the &#145;&#145;Company&#146;&#146;, formerly known as Powercom Holdings
Limited) and its subsidiaries (hereinafter, collectively referred to as the &#147;Group&#148;) are
principally engaged in the manufacture and sale of wireless coverage products and services in
the People&#146;s Republic of China (the &#145;&#145;PRC&#146;&#146;). The Group derives substantially all of its
revenues from China United Telecommunications Corporation and its affiliates (the &#145;&#145;China
Unicom Group&#146;&#146;), China Mobile Communications Corporation and its affiliates (the &#145;&#145;China
Mobile Group&#146;&#146;) and China Telecom Corporation Limited and its affiliates (the &#147;China Telecom
Group&#148;). At December&nbsp;31, 2006, the China Unicom Group and the China Mobile Group are the
only two licensed wireless communication operators in the PRC. See Note 24.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><I>Basis of Presentation and Organization</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company was incorporated in the Cayman Islands and was established on December&nbsp;3, 2003,
as part of the reorganization and initial public offering (&#147;IPO&#148;) of Shenzhen GrenTech
Company Limited (&#147;Shenzhen GrenTech&#148;, formerly known as Shenzhen Powercom Company Limited)
and its subsidiaries (the &#145;&#145;Reorganization&#146;&#146;). Shenzhen GrenTech was established in the PRC
in July&nbsp;1999 as a domestic limited liability company with registered capital of RMB
10,000,000. The registered capital was subsequently increased to RMB 112,000,000 in 2000.
As of December&nbsp;31, 2006, Shenzhen GrenTech&#146;s principal subsidiaries consist of i) Shenzhen
Lingxian Technology Company Limited (&#145;&#145;Shenzhen Lingxian&#146;&#146;), a 99% owned domestic limited
liability company; ii) Quanzhou Lake Communication Company Limited (&#145;&#145;Lake Communication&#146;&#146;),
an 80% owned domestic limited liability company and; iii) Quanzhou Lake Microwave Company
Limited (&#145;&#145;Lake Microwave&#146;&#146;), an 80% owned domestic limited liability company.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In connection with the Reorganization in December&nbsp;2003, the shareholders of Shenzhen
GrenTech, through a series of related transactions, including the issuance of Exchangeable
Bonds (Note 15) to third party investors for proceeds of US$ 20,700,000, transferred their
entire equity interests in Shenzhen GrenTech to the Company in exchange for 466,365,500
ordinary shares of the Company (see Note 17). As the Reorganization was completed for the
sole purpose of establishing the legal structure of the Company in preparation for the
initial public offering of securities of GrenTech, and as the shareholders&#146; proportionate
equity interests in the Company upon consummation of the Reorganization were identical to
their proportionate equity interests in Shenzhen GrenTech just prior to the consummation of
the Reorganization, the accompanying consolidated financial statements have been prepared as
a reorganization of businesses under common control in a manner similar to a
pooling-of-interests. Accordingly, the assets and liabilities transferred to the Company
have been stated at the historical carrying amounts of Shenzhen GrenTech.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-8<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(1)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Principal Activities, Basis of Presentation and Organization (continued)</B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">On April&nbsp;4, 2006, the Company completed its IPO and sold 5,000,000 ADSs, representing
125,000,000 new ordinary shares, at an initial public offering price of US$ 18.00 per ADS.
The Company received net proceeds, after deduction of the related offering costs, in the
amount of RMB 649,022,000 (approximately US$ 83,164,000).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (&#147;US GAAP&#148;).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">This basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company&#146;s principal subsidiaries, which are
prepared in accordance with the accounting principles and the relevant financial regulations
applicable to enterprises limited by shares as established by the Ministry of Finance of the
PRC (&#145;&#145;PRC GAAP&#146;&#146;), the accounting standards used in the country of their domicile. The
accompanying consolidated financial statements reflect necessary adjustments not recorded in
the books of account of the Company&#146;s subsidiaries to present them in conformity with US
GAAP.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(2)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Summary of Significant Accounting Policies and Practices</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(a)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Principles of Consolidation</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">The consolidated financial statements include the financial statements of the Company
and its subsidiaries. All significant intercompany balances and transactions have been
eliminated on consolidation.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(b)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Foreign Currency Transactions</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">The Company and its subsidiaries&#146; functional and reporting currency is the RMB.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Transactions denominated in currencies other than Renminbi (&#147;RMB&#148;) are translated into
RMB at the exchange rates quoted by the People&#146;s Bank of China (&#147;PBOC&#148;) prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into RMB using the applicable exchange
rates quoted by the PBOC at the balance sheet dates. The resulting exchange
differences are recorded in the statements of income.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Commencing from July&nbsp;21, 2005, the PRC government moved the RMB into a managed floating
exchange rate regime based on market supply and demand with reference to a basket of
currencies. Consequently, the PBOC&#146;s exchange rate of the U.S. dollar against the RMB
was adjusted from approximately RMB 8.28 per U.S. dollar on July&nbsp;20, 2005 to RMB 8.11
per U.S. dollar on July&nbsp;21, 2005, and has continued to fluctuate within a limited range
from that date, and was RMB 7.8087 per U.S. dollar on December&nbsp;31, 2006.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">





</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->F-9<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(2)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Summary of Significant Accounting Policies and Practices (continued)</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(b)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Foreign Currency Transactions (continued)</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">For the convenience of the readers, the 2006 RMB amounts included in the accompanying
consolidated financial statements have been translated into United States dollars at
the rate of US$ 1.00 = RMB 7.8041, being the noon buy rate for U.S. dollars in effect
on December&nbsp;29, 2006 in the City of New York for cable transfer in Renminbi per U.S.
dollar as certified for custom purposes by the Federal Reserve Bank. No representation
is made that the RMB amounts could have been, or could be, converted into United States
dollars at that rate or at any other certain rate on December&nbsp;31, 2006, or at any other
date.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">RMB is not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the PBOC or other institutions authorized to buy and
sell foreign exchange. The exchange rate adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC, which are determined largely by supply
and demand.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">As a result of the decline of the exchange rate of the U.S. dollar against RMB, the
carrying value of the mandatorily redeemable convertible preference shares, which was
denominated in U.S. dollars, was reduced by RMB 1,096,000 and RMB 359,000 (US$ 46,000)
respectively for the year ended December&nbsp;31, 2005 and the period from January&nbsp;1, 2006
to April&nbsp;3, 2006 (being the date of conversion into ordinary shares). The effects of
the foreign currency rate movements were reflected as adjustments to shareholders&#146;
equity in 2005 and 2006.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(c)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Use of Estimates</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">The preparation of the consolidated financial statements in accordance with US GAAP
requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates. On an ongoing basis, management reviews its
estimates and assumptions including those related to the recoverability of the carrying
amount of property, plant and equipment, valuation allowances for accounts receivable,
realizable values for inventories and accrued warranty costs. Changes in facts and
circumstances may result in revised estimates.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(d)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Cash and Cash Equivalents</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Cash and cash equivalents consist of cash on hand and in banks, including certificates
of deposit and other highly liquid debt instruments with initial terms of less than
three months.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-10<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(2)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Summary of Significant Accounting Policies and Practices (continued)</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(e)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Accounts Receivable</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Accounts receivable are stated at the historical carrying amount, net of an allowance
for doubtful accounts. The allowance for doubtful accounts is the Company&#146;s best
estimate of the amount of probable credit losses in the Company&#146;s existing accounts
receivable. The Company determines the allowance based on historical write-off
experience, customer specific facts and economic conditions. Allowances for doubtful
accounts are charged to general and administrative expenses.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Outstanding account balances are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">The Company&#146;s off-balance-sheet credit exposure consists primarily of receivables sold
to financial institutions that are subject to limited recourse (Note 3).
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(f)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Inventories</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Inventories are stated at the lower of cost or market. Cost is determined using the
weighted average cost method. Cost of work in progress and finished goods comprises
direct materials, direct production cost and an allocated proportion of production
overheads. Cost of finished goods also includes cost of installation services
performed on finished good products delivered and installed on customers&#146; sites, and
such installation services are pending for inspection and acceptance
by customers as of
the balance sheet date.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(g)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Property, Plant and Equipment</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Property, plant, and equipment are stated at cost less accumulated depreciation and
impairment.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Depreciation of property, plant and equipment is calculated based on the straight-line
method (after taking into account their respective estimated residual values) over the
estimated useful lives of the assets as follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="93%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2" style="border-bottom: 0px solid #000000"><I>Years</I></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Buildings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equipment and machinery</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">5-10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Motor vehicles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office equipment and computer software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">No deprecation is provided in respect of construction in progress.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-11<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(2)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Summary of Significant Accounting Policies and Practices (continued)</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(h)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Lease Prepayments</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Lease prepayments represent the cost of land use rights in the PRC. Land use rights
are carried at cost and amortized on a straight-line basis over the period of rights of
50&nbsp;years.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(i)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Goodwill and Other Intangible Assets</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Goodwill represents the excess of cost over the net fair value of tangible and
identifiable intangible assets of businesses acquired. Goodwill and intangible assets
other than goodwill which are determined to have indefinite useful lives are not
amortized, but instead tested for impairment at least annually in accordance with the
provisions of Statement of Financial Accounting Standards (&#147;SFAS&#148;) No.&nbsp;142, <I>Goodwill
and Other Intangible Assets. </I>Goodwill is tested annually for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset&#146;s fair value. This determination is made at the reporting
unit level and consists of two steps. First, the Company determines the fair value of
a reporting unit and compares it to its carrying amount. Second, if the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is recognized for any
excess of the carrying amount of the reporting unit&#146;s goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No.&nbsp;141, &#147;Business Combinations&#148;. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">As of December&nbsp;31, 2005 and 2006, goodwill was attributable to the acquisition of
additional 9% equity interest in Shenzhen Lingxian in 2005 (Note 11).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Intangible assets with estimated useful lives consist of registered patents that are
amortized on a straight-line basis over the estimated useful life of 10&nbsp;years.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-12<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(2)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Summary of Significant Accounting Policies and Practices (Continued)</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(j)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Investment securities</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Investments in equity securities of privately held companies where the Company&#146;s level
of ownership is such that it cannot exercise significant influence over the investee
(i.e. voting common stock ownership of less than 20%) are stated at cost, adjusted for
declines in fair value that are considered other than temporary. Fair value of the
investments is estimated based on market value appraisals or other valuation
techniques. In determining whether an impairment is other-than-temporary, the Company
considers whether it has the ability and intent to hold the investment until a market
price recovery and whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in this assessment
includes, but is not limited to, the reasons for the impairment, the severity and
duration of the impairment, changes in value subsequent to year end, and forecasted
performance, cash flows and the net assets of the investee. Any impairment is charged
to earnings and a new cost basis for the investment is established.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(k)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Impairment of Long-Lived Assets</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Long-lived assets, including intangible assets with finite useful lives, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">Recoverability of long-lived assets to be held and used is measured by a comparison of
the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset, including identifiable intangible assets with
finite useful lives. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value is
measured by the asset&#146;s discounted cash flows or market value, if readily
determinable.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-13<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>(2)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Summary of Significant Accounting Policies and Practices (Continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B><I>(l)</I></B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Revenue Recognition</I></B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 6%">The Company derives revenues principally from the provision and sale of wireless
coverage products and services, and to a lesser extent the sale of RF parts and
components. Revenue is recognized when the risk and rewards are transferred, delivery
has occurred or the services have been rendered, persuasive evidence of any
arrangement exists, the price to the buyer is fixed or determinable and collectibility
is reasonably assured. These criteria as they apply to the provision and sale of
wireless coverage products and services, and the sale of RF parts and components are
as follows:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 6%"><I>Wireless coverage products and services</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 6%">A wireless coverage products and services contract consists of two revenue-generating
activities, or deliverables, the sale of wireless coverage products and the provision
of installation services. Pursuant to Emerging Issues Task Force Issue No.
00-21,<I>&#147;Revenue Arrangements with Multiple Deliverables&#148;</I>, the equipment sale and
installation services are accounted for as separate units of accounting for the
following reasons: i) the equipment has standalone value as it can and has been sold
separately by the Company; ii) objective and reliable evidence of the fair value for
the installation services exists as evidenced by the amount charged by independent
third parties; and iii) there are no refund rights in these arrangements. As objective
and reliable evidence of fair value exists for both the equipment and installation
services, the appropriate revenue recognition convention is separately applied to each
of the two deliverables.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 6%">Revenue is allocated to each deliverable based on their relative fair values, such as
the sales price for the deliverable when it is sold on a stand-alone basis or based on
third-party pricing for a similar deliverable. Revenue attributable to the sale of the
wireless coverage products element is recognized when i) the buyer has executed and
signed a sale and purchase contract, which specifies the price, payment terms, and the
wireless coverage products and installation services to be delivered and provided; ii)
the wireless coverage products have been delivered to the buyer&#146;s premises; iii) the
risk and rewards of ownership and title of the delivered wireless coverage products
have been transferred to the buyer; iv) the buyer has issued a completion certificate,
which indicates the buyer&#146;s acceptance of the functionality, specifications, and
performance of the delivered wireless
coverage products; and v) the Company has an enforceable legal right to receive the
contractually specified amount in cash attributable to the delivered wireless coverage
products and such right is not contingent upon the Company providing the remaining
installation services or the buyer&#146;s acceptance of the installation services.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-14<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(2)&nbsp;Summary of Significant Accounting Policies and Practices (Continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(l)&nbsp;Revenue Recognition (continued)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">A portion of the installation service deliverable is rendered concurrently with the
delivery of wireless coverage products. As the amount of the wireless coverage
products and service contract consideration is not contractually due and customer
acceptance is not deemed to occur until the issuance of the completion certificate,
revenue for the wireless coverage products deliverable is not recognized until a
significant portion of the installation service has been rendered.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Revenue attributable to the installation service element of the contract is not
recognized until i) the services have been rendered; ii) the buyer has issued a
preliminary inspection certificate, which indicates the buyer&#146;s acceptance of the
installation services provided; iii) the Company has an enforceable legal right to
receive the contractually specified amount in cash attributable to the installation
service element of the contract and such right is not contingent upon the buyer&#146;s
issuance of a final inspection certificate; and iv) the Company&#146;s remaining obligation
relating to the buyer&#146;s final acceptance of the installation services is considered
inconsequential or perfunctory.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Pursuant to the terms of the Company&#146;s contracts, the customers are generally required
to pay i) a range of 30% to 60% of the contract sum either upon signing of the sale
and purchase contract or the issuance of the completion certificate, ii) a range of
30% to 60% of the contract sum upon issuance of the preliminary inspection
certificate, iii) a range of 10% to 30% of the contract sum upon the issuance of the
final inspection certificate and iv) a range of zero to 10% of the contract sum upon
the expiration of the warranty period. The Company has allowed its customers to pay
the contract sum in installments as a standard business practice. Sales of wireless
coverage products and services are made under these payment terms and, provided that
the above criteria for revenue recognition are met, are recognized as revenue due to:
i) the Company&#146;s history of successfully collecting all amounts due under the original
payment terms without making significant concessions on payments; and ii) the
Company&#146;s enforceable legal right to receive the contractually specified amount in
cash attributable to the element of the contract that has been delivered, and the
Company&#146;s intent to enforce this right, when considered necessary.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The portion of the contract sum recognized as revenue in excess of the amounts
received under the contract payment terms is recorded in accounts receivable in the
accompanying consolidated balance sheets. The portion of the amounts received under
the contract payment terms in excess of the revenue recognized is recorded as deferred
income and included in accrued expenses and other payables in the accompanying
consolidated balance sheets. Amounts due under the contract terms beyond one year are
reclassified as long term accounts receivable and are discounted at discount rate
generally available for discounting similar instruments with commercial banks in the
PRC.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-15<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(2)&nbsp;Summary of Significant Accounting Policies and Practices (Continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(l)&nbsp;Revenue Recognition (continued)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Provisions for estimated settlement discounts provided to customers are recorded as a
reduction of revenue in the same period that revenue is recognized. The provision for
estimated settlement discounts, which is based on historical settlement data, is the
Company&#146;s best estimate of the amount of discounts to be provided to customers to
encourage prompt payment.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">For most wireless coverage products and services contracts, the Company provides free
repairs and replacement for defective parts for a duration of 12&nbsp;months to 36&nbsp;months
after the issuance of final inspection certificate. The Company records an allowance
for estimated future costs to be incurred during the warranty period in the same
period that revenue is recognized. Allowances for warranties are recorded as cost of
revenues and are established on an individual basis. The estimates reflect historic
trends of warranty costs adjusted for specific conditions that may arise and the
number of contracts under warranty at each financial year-end.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Certain of the Company&#146;s wireless coverage products and service contracts contain
penalty clauses in which a penalty is levied on the party responsible for the delay in
the execution of the contract. In addition, under certain circumstances, certain
contracts may be terminated should the Company fail to provide products or
installation services within a specified timeframe. In the event of termination, the
Company would be entitled to recover a portion of the contract consideration billable
pursuant to its legally enforceable right under PRC law.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>RF-based parts and components</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The Company recognizes revenues from the sale of stand-alone RF parts and components
when the risk and rewards of ownership and title to the products have been transferred
to the buyer, which coincides with delivery and acceptance of the products by the
buyer.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Revenue is stated net of value added taxes (&#147;VAT&#148;), sales returns, trade discounts and
allowances. In the PRC, VAT of 17% on invoice amount is collected in respect of the
sales of goods on behalf of the tax authorities. The
VAT collected is not revenue of the Company; instead the amount is recorded as a
liability on the balance sheet until such VAT is paid to the tax authorities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(m)&nbsp;Cost of Revenues</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Cost of revenues consists primarily of material costs, payroll compensation,
installation costs, depreciation, rentals, product warranty allowances and related
expenses, which are directly attributable to the production of products and rendering
of services. Write-down of inventory to lower of cost or market is also recorded in
cost of revenues.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-16<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(2)&nbsp;Summary of Significant Accounting Policies and Practices (Continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(n)&nbsp;Deferred Income Taxes</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance is provided to reduce
the amount of deferred tax assets if it is considered more likely than not that some
portion, or all, of the deferred tax assets will not be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the
statements of income in the period that includes the enactment date.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(o)&nbsp;Advertising and Research and Development Costs</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Advertising and research and development costs are expensed as incurred. Advertising
costs included in sales and distribution expenses amounted to RMB 2,102,000, RMB
2,036,000 and RMB 955,000 (US$ 122,000) for the years ended December&nbsp;31, 2004, 2005
and 2006, respectively. Research and development costs consist primarily of the
remuneration of research and development staff, depreciation and maintenance expenses
of research and development equipment, material costs and rental expenses for premises
used for research and development.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(p)&nbsp;Freight Costs</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The Company records freight costs related to the transporting of the raw materials to
the Company&#146;s warehouse in cost of revenues and all other outbound freight costs in
sales and distribution expenses. For the years ended December&nbsp;31, 2004, 2005, and
2006, freight costs included in cost of revenues were RMB 1,948,000, RMB 2,546,000 and
RMB 2,608,000 (US$ 334,000), respectively, and freight costs included in sales and
distribution
expenses were RMB 2,289,000, RMB 2,970,000, and RMB 3,731,000 (US$ 478,000),
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(q)&nbsp;Bills Payable</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Bills payable represent bills issued by financial institutions to the Company&#146;s
vendors. The Company&#146;s vendors receive payments from the financial institutions
directly upon maturity of the bills and the Company is obliged to repay the face value
of the bills to the financial institutions.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-17<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(2)&nbsp;Summary of Significant Accounting Policies and Practices (Continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(r)&nbsp;Government Grants</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Receipts of government grants to encourage research and development activities which
are unconditional and non-refundable are recognized as grant income in the
accompanying consolidated statements of income upon receipt.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(s)&nbsp;Commitments and Contingencies</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Liabilities for loss contingencies arising from claims, assessments, litigation, fines
and penalties and other sources are recorded when it is probable that a liability has
been incurred and the amount of the assessment can be reasonably estimated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(t)&nbsp;Income per Share</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In accordance with SFAS No.128, <I>Computation of Earnings per Share</I>, basic net income
per share available to ordinary shareholders is computed by dividing net income
available to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. Diluted net income per share available to ordinary
shareholders is calculated by dividing net income available to ordinary shareholders
by the weighted average number of ordinary and dilutive potential ordinary shares
outstanding during the period. Dilutive potential ordinary shares consist of shares
issuable pursuant to mandatorily redeemable convertible preference shares, and are
determined using the as-converted method.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-18<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(2)&nbsp;Summary of Significant Accounting Policies and Practices (Continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(u)&nbsp;Share-Based Payment</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">A share option scheme was established on August&nbsp;25, 2005 (the &#147;Scheme&#148;) which allows
the Company to grant options to its employees to acquire ordinary shares of the
Company. The Company has adopted SFAS No.&nbsp;123R &#147;Share-Based Payment&#148;, which requires
that share based payment transactions with employees, such as share options, be
measured based on the grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service period, with a
corresponding addition to paid-in capital. Under this method, compensation cost
related to employee share options or similar equity instruments is measured based on
the fair value of the award at the date of grant and is recognized over the period
during which an employee is required to provide service in exchange for the award,
which generally is the vesting period, if any. No options have been granted under the
Scheme.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(v)&nbsp;Segment Reporting</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The Company uses the management approach in determining operating segments. The
management approach considers the internal organization and reporting used by the
Company&#146;s chief operating decision maker for making operating decisions, allocating
resources and assessing performance. Based on this assessment, the Company has
determined it has only one operating segment which is the manufacture and sale of
communication products in the PRC.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In view of the fact that the Company operates and manages its business solely in the
PRC and substantially all of its customers are located in the PRC, no geographical
segment information is presented.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(w)&nbsp;Recently Issued Accounting Standards</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>FASB Interpretation No.&nbsp;48 (&#147;FIN 48&#148;), Accounting for Uncertainty in Income Taxes</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In June&nbsp;2006, the FASB issued FIN 48, <I>Accounting for Uncertainty in Income Taxes</I>. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in the Company&#146;s
financial statements in accordance with SFAS No.&nbsp;109, <I>Accounting for Income Taxes</I>. FIN
48 prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning
after December&nbsp;15, 2006. The Company is in the process of evaluating the impact of
adopting this Interpretation on its financial condition, results of operations and
cash flows
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-19<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(w)&nbsp;Recently Issued Accounting Standards (Continued)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>Staff Accounting Bulletin No.&nbsp;108 (&#147;SAB 108&#148;), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In September&nbsp;2006, the Securities and Exchange Commission issued SAB 108, <I>Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements</I>. SAB 108 provides guidance on how prior year misstatements should
be taken into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year&#146;s financial statements
are materially misstated. SAB 108 requires registrants to apply the new quantification
guidance to errors in existence at the beginning of the fiscal year ending after
November&nbsp;15, 2006 by correcting errors determined to be material under this new
quantification method through a one-time cumulative effect adjustment to
beginning-of-year retained earnings. The Company has adopted SAB 108 as of October&nbsp;31,
2006. No significant adjustment was recorded by the Company upon adoption of SAB 108.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>SFAS
No.&nbsp;156, Accounting for Servicing of Financial Assets - an amendment of SFAS No.
140</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In March&nbsp;2006, the FASB issued SFAS No.&nbsp;156<I>, Accounting for Servicing of Financial
Assets &#151; an amendment of SFAS No.&nbsp;140. </I>This Statement amends SFAS No.&nbsp;140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement requires an entity to, among other things,
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract under
certain specific situation(s). This Statement is effective for the Company in fiscal
years beginning after September&nbsp;15, 2006. The Company is in the process of evaluating
the impact of adopting this Statement on its financial condition, results of
operations and cash flows.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>SFAS No.&nbsp;157, Fair value measurements</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In September&nbsp;2006, the FASB issued SFAS No.&nbsp;157, <I>Fair Value Measurements</I>. This
Statement defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require fair value measurements and does not require
any new fair value measurements. This Statement will be effective for the Company in
fiscal years beginning after November&nbsp;15, 2007. The Company is in the process of
evaluating the impact of adopting this Statement on its financial condition, results
of operations and cash flows.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-20<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>(w)&nbsp;Recently Issued Accounting Standards (Continued)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>SFAS No.&nbsp;159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of SFAS No.&nbsp;115</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In February&nbsp;2007, the FASB issued SFAS No.&nbsp;159, <I>The Fair Value Option for Financial
Assets and Financial Liabilities &#151; Including an amendment of SFAS No.&nbsp;115</I>. This
Statement permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is effective for the Company in
fiscal years beginning after November&nbsp;15, 2007. The Company is in the process of
evaluating the impact of adopting this Statement on its financial condition, results
of operations and cash flows.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><I>EITF Issue No.&nbsp;04-13, Accounting for Purchases and Sales of Inventory with the Same
Counterparty</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">In September&nbsp;2005, the FASB Emerging Issues Task Force (&#147;EITF&#148;) issued EITF Issue No.
04-13, <I>Accounting for Purchases and Sales of Inventory with the Same Counterparty</I>.
EITF 04-13 provides guidance as to when purchases and sales of inventory with the same
counterparty should be accounted for as a single exchange transaction. EITF 04-13
also provides guidance as to when a nonmonetary exchange of inventory should be
accounted for at fair value. EITF 04-13 will be applied to new arrangements entered
into, and modification or renewals of existing arrangements occurring after January&nbsp;1,
2007. The adoption of EITF 04-13 is not expected to have a material effect on the
Company&#146;s consolidated financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(3)&nbsp;Pledged Time Deposits</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pledged time deposits at December&nbsp;31, 2005 and 2006 consist of the following:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pledged deposits with financial institutions for security on:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">- accounts receivable sold (Note (a))</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57,198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,349</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,145</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">- bills payable (Note (b))</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,187</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,431</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">- short-term bank loans (Note (b))</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">156,082</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238,618</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-21<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(3)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Pledged Time Deposits (Continued)</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In its ordinary course of business, the Company entered into certain one-year agreements with
independent financial institutions to sell, on an ongoing basis, accounts receivable up to a
specified amount (which totalled RMB 400&nbsp;million as of December&nbsp;31, 2005 and 2006). Accounts
receivable are sold at a discount, which is adjusted based upon the timing of collection by
the financial institutions. Under the terms of certain of these agreements, a portion of the
sold receivables are subject to certain limited recourse provisions pursuant to which the
Company is required to deposit twenty percent of the sale proceeds into a restricted bank
account as security in the event of default of payment by the paying accounts receivable
customer. The cash in the restricted bank account is released to the Company upon full
payment by the customer and is released on a proportionate basis to the extent that the
collections fall short of the amount of accounts receivable sold. The Company did not
experience any significant losses under these recourse provisions during the three-year period
ended December&nbsp;31, 2006. The Company surrendered control over the accounts receivable
transferred to the financial institutions. Accordingly, pursuant to the provisions of SFAS No.
140, <I>Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, </I>accounts receivable of RMB 375,200,000 RMB 180,117,000 and RMB 117,664,000 (US$
15,077,000) were derecognized from the balance sheet on their respective dates of the transfer
during 2004, 2005 and 2006, respectively. The Company received proceeds from the sale of the
accounts receivable of RMB 360,234,000, RMB 169,041,000 and RMB
108,998,000 (US$ 13,967,000)
respectively for the years ended December&nbsp;31, 2004, 2005 and 2006, and recorded a discount on
the sale of accounts receivable of RMB 14,966,000, RMB 11,076,000 and
RMB 8,666,000 (US$
1,110,000) respectively, which was included in interest expense for the years ended December&nbsp;31,
2004, 2005 and 2006. Discount on the sale of accounts receivable is calculated based on the
time when the agreement was entered into but is subject to adjustments for the actual
collections of the accounts receivable. These adjustments are recorded as interest expenses in
the period during which it occurs.</TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">As of December&nbsp;31, 2005 and 2006, accounts receivable sold to financial institutions yet to
be settled by the Company&#146;s customers amounted to RMB 182,857,000 and RMB 143,986,000
respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Pursuant to the sale agreements with the financial institutions, the Company is responsible
for servicing the accounts receivable sold until the expiration of the sale agreements. The
service obligations primarily comprise of serving notice to customers and collecting the cash
on behalf of the financial institutions and remitting the cash to the
financial institutions by a specified period of time. No servicing obligation was recorded
at the date of sale as the amount was considered to be immaterial. As of December&nbsp;31, 2005
and 2006, an amount of RMB 72,082,000 and RMB 17,761,000 (US$ 2,276,000) respectively had
been collected by the Company pending transfer to the financial institutions, and are
included in accrued expenses and other payables in the accompanying consolidated balance
sheets.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-22<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(3)&nbsp;Pledged Time deposits (continued)</B>
</DIV>



<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company entered into several financing facilities for bills and short-term loans with
banks during the years presented. Under the terms of the arrangements, cash deposits ranging
from 30% to 100% of the respective financing facilities amount were pledged to the banks. The
pledged deposits will be released upon the termination or expiry of these facilities.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(4)&nbsp;Accounts Receivable, net</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Accounts receivable at December&nbsp;31, 2005 and 2006 consist of the following:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">721,680</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,020,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">130,701</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less:
Allowance for estimated settlement discounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(20,057</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(14,982</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,920</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">701,623</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,005,023</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128,781</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: Allowance for doubtful accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,177</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(791</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">697,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">998,846</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">127,990</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amounts due after one year, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(162,032</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(268,957</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(34,464</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">535,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">729,889</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,526</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Bills receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,877</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,303</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">537,321</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">747,859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,829</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Amounts due after one year, net were stated after the deduction of unearned interest of
RMB 8,083,000 and RMB 15,307,000 (US$ 1,961,000) respectively as of December&nbsp;31, 2005 and
2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Pursuant to the terms of the Company&#146;s contracts to provide wireless coverage products and
services (Note 2 (l)), amounts due beyond one-year are reclassified as long-term accounts
receivable in the accompanying consolidated balance sheets, being discounted at the
applicable discount rate at the time of recognition of the receivables. For the years ended
December&nbsp;31, 2005 and 2006, the weighted average discount rates were 4.42% and 5.58% per
annum respectively.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-23<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(4)&nbsp;Accounts Receivable, net (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An analysis of the allowance for doubtful accounts for 2004, 2005 and 2006 is as follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,927</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,235</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">532</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Charged to statements of income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,235</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,177</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">792</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Allowance for estimated settlement discounts provided to customers is recorded as a reduction
from the corresponding accounts receivables in the balance sheet. An
analysis of the allowance for estimated settlement discounts for 2004, 2005 and 2006 is as follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">USS&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,512</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,884</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,570</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount charged to
statements of income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount written back</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,827</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,075</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(650</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,884</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,982</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,920</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>




<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">As of December&nbsp;31, 2005, the Company pledged certain of its accounts receivable with a
carrying value of RMB 106,615,000 to banks as collateral for short-term bank loans of RMB
50,760,000. Such bank loans were fully repaid in 2006 and the asset pledge was released
accordingly (See also Note 14).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(5)&nbsp;Inventories</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventories at December&nbsp;31, 2005 and 2006 consist of the following:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raw materials</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,572</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,380</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Work-in-progress</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">658</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Finished goods</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">310,507</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">363,876</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,626</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">370,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">434,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,664</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Included in finished goods are wireless coverage products delivered to customers&#146; sites
which have not been accepted by the customers through the issuance of the completion
certificates. Also included in finished goods are deferred installation costs related to
wireless coverage products delivered and installed for which the related completion and/or
inspection certificates have not been issued at the respective year end dates. The deferred
installation costs are charged to cost of revenue in the same period that the revenue
attributable to the installation service is recognized. As of December&nbsp;31, 2005 and 2006,
deferred installation costs amounted to RMB 50,626,000 and RMB 47,210,000 (US$ 6,049,000)
respectively.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-24<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(6)&nbsp;Income Tax Expense</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Cayman Islands Tax</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Under the current Cayman Islands laws, the Company is not subject to tax on income or capital
gains.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>PRC Tax</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Subsidiaries established in the Shenzhen Special Economic Zone of the PRC, namely Shenzhen
GrenTech and Shenzhen Lingxian, are subject to income tax at a rate of 15%. Lake Microwave
is a foreign investment enterprise (&#147;FIE&#148;) established in a coastal open economic area and is
subject to income tax at a rate of 27%. Lake Communication is subject to income tax at a
rate of 33%.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Pursuant to the applicable Income Tax Law of the PRC, Shenzhen GrenTech is eligible for an
exemption from income tax for two years starting from the first profitable year of operations
and thereafter, a 50&nbsp;percent relief from income tax for the following three years (the &#147;tax
holiday&#148;). The local tax bureau initially determined the year 2000 was the first
profit-making year of Shenzhen GrenTech and therefore, Shenzhen GrenTech was exempted from
income tax in 2000 and 2001, and income tax for 2002 was provided for at a reduced rate of
7.5%. Subsequent to the initial determination, the PRC tax authorities reversed the initial
determination in 2004 and concluded that the first profit-making year of Shenzhen GrenTech
should have been 2001. Consequently, Shenzhen GrenTech became fully exempted for PRC income
for 2001 and 2002 and subject to PRC income PRC income tax at the rate of 7.5% for 2003, 2004
and 2005. In addition, the income tax previously paid in 2002 of RMB 12,781,000 was refunded
in 2004, which was recorded as a reduction to income tax expense in 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Shenzhen GrenTech applied for and was granted on December&nbsp;13, 2005, an extension of its 50
percent relief from income tax for an additional three-year period commencing from January&nbsp;1,
2006. Shenzhen GrenTech will be subject to PRC income tax at 15% from January&nbsp;1, 2009
onwards.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Shenzhen
Lingxian was entitled to full exemption from income tax for two years starting from
the first profit-making year and a 50% reduction in the next three years as approved by the
tax authorities. As the first profit-making year of Shenzhen Lingxian was 2002, Shenzhen
Lingxian was fully exempted for PRC income tax for 2002 and 2003 and subject to PRC income at
the rate of 7.5% for 2004, 2005 and 2006. Commencing from January&nbsp;1, 2007, Shenzhen Lingxian
is subject to PRC income tax at the rate of 15%.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-25<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(6)&nbsp;Income Tax Expense (continued)</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">On March&nbsp;16, 2007, the National People&#146;s Congress of the PRC passed the new Enterprise Income
Tax Law (the &#147;New Tax Law&#148;), which law will take effect as of January&nbsp;1, 2008. In accordance
with the New Tax Law, a unified enterprise income tax rate of 25%, a unified deduction
measure and standard and unified tax preferential treatment will be applied to both foreign
invested and domestic enterprises and an income tax rate of 15% will be available to advanced
technology enterprises recognized by the government authorities. The New Tax Law also
provides for transitional measures for enterprises established prior to the promulgation of
the New Tax Law and eligible for lower tax rate preferential treatment in accordance with the
then prevailing tax laws and administrative regulations. These enterprises will gradually
become subject to the new, unified tax rate over a five-year period; enterprises eligible for
regular tax reductions or exemptions may continue to enjoy tax preferential treatments after
the implementation of the New Tax Law and until their preferential treatment expire. Given
that the New Tax Law has been promulgated only recently, its implementation has yet to be
further clarified in practice. The implementation of the New Tax Law could adversely affect
the Company&#146;s financial condition and results of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Substantially, all the income and income tax expense derived by the Company is domestic in
nature.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Income tax expense consists of:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>PRC Income tax</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Current</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Deferred</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,353</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,020</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,097</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,277</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2006 (US$)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,212</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">130</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,342</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Income tax expense reported in the consolidated statements of income differs from the
amount computed by applying the PRC income tax rate of 15% (the statutory tax rate of the
Company&#146;s principal subsidiaries) for the years ended December&nbsp;31, 2004, 2005 and 2006 for
the following reasons:
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-26<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(6)&nbsp;Income Tax Expense (continued)</B>
</DIV>

<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="97%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,698</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">214,627</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Computed &#147;expected&#148; tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,055</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,194</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,237</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-deductible entertainment expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,756</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">609</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other non-deductible expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,313</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-taxable income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(562</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,317</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(36</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax rate differential of other subsidiaries</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,241</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax holiday</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,642</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(16,377</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(13,602</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,743</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax refunded</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(12,781</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Actual income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,097</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,277</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,342</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">If the Company&#146;s subsidiaries were not in the tax holiday periods, the income tax
expense would be increased by Rmb 10,642,000, RMB 16,377,000 and RMB 13,602,000 (US$
1,743,000) for the years ended December&nbsp;31, 2004, 2005 and 2006 respectively and the net
income per share available to ordinary shareholders for such periods would be decreased as
follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="97%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Decrease in net income per share available
to ordinary shareholders:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">- Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.003</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">- Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.003</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The tax effects of temporary differences that give rise to significant portions of the
deferred tax asset as of December&nbsp;31, 2005 and 2006 are presented below:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="97%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,637</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">226</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">884</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrealized profit on intercompany revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,781</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">613</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax losses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,068</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(865</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(111</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,466</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">957</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-27<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(6)&nbsp;Income Tax Expense (continued)</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">As of December&nbsp;31, 2006, a subsidiary of the Company had net operating losses for PRC income
tax purpose totalling Rmb 2,621,000 (US$ 336,000). Such tax losses are available for carry
forward to set-off against future taxable profits for a maximum period of five years. As of
December&nbsp;31, 2006, a valuation allowance of Rmb 865,000 (US$ 111,000) was established to
substantially provide for deferred tax assets in respect of such tax losses. The Company
believes it is more likely than not, that such amounts will not be recoverable, having
considered the expected future taxable profits of the subsidiary and restrictions on carrying
forward tax losses under PRC tax laws.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible or utilized.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon an assessment of the
level of historical taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible or can be utilized, management believes that the
deferred tax asset as of December&nbsp;31, 2005 and 2006 is more likely than not to be realized. The
amount of the deferred tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-28<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(7)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Property, Plant and Equipment, net</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Property, plant and equipment consist of the following:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="97%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>RMB&#146;000</b></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>RMB&#146;000</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>US$&#146;000</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Buildings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,241</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equipment and machinery</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">129,973</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">185,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,742</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Motor vehicles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,522</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,630</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office equipment and computer software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,763</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,251</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">163,626</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">225,255</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,864</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(43,270</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(63,752</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,169</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">161,503</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,695</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Construction in progress</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">909</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,604</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(8)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Lease Prepayments, net</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="97%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prepaid land use rights</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,421</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,609</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,871</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(685</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(977</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(125</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,736</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,746</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Amortization expense for the years ended December&nbsp;31, 2004, 2005 and 2006 were RMB
94,000, RMB 108,000 and RMB 292,000 (US$ 37,000) respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(9)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Investment Securities</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Investment securities at December&nbsp;31, 2005 and 2006 represented a 4.67% equity interest in
Quanzhou Bank, a privately held bank in the PRC. Such investment was not marketable, and
therefore accounted for using the cost method.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-29<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(10)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Intangible Assets, net</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Patent</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(262</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(300</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Amortization expense for the years ended December&nbsp;31, 2004, 2005 and 2006 were RMB
37,000, RMB 37,000 and RMB 38,000 (US$ 5,000) respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The estimated amortization expense of intangible assets for the next five years is as
follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="98%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-30<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(11)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Goodwill</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On March&nbsp;28, 2005, the Company entered into a sale and purchase agreement with Ms Zhang Xiu
Jun, the then 10% minority shareholder of Shenzhen Lingxian, whereby Ms Zhang sold her 9%
equity interest in Shenzhen Lingxian to Shenzhen GrenTech for RMB 20,000,000. The purchase
price was determined taking into consideration the estimated fair value of 9% equity interest
of Shenzhen Lingxian as of March&nbsp;28, 2005, and was paid by the transfer of the Company&#146;s
accounts receivable with carrying value of RMB 20,000,000 as at that date. Consequently, the
Company recorded a goodwill of RMB 8,216,000 from the acquisition.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The above acquisition was not considered significant to the Company&#146;s financial position or
results of operations for the periods presented.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(12)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Accrued Expenses and Other Payables</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Accrued expenses and other payables at December&nbsp;31, 2005 and 2006 consist of the following:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amounts collected on sold accounts receivable
on behalf of financial institutions (Note 3)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72,082</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,761</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,276</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Allowance for product warranties (Note 13)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,794</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,577</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accruals for salaries and welfare</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,394</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,872</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,265</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85,145</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,803</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,125</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">VAT payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91,747</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,756</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Bsuiness and other taxes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,090</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,820</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,258</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued interest on Exchangeable Bonds (Note 15)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Reimbursement payment to staff</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,680</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,879</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,842</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,158</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">263,331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">208,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-31<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(13)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Allowance for Product Warranties</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>An analysis of the allowance for product warranties for 2004, 2005 and 2006 is as
follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,623</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,981</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,794</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,511</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount charged to expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,281</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,056</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount utilized</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,653</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,468</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(7,726</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(990</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,981</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,794</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,577</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(14)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Short-Term Bank Loans</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Short-term bank loans outstanding, which are all denominated in Renminbi, are as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">- Unsecured</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,854</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">176,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,559</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">- Secured</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">160,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,502</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">160,614</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">336,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,061</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>During the years ended December&nbsp;31, 2004, 2005 and 2006, the Company entered into
various loan agreements with commercial banks with terms ranging from three months to one
year to finance its working capital. None of the loan agreements requires the Company to
comply with any financial covenants. The weighted average interest rate of short-term bank
loans outstanding as of December&nbsp;31, 2005 and 2006 were 4.42% and 5.58% per annum,
respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company had available undrawn committed bank loan facilities and bills financing
facilities amounting to RMB 52,756,000 (US$ 6,760,000) and RMB 40,130,000 (US$ 5,142,000)
respectively as of December&nbsp;31, 2006. In addition, the Company had available committed
receivable selling facilities of RMB 258,250,000 (US$ 33,092,000) as of December&nbsp;31, 2006.
Of the unutilized bills financing facilities and receivable selling facilities, the Company
will be required to pledge with the banks a time deposit equal to 30% and 20% respectively as
security for the amount to be utilized.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->F-32<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(15)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Long-Term Debt</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On December&nbsp;17, 2003, the shareholders of the Company entered into an Exchangeable Bonds
Subscription Agreement (the &#147;Agreement&#148;) with three investors &#151; Actis China Investment
Holdings No.1 Limited (&#147;Actis China&#148;), Standard Chartered Private Equity Limited (&#147;SCPEL&#148;)
and JAFCO Asia Technology Fund (&#147;JATF&#148;). Pursuant to the Agreement, the shareholders of the
Company issued exchangeable bonds (&#147;Exchangeable Bonds&#148;) at par value bearing interest at a
rate of 5% per annum, to Actis China, SCPEL and JATF for a total consideration of US$ 20.7
million. The bond holders were entitled to a premium payment when the total dividend as
declared and paid to ordinary shareholders exceeded a specified amount. The Exchangeable
Bonds would be automatically converted into approximately 131,365,500 existing ordinary shares held by the shareholders of the Company at a conversion price of US$ 0.16 per share
immediately prior and upon an initial public offering. Accordingly, no new ordinary shares
would be issued by the Company. The conversion price was determined based on the estimated
fair value of the Company&#146;s ordinary shares at the date of the Agreement. Proceeds received
by the shareholders from the issuance of the Exchangeable Bonds were entirely used by the
shareholders to subscribe 461,365,500 newly issued ordinary shares of the Company. The
Company used the proceeds from the sale of 461,365,500 newly issued ordinary shares to
complete the Reorganization through the acquisition of Shenzhen GrenTech by its wholly owned
subsidiary, GrenTech (BVI)&nbsp;Limited. The effect of these transactions was to distribute the
proceeds from the issuance of the Exchangeable Bonds to the Company&#146;s existing shareholders.
The ultimate shareholders and their respective proportionate ordinary share ownership
interest in the underlying net assets of the Company were identical to their respective
equity interests held in Shenzhen GrenTech as a result of these transactions (Note 1).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In connection with issuance of the Exchangeable Bonds, the Company provided a guarantee to
the bondholders effective from the date of the Agreement until all liabilities of the
shareholders under the Exchangeable Bonds and the Agreement are discharged in full when the
Exchangeable Bonds are converted to ordinary shares or redeemed. Under the Agreement and the
relevant guarantee and the share pledge agreements, the Company was subject to various
covenants and restrictions, including a minimum after-tax profit requirement. In addition,
whether the anticipated initial public offering is successful or not, the holders of
Exchangeable Bonds are entitled to redeem the Exchangeable Bonds at any time after three
years from the date of issuance of the preference shares (see Note 16) or in the event of the
occurrence of triggering events such as the Company receiving third party demand letters for
immediate repayment of aggregate indebtedness over RMB 50,000,000. The Exchangeable Bonds
were redeemable at an amount equal to the principal amount of the Exchangeable Bonds plus 8%
interest.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-33<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(15)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Long-Term Debt (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Because the Exchangeable Bonds were guaranteed by the Company, the debt obligation and
related interest costs were pushed down to the Company, and were reflected in the
consolidated financial statements as though the Company was the primary obligor. The push
down of Exchangeable Bonds was reflected as long-term debt in the consolidated balance sheet,
with a corresponding decrease in retained earnings in 2003. In association with the pushed
down debt and pursuant to the guarantee given by the Company, interest expense of RMB
13,706,000 and RMB 14,117,000 and RMB 3,340,000 (US$ 428,000), calculated based on interest
of 8% per annum, was pushed down and recognized with a corresponding increase to interest
payable for the year ended December&nbsp;31, 2004, 2005 and 2006 respectively. The amount of
interest payable by the Company would depend on the satisfaction of the obligation by the
shareholders pursuant to the guarantee arrangement specified above. Upon satisfaction of the
obligation by the shareholders or release of the guarantee, the amount of interest payable
would be recorded as an adjustment to retained earnings. Any unpaid portion would be credited
to the retained earnings upon the conversion of the Exchangeable Bonds.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In January&nbsp;2005 and 2006, shareholders of the Company satisfied their obligation and paid
interest on the Exchangeable Bonds in the amount of RMB 8,567,000 and RMB 8,345,000 (US$
1,069,000), respectively. Accordingly, the Company reduced its accrued interest on
Exchangeable Bonds and increased retained earnings by the same amounts in the years ended
December&nbsp;31, 2005 and 2006 respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In connection with the IPO and pursuant to a board resolution of the Company dated April&nbsp;3,
2006, the Exchangeable Bonds were converted fully into 131,365,500 existing ordinary shares
held by the shareholders of the Company in April&nbsp;2006. Consequently, the Company&#146;s
obligations in respect of the Exchangeable Bonds and unpaid portion of interest payable,
totalling RMB 179,712,000 (US$ 23,028,000), were extinguished and such amount was credited to
the retained earnings.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-34<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(16)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Mandatorily Redeemable Convertible Preference Shares</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On December&nbsp;30, 2003, the Company received RMB 43,565,000 (US$ 5,300,000) from three
investors &#150; Actis China, SCPEL and JATF, in exchange for 33,634,500 mandatorily redeemable
convertible preference shares. The holders of the preference shares were entitled to a fixed
cumulative preference dividend of 5% per annum based on the face value of the preference shares and a special dividend as when the total dividend declared and payable to the ordinary
shareholders exceeds a certain amount. In addition, upon redemption, the Company was
required to pay the subscription price plus an 8% per annum compounded return less any
preference dividends accrued, declared or paid up to the date of redemption. Cumulative
preference dividends and accretion to redemption value were reflected as a reduction to net
income to arrive at net income available to ordinary shareholders in the accompanying
consolidated statements of income. In December&nbsp;2004 and 2005 and April&nbsp;2006, the directors
declared a preference share dividend of RMB 0.065, RMB 0.064 and RMB 0.016 (US$ 0.002) per share, respectively, totalling RMB 2,193,000 and RMB 2,139,000 and RMB 548,000 (US$ 70,000)
to the holders of preference shares, respectively. In addition, accretion to redemption
value of RMB 1,316,000, RMB 1,385,000 and RMB 360,000 (US$ 46,000), being the difference
between the 8% yield on the mandatorily redeemable convertible preference shares upon
redemption and the actual dividend declared of 5%, was accrued and charged to consolidated
statements of income for the years ended December&nbsp;31, 2004, 2005 and 2006 respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In connection with the IPO and pursuant to a board resolution of the Company dated April&nbsp;3,
2006, the mandatorily redeemable convertible preference shares were converted fully into
33,634,500 new ordinary shares of the Company in April&nbsp;2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The mandatorily redeemable convertible preference shares contained the following terms:</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Liquidation Preference</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On a distribution of assets of the Company on a winding up or other return of capital, the
holders of the preference shares are entitled, in proportion to the number of preference shares held by them and in priority to any holder of any other class of shares, to receive an
amount equal to the sum of the subscription price of the preference shares and any and all
accrued and unpaid dividends.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Conversion</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In accordance with the articles of association of the Company, the holders of the preference shares have the right to convert their preference shares into ordinary shares only upon the
occurrence of an initial public offering of the Company&#146;s ordinary shares. The rate at which
the preference shares shall be converted into ordinary shares shall be one ordinary share for
every one preference share, subject to certain anti-dilutive adjustments.</TD>
</TR>

</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->F-35<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(16)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Mandatorily Redeemable Convertible Preference Shares (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Redemption</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In accordance with the articles of association of the Company, the holders of preference shares are entitled to redeem the preference shares upon serving written demand to the
Company. Such demand may be made by a holder of preference share at any time after three
years from the date of issuance of the preference shares or in the event of the occurrence of
a triggering event as specified in the articles of association, such as receiving third party
demand letters for immediate repayment of aggregate indebtedness over RMB 50,000,000.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Voting Rights</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Each mandatorily redeemable preference share carries the same number of votes as an ordinary
share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(17)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Shareholders&#146; equity</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Registered capital</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Prior to the Reorganization, the registered capital of Shenzhen GrenTech was RMB 112,000,000.
Capital contribution in excess of the registered capital was credited to contributed surplus.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In October&nbsp;2003, Shenzhen GrenTech repurchased a total of 28.672% equity interests from two
shareholders, for total consideration of RMB 66,308,000 of which RMB 20,308,000 and RMB
46,000,000 was paid in 2003 and 2004 respectively. Shenzhen GrenTech, through Shenzhen
Lingxian, simultaneously sold 28.672% equity interests to the three existing shareholders of
Shenzhen GrenTech for a total consideration of RMB 66,308,000 which was fully received as of
December&nbsp;31, 2003. In connection with the said share transfers, the Company had unrestricted
use of the excess cash proceeds from the reissuance of shares over the amounts paid through
the final settlement in 2004. Since all of the risks and rewards ownership of the said shares of Shenzhen GrenTech were transferred to the three existing shareholders
simultaneously with the purchase of the equity interests by Shenzhen GrenTech, the share
transfers are deemed to occur at the same time for accounting purposes.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Ordinary shares</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In connection with the Reorganization described in Note 1, the Company issued 932,731
ordinary shares (as adjusted for the five-hundred-for-one share split as described below) to
the shareholders of Shenzhen GrenTech in exchange for the transfer of their equity interests
in Shenzhen GrenTech. Accordingly, the registered capital of Shenzhen GrenTech was eliminated
through a corresponding increase in the par value of ordinary shares of RMB 77,000 and
contributed surplus of RMB 111,923,000.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-36<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(17)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Shareholders&#146; equity (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On August&nbsp;25, 2005, the Company declared a five-hundred-for-one share split of the Company&#146;s shares. The share split was effected in the form of subdividing each of the
Company&#146;s issued and unissued ordinary shares and mandatorily redeemable convertible
preference shares into 500 ordinary shares and 500 redeemable convertible preference shares,
respectively. The par value of the ordinary shares was adjusted from US$ 0.01 per share to
US$ 0.00002 per share. All references in the accompanying consolidated financial statements
and notes to the number of shares, per share amounts and par value data of the Company&#146;s
ordinary and mandatorily redeemable convertible preference shares have been restated to
reflect the effect of the share split for all periods presented.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On April&nbsp;3, 2006, the directors declared dividends totalling RMB 7,609,000 to the holders of
the Company&#146;s ordinary shares in issue as of that date.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In connection with the IPO, 125,000,000 new ordinary shares of the Company were issued to
public shareholders in April&nbsp;2006 (Note 1).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(18)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Revenues</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company derives revenues from the provision of wireless coverage products and services,
which consist of the sale of wireless coverage equipment and the rendering of related
installation services, as well as sale of RF parts and components. The components of revenues
are as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sale of wireless coverage products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">503,904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">614,503</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">679,606</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,083</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Installation services of wireless
coverage products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,115</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,338</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,950</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sale of other products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,857</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,602</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,247</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,029</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">567,876</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">709,443</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">827,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,062</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: (Provision for)/write back
of settlement
discounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,372</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,827</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">650</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">566,504</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">832,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-37<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(19)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Depreciation</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Depreciation of property, plant and equipment is included in the following:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,917</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,841</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and development costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,931</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,504</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">320</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sales and distribution expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,468</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,104</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">270</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">General and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,076</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">394</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,622</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,707</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,825</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-38<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(20)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Net income available to Ordinary Shareholders</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income available to ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,002</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Denominator for basic net income available to
ordinary shareholders:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average number of ordinary
shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic net income per share available to
ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.31</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income available to ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,002</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividend, accretion to redemption value
and foreign exchange currency rate movements
on mandatorily redeemable convertible
preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,509</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net income available to ordinary
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Denominator for diluted net income available to
ordinary shareholders:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average number of ordinary shares
outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466,365,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,580,799</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average number of mandatorily
redeemable convertible preference shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,634,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,634,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,569,885</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,569,885</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">593,150,684</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">593,150,684</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net income per share available to
ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.29</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Basic and diluted net income per share available to ordinary shareholders for the years
ended December&nbsp;31, 2004 and 2005 have been calculated as if 466,365,500 ordinary shares had
been issued and outstanding throughout for such periods.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->F-39<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 18pt"><B>(21)&nbsp;&nbsp;&nbsp;Related Party Transactions</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The
principal related party transactions during the years ended December&nbsp;31, 2004, 2005 and
2006 are as follows:
</DIV>

<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Payment for rental (Note (a))</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Amount due to related party as of December&nbsp;31, 2005 and 2006 was as follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due to related company </DIV></TD>

    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Shenzhen Fang Sheng AutoBig World Management
Co., Ltd (&#147;Shenzhen Fang Sheng&#148;) (Note(a))</DIV></TD>

    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,920</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 0pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%">&nbsp;</TD>
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Shenzhen GrenTech has leased and occupied certain premises in an office building
of floor area of approximately 1,433.35 square metres owned by Shenzhen Fang Sheng.
Certain directors of the Company are also directors of Shenzhen Fang Sheng. The lease
which expired on December&nbsp;31, 2005, was subsequently renewed until December&nbsp;31, 2006
under the same contract terms. A rental of RMB 960,000 which was determined with
reference to the market rental, was charged to expenses for 2004, 2005 and 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%">&nbsp;</TD>
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As of December&nbsp;31, 2005, the Company had a balance due to Shenzhen Fang Sheng of RMB
1,920,000 in respect of the rental, which was fully settled during 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%">&nbsp;</TD>
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As of December&nbsp;31, 2005 and 2006, the 20% minority equity interest in Lake
Communication is owned by the son of a director of the Company.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(22)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Pension and Other Postretirement Benefits</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Pursuant to the relevant PRC regulations, the Company is required to make contributions at a
rate 8% to 9% of employees&#146; salaries and wages to a defined contribution retirement scheme
organized by the local social security bureau in respect of the retirement benefits for the
Company&#146;s employees in the PRC. The total amount of contributions of RMB 3,964,000, RMB
7,889,000 and RMB 10,970,000 (US$ 1,406,000) for the years ended December&nbsp;31, 2004, 2005 and
2006 respectively, was charged to expense in the accompanying consolidated statements of
income. The Company has no other obligation to make payments in respect of retirement
benefits of the employees.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->F-40<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(23)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Fair Value of Financial Instruments</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amount of financial
assets, such as cash and cash equivalents, short-term accounts receivable, bills receivable,
amounts due from related parties, accounts and bills payable, accruals and other payables,
amounts due to related parties and other payables, approximates their fair values because of
the short maturity of these instruments. The carrying amount of short-term borrowings
approximate fair value determined based on the borrowing rates currently available for debt
securities with similar terms and maturities. The investment securities represented unquoted
equity securities of an entity established in the PRC. There is no quoted market price for
such equity securities and accordingly, it is impracticable to have a reasonable estimate of
the fair value.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Long term accounts receivables as of December&nbsp;31, 2005 and 2006 were recorded in the
accompanying consolidated balance sheet at their net present value based on a discount rate
of 4.42% and 5.58% per annum respectively, which approximated the discount rate generally
available for discounting similar instruments with commercial banks in the PRC. The carrying
amount of long term accounts receivable approximate their fair value.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The carrying amount of long-term debt approximated their fair value based on the borrowing
rates currently available for debt securities with similar terms and average maturities.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-41<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(24)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Business and Credit Concentrations</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Substantially all of the Company&#146;s customers are located in the PRC. The following are
customers that individually comprise 10% or more of gross revenue for the years ended
December&nbsp;31, 2004, 2005 and 2006:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Unicom Group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">345,847</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">322,896</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">298,693</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,274</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Mobile Group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157,327</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">241,575</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">277,098</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,507</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Telecom Group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,299</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,169</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,426</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">At December&nbsp;31, 2005 and 2006, approximately 87% and 80% of gross accounts receivable,
respectively, were due from these customers. As a result, a termination in relationship in or
a reduction in orders from any one of these customers would have a material impact on the
Company&#146;s results of operations and financial condition. The Company performs ongoing credit
evaluations of its customers&#146; financial condition and, generally, requires no collateral from
its customers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The gross accounts receivable due from major customers, China Unicom Group, China Mobile
Group and China Telecom Group at December&nbsp;31, 2005 and 2006, were as follows:
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Unicom Group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">305,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,186</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Long-term portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79,032</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,835</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">367,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">405,975</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,021</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Mobile Group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">147,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">223,374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,623</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Long-term portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,010</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,252</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">303,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,875</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">China Telecom Group</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,158</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,990</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Long-term portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,697</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,166</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">99,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,687</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">610,801</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">808,370</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">103,583</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-42<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(25)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Commitments and Contingencies</B></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Operating lease commitments</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Future minimum lease payments under non-cancelable operating leases as of December&nbsp;31,
2006 are as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="right">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="94%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">RMB&#146;000</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">US$&#146;000</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">886</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,945</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">249</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,156</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,283</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>For the years ended December&nbsp;31, 2004, 2005 and 2006, total rental expenses for
non-cancellable and cancellable operating leases were RMB 8,480,000, RMB 13,361,000 and
RMB 16,385,000 (US$ 2,100,000), respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(ii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Capital commitments</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Capital commitments for future purchase of property, plant and equipment as of December
31, 2006 was RMB 219,612,000 (US$ 28,141,000).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(iii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Contingencies</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In the ordinary course of its business, the Company provides customers with one to three
years of warranty protection, under which the Company agrees to repair or replace
defective installed wireless coverage products at no additional cost to the customers.
The contracts generally do not contain disclaimers or limitations on product liabilities
for special, consequential and incidental damages, nor does the Company typically cap
the amounts the customers may recover for damages. In addition, the Company does not
currently maintain any insurance for product liability or warranty claims. A failure of
the Company&#146;s products to operate properly and the potential damage from malfunction of
the Company&#146;s products could give rise to substantial liabilities under the warranties
and otherwise.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-43<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>China GrenTech Corporation Limited and subsidiaries<BR>
Notes to the Consolidated Financial Statements<BR>
December&nbsp;31, 2004, 2005 and 2006</B><BR>
(expressed in RMB and US$)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>(26)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>China GrenTech Corporation Limited (Parent Company)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In accordance with the relevant PRC regulations, the Company&#146;s subsidiaries may pay
dividends only out of their accumulated profits, if any, determined in accordance with
PRC GAAP. In addition, the Company&#146;s subsidiaries are required to set aside at least
10% of their respective accumulated profits each year, if any, to fund the statutory
general reserve until the balance of the reserve reaches 50% of their respective
registered capital. The statutory general reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year losses,
if any, and may be converted into share capital by the issue of new shares to
shareholders in proportion to their existing shareholdings, or by increasing the par
value of the shares currently held by them, provided that the reserve balance after such
issue is not less than 25% of the registered capital. As of December&nbsp;31, 2006, the
statutory general reserve already reached 50% of the registered capital of certain
subsidiaries of the Company and no additional transfer is required.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Furthermore, certain subsidiaries were previously required to allocate 5% to 10% of the
profit after tax, determined in accordance with PRC GAAP, to the statutory public welfare
fund, which was restricted to be used for capital expenditures for staff welfare facilities
owned by the Company. In accordance with the new regulations which became effective January
1, 2006, appropriation to the statutory public welfare fund is longer required and the
balance of the statutory public welfare fund of RMB 40,986,000 had been transferred to the
statutory general reserve on January&nbsp;1, 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As of December&nbsp;31, 2005 and 2006, an aggregate amount of RMB 117,092,000 and RMB 132,403,000
(US$ 16,966,000) were appropriated from retained earnings and set aside for statutory general
reserves and public welfare fund respectively by the Company&#146;s subsidiaries.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As of December&nbsp;31, 2005 and 2006, the amount of restricted net assets of the Company&#146;s
subsidiaries, which may not be transferred to the Company in the forms of loans, advances or
cash dividends by the subsidiaries without the consent of a third party, was approximately
23% and 9% respectively of the Company&#146;s consolidated net assets as discussed above. In
addition, the current foreign exchange control policies applicable in the PRC also restrict
the transfer of assets or dividends outside the PRC.</TD>
</TR>

</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-44<!-- /Folio -->
</DIV>


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CHINA GRENTECH CORPORATION LIMITED
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transaction period from
to
COMMISSION FILE NUMBER
CHINA GRENTECH CORPORATION LIMITED
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
16th Floor, Zhongyin Tower
Caitian North Road, Futian District
Shenzhen 518026, People's Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12 (b) of the Act.
Name of Each Exchange
Title of Each Class
On Which Registered
American depositary shares, each representing
25 ordinary shares of par value US$0.00002 per share
The Nasdaq National Market
Ordinary shares of par value US$0.00002 per share
The Nasdaq National Market *
*
Not for trading, but only in connection with the registration of American depositary
shares.
Securities registered or to be registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common
stock as of the close of the period covered by the annual report.
As
of December 31, 2006, 625,000,000 ordinary shares were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
o
No
þ
The Registrant is required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Note — Checking the box above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those
Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17
o
Item 18
þ
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
Table of Contents
Page
FORWARD-LOOKING STATEMENTS
1
SUPPLEMENTAL INFORMATION
2
PART I
3
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
3
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
3
ITEM 3.
KEY INFORMATION
3
ITEM 4.
INFORMATION ON THE COMPANY
18
ITEM 4A.
UNRESOLVED STAFF COMMENTS
32
ITEM
5.
OPERATING AND
FINANCIAL REVIEW AND PROSPECTS
33
ITEM
6.
DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES
51
ITEM
7.
MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS
57
ITEM
8.
FINANCIAL
INFORMATION
58
ITEM
9.
THE OFFER AND
LISTING
59
ITEM
10.
ADDITIONAL
INFORMATION
59
ITEM
11.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
61
ITEM
12.
DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
61
PART
II
61
ITEM
13.
DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES
61
ITEM
14.
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
61
ITEM
15.
CONTROLS AND
PROCEDURES
61
ITEM
16A
AUDIT COMMITTEE
FINANCIAL EXPERT
61
ITEM
16B
CODE OF ETHICS
61
ITEM
16C
PRINCIPAL ACCOUNTANT
FEES AND SERVICES
62
ITEM
16D
EXEMPTIONS FROM THE
LISTING STANDARDS FOR AUDIT COMMITTEES
62
ITEM
16E
PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
62
ITEM
17.
FINANCIAL
STATEMENTS
62
ITEM
18.
FINANCIAL
STATEMENTS
62
ITEM
19.
EXHIBITS
62
EX-11.1 Code of Ethics
EX-12.1 302 CEO Certification
EX-12.2 302 CFO Certification
EX-13.1 906 Certification by the CEO and the CFO
Table of Contents
FORWARD-LOOKING STATEMENTS
This annual report filed on Form 20-F contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial
condition, results of operations, cash flows, dividends, financing plans, business strategies,
capital and other expenditures, competitive positions, availability of capital, growth
opportunities for new and existing products, availability and deployment of new technologies, plans
and objectives of management, mergers and acquisitions, and other matters.
Statements in this Form 20-F that are not historical facts are hereby identified as
"forward-looking statements" for the purpose of the safe harbor provided by Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The words "estimate," "project," "intend," "expect," "believe," "plan" and similar
expressions are intended to identify forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date of this
document. In addition, other written or oral statements which constitute forward-looking statements
have been made and may in the future be made by us or on our behalf, including with respect to the
matters referred to above. These forward-looking statements are necessarily estimates reflecting
the best judgment of senior management that rely on a number of assumptions concerning future
events, many of which are outside of our control, and involve a number of risks and uncertainties
that could cause actual results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth in this annual report. Important factors that could
cause actual results to differ materially from estimates or projections contained in the
forward-looking statements include, without limitation:
•
the Company's reliance on business relationships with the Chinese
telecommunications operators and base station equipment manufacturers, in particular,
the annual capital spending by China Mobile group and China Unicom group;
•
risks associated with large accounts receivable, long collection periods and accounts receivable cycles;
•
fierce competition in the wireless communication industry;
•
growth of, and risks inherent in, the wireless communication industry in China;
•
uncertainty as to future profitability and the Company's ability to obtain
adequate financing for its planned capital expenditure requirements;
•
uncertainty as to its ability to continuously develop and manufacture new
radio frequency, or RF technology and keep up with changes in RF technology;
•
uncertainty as to the issuance of 3G licenses by the PRC governmental
authorities;
•
future changes to the regulations and policies governing the
telecommunications industry in China, including possible future industry restructuring;
•
limitation on the Company's production capacity for RF products;
•
risks associated with possible defects and errors in its wireless coverage products or RF products;
•
uncertainty as to the Company's ability to protect and enforce its intellectual property rights; and
•
uncertainty as to the Company's ability to attract and retain qualified
executives and personnel, particularly in its research and development department.
1
Table of Contents
CONVENTIONS
Definitions
SUPPLEMENTAL INFORMATION
We have twice subdivided our share capital since our inception in 1999. On December 24, 2003,
we subdivided each of our issued and unissued ordinary shares, par value US$1.00 per share, into
100 ordinary shares, par value US$0.01 per share. On August 25, 2005, we further subdivided each of
our issued and unissued ordinary shares, par value US$0.01 per share, into 500 ordinary shares, par
value US$0.00002 per share. Unless otherwise specified, we present ownership of our ordinary shares
throughout this annual report as if our ordinary shares, including ordinary shares into which our
existing preference shares are convertible and exchangeable bonds are exchangeable, were so
subdivided since our inception, with a par value of US$0.00002 per share.
For the purposes of this annual report, we refer to Actis China Investment Holdings No. 1
Limited, or Actis China, Standard Chartered Private Equity Limited, or Standard Chartered Private
Equity, and JAFCO Asia Technology Fund, or JAFCO, holders of our outstanding mandatorily redeemable
convertible preference shares prior to our initial public offering in March 2006, as our preference
shareholders; all geographical and statistical references to "China," "mainland China" and "PRC" in
this annual report are to the People's Republic of China and do not include the Hong Kong Special
Administrative Region, or Hong Kong, the Macau Special Administrative Region, or Macau, and Taiwan.
References to "provinces" of China are to the provinces, municipalities under direct administration
of the PRC central government and provincial-level autonomous regions of China.
All references to "RMB" or "Renminbi" are to the legal currency of China and all references to
"U.S. dollar" or "US$" are to the legal currency of the United States of America, or the United
States or U.S. For your convenience, this annual report contains translations of Renminbi amounts
into U.S. dollars at the noon buying rate for U.S. dollars in effect on December 29, 2006, the last
business day in 2006, in The City of New York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of New York at RMB7.8041 = US$1.00.
On May 1, 2007, the latest practicable date, the noon buying rates in the City of New York
for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York are
RMB7.7065 = US$1.00. See "Exchange Rate Information." We make no representation that any amounts
in Renminbi or U.S. dollars referred to in this annual report could be or could have been converted
into each other at any particular rate or at all.
We have approximated all numbers in this annual report to their closest round numbers. Also
due to rounding, figures shown as totals in tables may not be an arithmetic aggregation of the
figures preceding them.
2
Table of Contents
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following tables present our selected consolidated financial data as of and for the years
ended December 31, 2002, 2003, 2004, 2005 and 2006.
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and we
publish our financial statements in Renminbi. We have derived the selected consolidated financial
data as of and for the years ended December 31, 2002, 2003, 2004, 2005 and 2006 from our
consolidated financial statements audited by KPMG, an independent registered public accounting
firm. Our audited consolidated financial statements as of December 31, 2005 and 2006 and for each
of the years ended December 31, 2004, 2005 and 2006 are included elsewhere in this annual report.
You should read the selected consolidated financial data below together with our consolidated
financial statements, including the notes thereto, included elsewhere in this annual report, and
"Item 5. Operating and Financial Review and Prospects."
Year ended December 31,
2002
2003
2004
2005
2006
2006
(RMB)
(RMB)
(RMB)
(RMB)
(RMB)
(US$)
(in thousands, except for per share and number of shares data)
Consolidated statements of income
information
Revenues
315,810
360,816
566,504
716,270
832,795
106,712
Cost of revenues
(127,094
)
(141,053
)
(241,930
)
(328,064
)
(437,040
)
(56,001
)
Gross profit
188,716
219,763
324,574
388,206
395,755
50,711
Operating expenses:
Research and development costs
(7,573
)
(12,410
)
(16,326
)
(30,616
)
(47,671
)
(6,108
)
Sales and distribution expenses
(19,034
)
(27,965
)
(71,035
)
(91,489
)
(112,948
)
(14,473
)
General and administrative expenses
(21,885
)
(23,865
)
(29,744
)
(41,057
)
(55,944
)
(7,169
)
Total operating expenses
(48,492
)
(64,240
)
(117,105
)
(163,162
)
(216,563
)
(27,750
)
Operating income
140,224
155,523
207,469
225,044
179,192
22,961
Other income/(expense):
Interest income
695
3,049
4,006
3,213
19,186
2,458
Interest expense
(3,245
)
(6,933
)
(39,392
)
(36,105
)
(28,026
)
(3,591
)
Investment income
—
176
899
159
238
30
Foreign currency exchange gain/(loss)
—
—
—
5,584
(9,875
)
(1,265
)
Grant income
1,431
7,293
716
16,732
7,670
983
Total other income/(expense)
(1,119
)
3,585
(33,771
)
(10,417
)
(10,807
)
(1,385
)
Income before income tax expense and
minority interests
139,105
159,108
173,698
214,627
168,385
21,576
Income tax expense
(9,703
)
(7,841
)
(16,020
)
(26,097
)
(18,277
)
(2,342
)
Income before minority interests
129,402
151,267
157,678
188,530
150,108
19,234
Minority interests, net of tax
(826
)
(2,419
)
(11,117
)
(7,086
)
(1,267
)
(162
)
Net income
128,576
148,848
146,561
181,444
148,841
19,072
Dividends, accretion to redemption
value and foreign currency rate
movements on mandatorily redeemable
convertible preference shares
—
—
(3,509
)
(2,428
)
(549
)
(70
)
Net income available to ordinary
shareholders
128,576
148,848
143,052
179,016
148,292
19,002
Net income per share available to
ordinary shareholders:
Basic
0.28
0.32
0.31
0.38
0.25
0.03
Diluted
0.28
0.32
0.29
0.36
0.25
0.03
Weighted average number of ordinary
shares:
Basic
466,365,500
466,365,500
466,365,500
466,365,500
584,580,799
584,580,799
Diluted
466,365,500
466,365,500
500,000,000
500,000,000
593,150,684
593,150,684
Total cash dividend declared to
ordinary shareholders
24,800
—
54,411
29,653
7,609
975
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Table of Contents
As of December 31,
2002
2003
2004
2005
2006
2006
(RMB)
(RMB)
(RMB)
(RMB)
(RMB)
(US$)
Consolidated balance sheet information
Cash and cash equivalents
111,558
181,988
302,932
128,608
467,423
59,895
Pledged time deposits
17,682
69,214
95,908
76,250
238,618
30,576
Accounts receivable, net
66,768
325,821
248,662
537,321
747,859
95,829
Inventories
110,539
169,125
296,404
370,136
434,406
55,664
Total current assets
357,484
776,620
1,014,447
1,172,072
1,948,407
249,665
Property, plant and equipment, net
27,729
66,602
96,505
120,356
168,603
21,604
Long-term accounts receivable
121,971
115,654
126,649
162,032
268,957
34,464
Total assets
525,394
970,983
1,250,539
1,475,469
2,415,834
309,560
Short-term bank loans
61,050
239,850
164,850
160,614
336,050
43,061
Total current liabilities
235,388
479,209
662,838
738,551
866,435
111,023
Long-term debt
—
171,325
171,325
167,053
—
—
Total liabilities
235,388
650,534
834,163
905,604
866,435
111,023
Mandatorily redeemable convertible
preference shares
—
43,868
45,184
45,441
—
—
Total shareholders' equity
282,626
260,149
348,790
506,720
1,530,428
196,106
EXCHANGE RATE INFORMATION
We prepare our financial statements in Renminbi. Solely for the convenience of the reader,
this annual report contains translations of Renminbi amounts into U.S. dollars, and vice versa, at
RMB7.8041 = US$1.00, the noon buying rates on December 29, 2006, the last business day in 2006, in
the City of New York for cable transfers as certified for customs purposes by the Federal Reserve
Bank of New York. You should not assume that Renminbi amounts could actually be converted into
U.S. dollars at these rates or at all.
On May 1, 2007, the latest practicable date, the noon buying rates in the City of New York
for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York are
RMB7.7065 = US$1.00.
The following table sets forth, for the periods indicated, the noon buying rates for U.S.
dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the
Federal Reserve Bank of New York:
Noon buying rate
Period
Period end
Average
(1)
High
Low
(RMB per US$1.00)
2001
8.2766
8.2772
8.2786
8.2676
2002
8.2800
8.2772
8.2800
8.2669
2003
8.2767
8.2771
8.2800
8.2765
2004
8.2765
8.2768
8.2774
8.2764
2005
8.0702
8.1826
8.2765
8.0702
2006
7.8041
7.9723
8.0702
7.8041
November
7.8340
—
7.8750
7.8303
December
7.8041
—
7.8350
7.0841
2007 (through May 1, 2007)
7.7065
—
7.8127
7.7065
January
7.7714
—
7.8127
7.7705
February
7.7410
—
7.7632
7.7410
March
7.7232
—
7.7454
7.7232
April
7.7090
—
7.7345
7.7090
Source: Federal Reserve Bank of New York.
(1)
Determined by averaging the noon buying rates on the last business day of each month or the
elapsed portion thereof during the relevant period.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
4
Table of Contents
RISK FACTORS
Risks Relating to Our Company
We derive a significant portion of our revenues from the China Unicom group and the China Mobile
group and our revenues could decline significantly if either of them reduces its purchases of, or
fails to pay for, our wireless coverage products and services
We provide most of our wireless coverage products and services to the China Unicom group and
the China Mobile group. This is primarily because the China Unicom group and the China Mobile group
are currently the only two licensed wireless operators in China. In 2004, 2005 and 2006, we derived
61.0%, 45.1% and 35.9%, respectively, of our revenues from China Unicom group's local affiliates
and 27.8%, 33.8% and 33.3%, respectively, from China Mobile group's local affiliates. In addition,
as of December 31, 2004, 2005 and 2006, 59.2%, 52.3% and 40.4%, respectively, of our gross accounts
receivable were attributable to China Unicom group's local affiliates and 26.3%, 27.3% and 30.2%,
respectively, to China Mobile group's local affiliates.
Because of the current procurement policies and practices of the China Unicom group and the
China Mobile group, we typically contract with their individual local affiliates and treat these
local affiliates as separate customers. Although our business practice is to interact with each
local affiliate individually, they are under the common control of their parent company. In certain
instances, procurement decisions are made only with the approval of the parent company. For
example, parent company approval was required before we were awarded our first CDMA contracts by
China Unicom group's affiliates in 2001. More recently in the fourth quarter of 2006, China Mobile
group announced that it would, effective immediately, separately run the bidding processes for the
procurement of GSM wireless coverage equipment at the parent company level. For more details, see
"Risk Factors—Risks Relating to Our Company— Changes in the procurement policies by our major
customers may adversely affect our revenue and profit margin on our wireless coverage products."
We also experience delays in payments from the China Unicom group and the China Mobile group
during the ordinary course of our business. As explained in the next risk factor, this is largely
due to our limited bargaining leverage and the resulting lack of a specific timetable in our sale
and purchase contracts to require our customers to issue completion certificates and to perform
preliminary inspections, which are pre-conditions to their initiation of payments. Despite our
constant attempts, we have not been able to significantly change this prevalent practice in our
industry due to the limited bargaining leverage of wireless coverage operators such as ourselves
and we expect this practice to continue in coming periods.
One or more of China's main telecommunication operators (including our two principal group
customers) may reorganize by means of a corporate spin-off, merger or otherwise. Any such
reorganization could disrupt, slow down or otherwise materially affect their capital expenditures
and, therefore, our revenues. Additionally, the competitive situation in the wireless communication
market in China may be altered, or the resulting entities may change suppliers or sourcing
policies. If the China Unicom group or the China Mobile group decides to centralize or otherwise
significantly change its procurement methods for wireless coverage products and services, reduces
or eliminates the purchase of our products and services or becomes unable or refuses to pay for our
products and services it has purchased, our revenues would decline significantly.
Because we have limited bargaining leverage with the China Unicom group and the China Mobile group,
some contractual terms and market practices are materially adverse to our interest
The China Unicom group and the China Mobile group award contracts through competitive bidding.
According to Infosage Analysis, a market research and consulting firm focusing on innovative
technologies, there are over 70 entities competing in the wireless coverage market in China. As
the China Unicom group and the China Mobile group are currently the only two licensed wireless
operators in China, we have limited negotiating leverage with these key clients in the bidding
process. As a result, many proposed contractual terms and market practices subject to bidding are
materially adverse to our interest. For example, in most instances, the wireless operators will not
sign sale and purchase agreements with us until they have formally accepted our products delivered
for a whole project. In addition, most of our contracts, in the form contained in the bidding
materials, do not specify a timetable for our customers to issue a completion certificate or
perform the preliminary inspection of products we install. This affects our revenues as the
execution of the sale and purchase contract and the issuance of a completion certificate are
conditions to our recognition of revenues for our products and the preliminary inspection by our
wireless operator customers is a condition to our recognition of service revenue. As a result of
these contractual terms and market practices, we are required to finance significant operating
expenses before we recognize revenues and to finance significant accounts receivable once we
recognize revenues. Any worsening of these terms and conditions could have a material adverse
effect on our liquidity and cash flows from operations. Also see "— We have long accounts
receivable cycles and long collection periods and our liquidity and cash flows from operations will
deteriorate if our accounts receivable cycles or collection periods continue to lengthen" below for
additional cash flow and liquidity risks resulting from these market practices.
Changes in the procurement policies by our major customers may adversely affect our revenue and
profit margin on our wireless coverage products
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Table of Contents
Historically we have been awarded contracts by the local affiliates of China Mobile Group
through bidding and negotiation, and these contracts covered wireless coverage equipment and
services. For more details on the bidding process conducted by wireless operators in China, please
see "Item 4. Information on the Company—Business—Our Wireless Coverage Products and Services—Our
Sales Cycle—Bidding Process." China Mobile group, in an effort to shift to a more centralized
procurement model, announced during the fourth quarter of 2006 that it was going to adopt a new
procurement policy whereby the bidding processes for wireless coverage equipment and services will
be separately conducted, and procurement decisions for wireless coverage equipment and services
made by the parent company and local affiliates, respectively. Under the new policy, even if we
win the bid for wireless coverage equipment, we may not win the bid for services, or vice versa.
Consequently, we may lose revenue with respect to any single wireless coverage project if we cannot
win both equipment contract and service contract for the project. In order to achieve the same
level of revenues from China Mobile group, we may be required to obtain a higher number of projects
from China Mobile group as the per project revenue may be lowered as a result of the policy change
by China Mobile group. Further, the change in procurement policy aims to encourage more
competitive pricing among providers of wireless coverage equipment, which could lead to a
significant decrease in aggregate bidding price for the equipment contracts and the service
contract in relation to any project. As a result, our profit margin may be adversely affected.
We often begin work on a project before we have a contract for our products and services, which may
materially and adversely affect our cash flows from operating activities and liquidity
In line with industry practice in China, when a customer accepts our bid for a wireless
coverage project, it does not immediately sign a sale and purchase contract. On a typical project,
we must complete the initial installation of our coverage products before our customer will issue a
completion certificate to confirm the acceptance of the products we have delivered and sign a
contract with us. Although we believe that our bidding documents, together with our customers'
acceptances of our bids, effectively constitute binding contracts under PRC law, our PRC counsel
has advised us that enforcement of our rights to payment in the PRC courts may be difficult. In
particular, it is unclear what terms and provisions need to be included in a bid and acceptance in
order for a payment obligation to exist under PRC law. As a result, we effectively assume the risk
of loss for our projects before the customer signs a contract with us.
In addition, in line with current industry practice in China, most of our bid documents do not
specify a time period or date by which our customers must issue completion certificates or sign a
sale and purchase contract. As a result, our sales and marketing staff spend a significant amount
of time persuading customers to conduct inspections, issue completion certificates and sign
contracts. These unfavorable practices are in large part attributable to the market dominance of
our customers and the competitive landscape of our wireless coverage industry. We expect that this
unfavorable industry practice in China will continue and that it will continue to materially and
adversely affect our cash flows from operating activities and liquidity.
We have long accounts receivable cycles and long collection periods and our liquidity and cash
flows from operations will deteriorate if our accounts receivable cycles or collection periods
continue to lengthen
Our wireless coverage revenues consist of two components: (i) sale of products and (ii)
product installation services. We only begin to recognize revenues from sale of our products when
all of the following revenue recognition criteria have been met:
•
title has been transferred, i.e. the risk and rewards are transferred;
•
delivery has occurred;
•
persuasive evidence of an arrangement exists;
•
price to the buyer is fixed and determinable;
•
collectibility is reasonably assured; and
•
we have an enforceable legal right to receive the contractually specified amount in cash
attributable to sale of products and such right is not contingent upon the installation
services and/or further action of the customers.
We recognize revenues from the provision of installation services when:
•
the services have been rendered in full;
•
the customer has issued a preliminary inspection certificate which indicates the
customer's acceptance of the installation services provided; and
•
we have an enforceable legal right to receive the contractually specified amount in cash
attributable to the installation services and such right is not contingent upon further
action of the customer.
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However, our sale and purchase contracts, in line with industry practice, generally permit our
customers to pay their purchase price in installments even though the revenue for that contract has
already been recognized. Under these contracts, on a weighted average basis, our installment
payment schedule is approximately as follows:
•
43% of the contract value due upon the signing of the contract and the issuance of the completion certificate,
•
an additional 38% due upon the issuance of the preliminary inspection certificate,
•
a further 16% due upon the issuance of the final inspection certificate, and
•
the final 3% due upon the expiration of our warranty period.
Because our contracts often do not stipulate when our customers must conduct the relevant
inspections, our customers may delay their payments. To the extent revenue recognized under a
contract is not yet paid, it is recorded as an account receivable. From time to time, we sell a
portion of our accounts receivable to third parties to meet our working capital needs. Installment
intervals range from six months to three years and the amounts of individual payments have varied
and may continue to vary in the future. As of December 31, 2006, we had in aggregate gross accounts receivable,
including amounts not yet due pursuant to contractual terms, of RMB1,005.0 million (US$128.8
million). Of this total amount, RMB700.9 million (US$89.8 million), or 69.7%, had been outstanding
for less than 12 months from the time the revenue was recognized, RMB231.3 million (US$29.7
million), or 23.0%, had been outstanding for 12 to 24 months from the time the revenue was
recognized, RMB68.0 million (US$8.7 million), or 6.8%, had been outstanding for 24 to 36 months
from the time the revenue was recognized, and RMB4.8 million (US$0.6 million), or 0.5%, had been
outstanding for over 36 months from the time the revenue was recognized. Our net accounts
receivable as of December 31, 2006 increased by 39.2% to RMB747.9 million (US$95.8 million) from
our net accounts receivable of RMB537.3 million (US$66.6 million) as of December 31, 2005 as a
result of (1) an increased proportion of our annual revenues being generated in the third and
fourth quarters of 2006, (2i) a 16.3% increase in our total revenues from 2005 to 2006, and (iii)
reduced sales of our accounts receivable to receivable purchasing banks in 2006 as compared to
2005.
Our
principal customers, such as China Mobile group and China Unicom
group may delay in paying their installments to us as they come due and, because of our limited bargaining leverage and our need to maintain an ongoing relationship with these principal customers, it is impracticable for us to obtain a significant improvement in their payment patterns. As of December 31, 2006, accounts receivable that became due under our contracts and remained
unpaid amounted to RMB353.5 million (US$45.3 million), or 35.2%, of our gross accounts receivable
of RMB1,005.0 million (US$128.8 million). Historically, we have made allowances for doubtful
accounts representing 100% of our accounts receivable outstanding for more than 24 months from the
date they became due under the relevant contract. As of December 31, 2006, this allowance amounted to
RMB6.2 million (US$0.8 million). Apart from these doubtful accounts for which allowances are made,
all of our remaining accounts receivable were outstanding for less than six months as of December
31, 2006 from the date they became due under the relevant contract. We cannot assure you that our
past allowance practice will not change in the future or that our allowance will be sufficient to
cover defaults in our accounts receivable. You should refer to "Item 5. Operating and Financial
Review and Prospectus—Key Factors Affecting Our Results of Operations—Revenue Recognition Policy
and Accounts Receivable Cycle" for further details on our revenue recognition policy and collection
periods. Our liquidity and cash flows from operations will deteriorate if our accounts receivable
cycles or collection periods continue to lengthen.
We historically recognized significantly lower revenues in the first quarter, which sometimes
resulted in net losses in the first quarter, and our revenues may fluctuate significantly from
quarter to quarter in the future, resulting in quarterly net losses
Our customers typically set their annual budgets at the beginning for each year. Once the
annual budget is set, the customers will commence the bidding process for specific projects. As a
wireless coverage equipment and service provider, we do not recognize revenues until installation
is completed. In other words, the amount of revenues we could recognize is typically lower during
the earlier part of the year, especially during the first quarter.
Our customers generally use the same team to manage different aspects of a project, including
bidding, contracting and payment. Their work is performed in accordance with their internal annual
and semi-annual project management process. As a result, our customers prefer to perform
completion inspections and sign contracts for each batch of installed projects at the same time. We
typically recognize higher levels of revenue during the second and third quarter than that of the
first quarter, because more projects are installed and inspected, and for which completion
certificates are issued, during the second and the third quarter. During the fourth quarter,
especially in December, our principal customers, being public companies and influenced by their
annual reporting obligations, usually perform completion inspection, issue completion certificate
and sign contracts for a vast majority of our projects. Therefore, we typically recognize the
highest level of revenue during the fourth quarter.
Despite the quarterly fluctuations experienced in revenue, our overall volume of contracts has
increased, resulting in increasing costs associated with servicing these contracts. Fluctuations in
quarterly revenue with expanding costs have resulted in net losses
being incurred in certain quarters of the recent years, particularly in the first quarter. In 2004, 1.5%, 41.1%, 8.3% and 49.1% of our
7
Table of Contents
annual revenues were generated in the first, second, third and fourth quarters of that year, respectively,
and we reported net losses of RMB20.7 million and RMB7.7 million in the first and third quarters,
respectively. In 2005, 1.2%, 24.3%, 21.8% and 52.7% of our annual revenues were generated in the first, second, third and fourth quarters of that
year, respectively, and we reported net losses of RMB32.3 million (US$4.0 million) in the first
quarter. In 2006, 1.8%, 21.6%, 22.5% and 54.1% of our annual revenues were generated in the first,
second, third and fourth quarters of that year, respectively, and we reported a net loss of RMB35.7
million in the first quarter. You should refer to "Item 5. Operating and Financial Review and
Prospectus—Key Factors Affecting Our Results of Operations—Revenue Recognition Policy and
Accounts Receivable Cycle" and "—Significant Quarterly Fluctuations of Our Results of Operations"
for further details on our revenue fluctuation and other quarterly financial information. However,
past quarterly results may not provide an accurate indication of future performance or fluctuation.
Whether we continue to recognize the majority of our revenues in the fourth quarter will depend
largely upon the timing of our customers' project management processes. We anticipate that we will
continue to experience significant fluctuations in revenues on a quarterly basis and may continue
to experience net losses as a result, particularly in the first quarter.
We rely on short-term bank financing, including bills payable and sale of receivables, to finance
our operations; any expansion of our business will require further financing and will increase our
financial leverage
We tend to recognize more revenues and collect payments primarily in the fourth quarter. In
2004, 2005 and 2006, 54.5%, 53.0% and 53.8%, respectively, of our total annual collections were
made in the fourth quarter. This is because our customers prefer to pay for our completed projects
toward the end of their budget year. However, we commence our production and arrange installation
of products for a significant number of projects beginning in the second quarter of the year and
typically complete and deliver a majority of our wireless coverage products during the third and
fourth quarters. As a result, we tend to generate more cash flow from operating activities toward
the end of the year and encounter increasing working capital needs during the middle part of the
year, especially the third quarter. We are therefore highly dependent on bank financing, including
issuing bills payable and selling accounts receivable, to fund our working capital requirements and
maintain liquidity. Historically, we have relied on short-term bank loans to finance our working
capital needs. As of December 31, 2006, we had an aggregate of RMB336.1 million (US$43.1 million)
of bank loans outstanding and RMB78.6 million (US$10.1 million) in bills payable. As of December
31, 2006, interest rates on our short-term bank loans ranged from 4.9% to 7.0% and interest rates
on our bills payable financing ranged from 2.4% to 4.4%. In 2005 and 2006, we sold an aggregate of
RMB180.1 million and RMB117.7 million (US$15.1 million), respectively, of our accounts receivable
to third party financial institutions. We expect external financing required for expanding our
operations will increase our financial leverage. See "— Our inability to access long-term working
capital financing due to the current regulatory conditions in China has adversely affected, and
could continue to have a negative impact on, our liquidity" below.
We may be unable to generate sufficient cash to pay the principal and interest due on our
indebtedness. Our ability to service our debts will largely depend on our ability to collect
accounts receivable from our customers and on our future operating performance. If we do not have
sufficient available sources of liquidity to repay our outstanding indebtedness, we may have to
refinance our obligations. However, we cannot assure you that financing or refinancing will be
available on terms acceptable to us or at all. If we encounter any difficulties in generating
sufficient cash to pay our outstanding indebtedness or in securing financing or refinancing or
receivable selling arrangements on terms satisfactory to us as and when required, our business and
liquidity will be materially and adversely affected, and we will be unable to expand our business.
Our inability to access long-term working capital financing due to the current regulatory
conditions in China has adversely affected, and could continue to have a negative impact on, our
liquidity
As with most small- and medium-sized enterprises in China, it is difficult for us to enter
into working capital financing arrangements with maturities longer than 12 months with lenders or
from the capital markets. Under the current regulatory regime in China, commercial banks are
required by the People's Bank of China, the central bank in China, to strictly control the making
of working capital loans to small- and medium-sized borrowers with maturities of longer than one
year. We therefore finance our working capital needs through the issue of bills payable backed by,
short-term borrowings from, and sale of accounts receivable to, various financial institutions. The
rates of interest, duration, need for collateral, documentation and other key terms of these
financing arrangements vary significantly and are generally less favorable than long-term financing
or similar arrangements available in other jurisdictions. In addition, we may not be able to renew
existing financing arrangements, and lenders may also have the ability to unilaterally withdraw or
change the terms of our funding, either due to their own internal review process or as guided by
national economic policies. See "— Risks Relating to Business Operations in China — Changes in
China's political and economic policies and conditions could cause a substantial decline in the
demand for our products and services." We therefore face a higher cost of funding than non-PRC and
large-sized PRC companies and greater uncertainty as to the availability of financing, which in
turn has adversely affected, and could continue to have a negative impact on, our liquidity.
If the wireless communication sector in China does not maintain its current pace of growth, or the
PRC government does not issue 3G licenses in the near future, the profitability and future
prospects of our business and our liquidity could be materially and adversely affected
We generate almost all of our revenues from the provision of wireless coverage products and
services to telecommunication
8
Table of Contents
operators in China. Our future success depends on the continued
growth of the PRC wireless communication industry. Any slowdown in the development of the wireless
communication industry in China or reduction in our customers' expenditures on wireless coverage
products and services may reduce market demand for our products and services. Alternatively, if the
PRC government or other relevant regulatory authorities fail to allow construction of new wireless
communication networks, or decide to terminate, delay or suspend construction or extension of new
or existing wireless communication networks, the profitability and future prospects for our
business could be materially and adversely affected.
The third generation wireless communication, or 3G, network deployment will require
significant capital investment by PRC telecommunication operators, including investments in
wireless coverage products and services, RF parts and components and wireless communication
systems. Therefore, we believe that issuance of 3G licenses will in general have a positive impact
on the growth of our business. Mr. Xudong Wang, Minister of the Ministry of Information Industry
in China, or MII, mentioned on the national information industry conference in December 2006 that
"the conditions for the development of China's 3G mobile communication are more or less mature, and
we will continue our efforts to improve the results of large-scale TD-SCDMA application trials
2007." In the absence of an official guidance from the PRC government on the timing of the
issuance of 3G licenses, the expected return on our investments in 3G technology is uncertain.
Continued delay in the issuance of 3G licenses will negatively impact our business growth and
liquidity.
We may fail to offer products that meet industry standards or our customers' specific requirements,
and as a result we may lose customers or orders or incur significant warranty or other costs, and
our revenue growth may be materially and adversely affected
The development of our products is based upon a complex technology, and requires significant
time and expertise in order to meet industry standards and customers' specifications. Our customers
also have their own sets of standards and criteria relating to their requirements for wireless
coverage or base station RF products, including standards and criteria issued by the relevant
governmental authorities. We must satisfy these standards and criteria in order to be eligible to
supply our products and services to those customers. If we are unable to continue to meet these
standards and criteria, we may become ineligible to provide our products and services that have in
the past generated most of our revenues and profitability. For example, in 2003, because of a
miscommunication with a China Unicom group's local affiliate with respect to its bidding
requirements, we failed to tailor our wireless coverage products to the required specifications of
its base stations. As a result, we lost a RMB6.4 million bid. Furthermore, quality and performance
problems could damage our reputation and our relationships with existing and prospective customers
and could have a material and adverse effect on our revenue growth.
We customarily provide our customers with one to three years of warranty protection, under
which we agree to repair or replace defectively installed wireless coverage products at no
additional cost to our customers. Our contracts generally do not contain disclaimers or limitations
on product liabilities for special, consequential and incidental damages, nor do we typically cap
the amounts our customers may recover for damages. In addition, we do not currently maintain any
insurance for product liability or warranty claims. The failure of our installed projects to
operate properly and the potential damage from malfunction of our products could give rise to
substantial liabilities under our warranties and otherwise.
Our research and development efforts may not lead to successful development of commercially viable
or acceptable products, which could cause a decline in customer use of our products
The markets in which we compete are characterized by:
•
rapidly changing technology;
•
evolving industry standards and transmission protocols;
•
frequent improvements in products and services; and
•
fierce competition from well-funded and technologically advanced companies.
To succeed, we must continually improve our current products and develop and introduce new or
enhanced products that adequately address the requirements of our customers and are competitive in
terms of functionality, performance, quality and price. We expend considerable efforts in the
development of new and enhanced RF technology and in its commercial applications, including the
development of 3G products and base station RF components. Although we have successfully developed
products that meet customers' requirements in the past, there is no assurance that any of our
research and development efforts will necessarily lead to any new or enhanced products or generate
sufficient market share to justify commercialization. For example, 3G is a new and evolving
technology. We cannot assure you that our research and development efforts will yield RF wireless
coverage products that are readily deployable in 3G networks or that our customers will be
satisfied with the performance of our 3G coverage products. Under those circumstances, we will not
be able to recoup our research and development costs and expenses, we may not be able to serve our
customers' 3G needs, and customers may refuse to use our products.
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Gross profit margins for our products and services vary substantially and any deterioration in the
gross profit margin for our principal products and services will have a material and adverse effect
on our results of operations
Gross profit margins for our products and services vary substantially. Although the gross
profit margin for our wireless coverage products and services has been on average higher than the gross profit margin of our
RF parts and components, all of our products and services have been subject to downward pricing
pressure over their life cycles. In addition, the gross profit margin of our products has
fluctuated significantly from year to year. For example, the gross profit margin of our wireless
coverage products was 48.0% in 2006, compared to 54.9% in 2005 and 59.6% in 2004. Further, due to
the rapidly changing technology and evolving industry standards and transmission protocols or
changes in the procurement policies of our major customers, our historical gross profit margin is
not an accurate measure for estimating our future gross profit margins. Any deterioration in the
gross profit margin for our principal products and services will have a material and adverse effect
on our results of operations.
Our industry is highly competitive and our inability to compete effectively would hurt our current
business and future growth potential
Our industry is extremely competitive and is characterized by rapid technological advancement,
frequent development of new products, evolving industry standards and a downward pricing trend over
the life cycle of a product. According to Infosage Analysis, there were more than 70 companies
providing wireless coverage products and services in China as of December 31, 2006 and the top
three providers in China in this business, including our company, accounted in aggregate for
approximately 50% of the total market share in 2006. We compete on the following principal bases:
•
research and development capability;
•
product quality;
•
scope and flexibility of product offering;
•
after-sale service capability;
•
pricing; and
•
relationships with wireless operators at the local level.
In addition, China has gradually lifted its import restrictions, lowered import tariffs and
relaxed foreign investment restrictions after its entry into the World Trade Organization in
December 2001. This has led to increased competition from foreign wireless equipment companies,
such as Andrew Corporation, Sagem Communication and Powerwave Technologies, Inc., who are
significantly larger and financially stronger than us. Many of our foreign competitors have
established PRC-based manufacturing facilities to lower production costs, which has further
intensified price competition in the marketplace and may in the future affect our profit margins.
If we fail to compete effectively in the future, our current business and future growth potential
would be adversely affected.
We have limited experience in operating outside mainland China, and failure to achieve our overseas
expansion strategy may have an adverse effect on our business growth in the future
Our future growth depends, to a considerable extent, on our ability to expand our customer
base in both the domestic and overseas markets. We are currently exploring new business
opportunities outside mainland China for our wireless coverage products and services. We have set
up local sales offices in some Southeast Asian countries, such as the Philippines and Indonesia, to
explore market opportunities for our wireless coverage products. However, we have limited
experience in operating outside mainland China or with foreign regulatory environments and market
practices, and cannot guarantee that we will be able to penetrate any overseas market. In
connection with our initial efforts to expand overseas, we have encountered many obstacles,
including cultural and linguistic differences, difficulties in keeping abreast of market, business
and technical developments in foreign jurisdictions, and political and social disturbances. For
example, our products and services sold in China are tailored to the specifications of our domestic
operators and their wireless systems and are not readily deployable overseas. To meet the
requirements of our potential overseas customers, we have to adjust some of our technical
parameters such as transmission frequencies and make other modifications. In addition, recent
political instability in some Southeast Asian countries has hindered our expansion efforts into
those wireless coverage markets. Failure in the development of overseas markets may have an adverse
effect on our business growth in the future.
We rely on key managerial and technical personnel and failure to attract or retain such personnel
may compromise our ability to develop new products and to effectively carry on our research and
development and other efforts
Our future growth and success depend largely on the efforts and abilities of our senior
management and senior technical staff, particularly Mr. Yingjie Gao, our chairman and chief
executive officer, Professor Kunjie Zhuang, our director and chief
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technology officer, and our
other senior technicians and engineers. We have entered into employment agreements with these
individuals. These employment agreements have an initial term of three years, subject to the right
of termination under specified circumstances, such as a material breach of their contractual
obligations. If we lose the services of Mr. Gao, Professor Zhuang or any other senior technicians
or engineers, our operations will be materially and adversely affected. We also believe that our
future success will depend in large part upon our ability to attract and retain senior, experienced
and highly qualified scientific and technical personnel.
The wireless coverage industry is characterized by a high level of employee mobility.
Competition in China for experienced RF technology experts is intense. In 2004, 2005 and 2006, our
employee turnover rate was 14.0%, 17.7% and 24.6%, respectively, as determined by dividing the
number of our employees departing during the year over the total number of employees at the end of
the year. There are few senior-level research and development or technical personnel available for
hire as the costs of hiring and retaining such individuals are high, and such personnel may not
remain with us once hired. If we are unable to successfully attract or retain senior-level research
and development employees, our ability to develop new technologies and products and to effectively
conduct our operations could be compromised and our ability to carry on our research and
development and other efforts could be materially and adversely affected.
We rely on third parties to carry out the initial installation of our wireless coverage products,
are liable for the failure or inadequacy of their services, and are vulnerable to the loss and
unavailability of their services
We rely on independent third party contractors to carry out the initial installation of our
wireless coverage products, which include affixing the products to the customers' physical
structure and interconnection of the products under the supervision of engineers from our technical
support team. We outsource substantially all of our initial installation work to independent third
party contractors located across China. Under our contracts, we are responsible to our customers
not only for the quality of our wireless coverage products but also for the quality of the
installation service. We therefore effectively take the credit and workmanship risks of these
independent contractors. To the extent our independent contractors fail to install our products
properly, we will be liable to cure the defects. We usually contract our initial installation work
to those contractors located near the project sites for cost efficiency reasons. If any of the
local contractors becomes unavailable and we are not able to find any suitable replacement, we will
be forced to use contractors located farther away from the project sites. This is likely to delay
our projects or increase our project costs. It is also possible that we may not be able to find
suitable replacements at all to complete our project installations on schedule. In each case, our
business would be harmed, and our reputation would be adversely affected if we fail to find the
appropriate third party contractors to carry out the initial installation.
We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss
or misappropriation of, or disputes over, our intellectual property
Our ability to compete successfully and to achieve future revenue growth will depend, in
significant part, on our ability to protect our proprietary technology and operate without
infringing upon the intellectual property rights of others. The legal regime in China for the
protection of intellectual property rights is still at its early stage of development. Intellectual
property protection became a national effort in China in 1979 when China adopted its first statute
on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and
Copyright Law and promulgated related regulations such as Regulation on Computer Software
Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on
Internet Domain Names. China has also acceded to various international treaties and conventions in
this area, such as the Paris Convention for the Protection of Industrial Property, Patent
Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of
Marks. In addition, when China became a party to the World Trade Organization in 2001, China
amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of
Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made
by China over the years with a view to tightening up its regulation and protection of intellectual
property rights, private parties may not enjoy intellectual property rights in China to the same
extent as they would in many Western countries, including the United States, and enforcement of
such laws and regulations in China have not achieved the levels reached in those countries. Both
the administrative agencies and the court system in China are not well-equipped to deal with
violations or handle the nuances and complexities between compliant technological innovation and
non-compliant infringement.
We rely on trade secrets and registered patents and trademarks to protect our intellectual
property. We have also entered into confidentiality agreements with our management and employees
relating to our confidential proprietary information. However, the protection of our intellectual
properties may be compromised as a result of:
•
departure of any of our management members or employees in possession of our confidential
proprietary information;
•
breach by such departing management member or employee of his or her confidentiality and
non-disclosure undertaking to us;
•
expiration of the protection period of our registered patents or trademarks;
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•
infringement by others of our proprietary technology and intellectual property rights; or
•
refusal by relevant regulatory authorities to approve our patent or trademark applications.
Any of these events or occurrences may have a material adverse effect on our operations. There
is no assurance that the measures that we have put into place to protect our intellectual property
rights will be sufficient. As the number of patents, trademarks, copyrights and other intellectual property rights in our industry increases, and
as the coverage of these rights and the functionality of the products in the market further
overlap, we believe that business entities in our industry may face more frequent infringement
claims. Litigation to enforce our intellectual property rights could result in substantial costs
and may not be successful. If we are not able to successfully defend our intellectual property
rights, we might lose rights to technology that we need to conduct and develop our business. This
may seriously harm our business, operating results and financial condition, and enable our
competitors to use our intellectual property to compete against us.
Furthermore, if third parties claim that our products infringe their patents or other
intellectual property rights, we might be required to devote substantial resources to defending
against such claims. If we are unsuccessful in defending against such infringement claims, we may
be required to pay damages, modify our products or suspend the production and sale of such
products. We cannot guarantee that we will be able to modify our products on commercially
reasonable terms.
If we lose certain government tax concessions, our profitability may be materially and adversely
affected.
Shenzhen GrenTech Co., Ltd., or Shenzhen GrenTech, is our principal operating subsidiary in
China. Shenzhen GrenTech and one of our indirect majority-owned subsidiaries, Shenzhen Lingxian
Technology Co., Ltd., or Shenzhen Lingxian, were recognized by Shenzhen municipal tax authorities
as newly established production-oriented enterprises in 2000 and 2002, respectively. According to
the relevant September 1988 regulation issued by the Shenzhen municipal government, such status and
accompanying tax concessions are granted to all newly established enterprises in Shenzhen engaged
in industrial, agricultural, transportation and other production-oriented businesses that have an
expected corporate existence of over 10 years. These enterprises are exempt from 100% of their
corporate income tax for each of the first and second profitable years and 50% of their corporate
income tax for each of the following three years. In addition, advanced technology enterprises
recognized by the Shenzhen municipal government may continue to enjoy a 50% reduction in their
corporate income tax for a further three years. As newly established production-oriented
enterprises, both Shenzhen GrenTech and Shenzhen Lingxian were exempt from PRC corporate income tax
for the first two profitable years from January 1, 2001 to December 31, 2002 for Shenzhen GrenTech
and from January 1, 2002 to December 31, 2003 for Shenzhen Lingxian. The companies were subject to
a reduced tax rate of 7.5% for the three financial years from January 1, 2003 to December 31, 2005
for Shenzhen GrenTech and from January 1, 2004 to December 31, 2006 for Shenzhen Lingxian. Because
Shenzhen GrenTech was recognized by Shenzhen municipal government as an advanced technology
enterprise in December 2004, Shenzhen GrenTech applied for and was granted on December 13, 2005 an
extension of its 50% relief from income tax for an additional three-year period commencing from
January 1, 2006 and ending on December 31, 2008. Shenzhen Lingxian is currently applying for
recognition as an advanced technology enterprise. If we receive the government approval, Shenzhen
Lingxian will be subject to the 50% relief from income tax rate for the three financial years
commencing from January 1, 2007 to December 31, 2009.
Although we have the right to apply for advanced technology enterprise recognition and
extension of our tax exemption, there is no assurance that Shenzhen Lingxian will receive such
recognition and approval in due course, or that any of the current tax exemptions that we enjoy
will be extended upon their expiration. Without extension of the tax relief period, Shenzhen
Lingxian will be subject to the corporate income tax rate generally applicable to enterprises
established in the Shenzhen Special Economic Zone.
On March 16, 2007, the National People's Congress of the PRC passed the Enterprise Income Tax
Law, which will take effect as of January 1, 2008. In accordance with the enterprise income tax
law, a unified enterprise income tax rate of 25%, a unified deduction measure and standard and
unified tax preferential treatment will be applied to both foreign invested and domestic
enterprises and an income tax rate of 15% will be provided to advanced technology enterprises
recognized by the government authorities. The new law also provides for transitional measures for
enterprises established prior to the promulgation of the new law and eligible for lower tax rate
preferential treatment in accordance with the then prevailing tax laws and administrative
regulations. These enterprises will gradually become subject to the new, unified tax rate over a
five-year period; enterprises eligible for regular tax reductions or exemptions may continue to
enjoy tax preferential treatments after the implementation of the new law and until their
preferential treatment expire. The preferential treatment period of enterprises which have not
enjoyed any preferential treatments for the reason of not having made any profits, however, shall
be deemed as starting from the implementation of the new law. In addition, foreign companies
headquartered in China may be classified as PRC resident enterprises and their worldwide income may
be subject to tax under the new law. Given that the new law has been promulgated only recently,
its implementation has yet to be further clarified in practice. Moreover, our historical operating
results may not be indicative of our operating results for future periods as a result of the
expiration of the tax holidays we enjoy.
If our customers increasingly provide their own equipment or accessories instead of ordering
them from us, our ability to generate revenues to sustain our business or support our growth may be
materially and adversely affected
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Our wireless coverage products often include, among other things, various accessories such as
cables and antennas for installation. In 2004, 2005 and 2006, accessories included as a part of our
product sales accounted for approximately 29.8%, 26.4% and 33.9% of our revenues, respectively. In
2003, some of our customers began to procure accessories on their own and exclude accessories from
our wireless coverage products. This practice effectively reduced our revenues. We lost revenues
from sale of accessories from our wireless coverage products in 2004, 2005 and 2006 by RMB24.4
million, RMB20.4 million and RMB20.0 million, or 4.3%, 2.8% and 2.4% of our revenues, respectively.
If customers continue to choose to procure their own accessories, our ability
to generate revenues to sustain our business or support our growth may be materially and adversely
affected. Similarly, the new procurement policy adopted by China Mobile during the fourth quarter
of 2006 may result in lower revenues for us from certain product offerings. For more details, see
"Risk Factors—Risks Relating to Our Company—Changes in the procurement policies by our major
customers may adversely affect our profit margin on our wireless coverage products."
If our idle or insufficient production capacity significantly increases during any particular
period, our results of operations for that period may be materially and adversely affected
We plan the utilization of our production capacity primarily based on our projected orders
from our customers. We cannot guarantee the accuracy of our internal projections for demands of our
products and the effectiveness of our planning for production capacity utilization. For example, we
currently have 16 assembly lines in Shenzhen with a monthly production capacity of 2,400 sets of
wireless coverage products and 15,000 sets of RF parts and components for base stations. We also
have six assembly lines in Quanzhou with a monthly production capacity of 18,000 sets of RF parts
and components. Our actual average monthly production at the Shenzhen facility in 2006 amounted to
approximately 2049 sets of wireless coverage products and 10,000 sets of RF parts and components
for base stations; and our actual average monthly production at the Quanzhou facility in 2006
amounted to approximately 10,700 sets of RF parts and components. It costs approximately RMB1.3
million (US$0.2 million) to add or remove an assembly line for wireless coverage products, and
approximately RMB4.3 million (US$0.5 million) to add or remove an assembly line for RF parts and
components. Therefore, if our projections are inaccurate, there may be periods when we will have
idle or insufficient production capacity for all or some types of our products. For example,
demands for our base station RF parts and components exceeded our projections in 2006. We were
limited by our production capacity and unable to fill all orders. Any significant increase in our
idle or insufficient production capacity during any particular period may materially and adversely
affect our results of operations for that period.
Our operations may be adversely affected by shortages of raw materials and the volatility in the
prices of raw materials.
We purchase raw materials such as various electronic components, metal cases for modules and
wireless coverage products, electronic cables, packaging materials and other accessories. In
order to meet our production delivery schedules, we must obtain sufficient quantities of high
quality raw materials in a timely manner. In this respect, we do not enter into long-term
contracts with our suppliers of raw materials. As a result, our operations are vulnerable to
changes in the supply and prices of raw materials. For example, in the third quarter of 2006, the
cost of coaxial cables rose as a result of increases in copper prices, which in turn led to a
reduction of 1.6% in the gross profit margin of our products incorporating coaxial cables.
No assurance can be given that we will be able to obtain sufficient quantities of raw
materials in the future and no assurance can be given that our operations will not be adversely
affected by increases in prices of raw materials.
If we fail to acquire raw materials on time or on acceptable terms and consequently fail to fill
our customers' orders in a timely and cost-effective manner, our business operations may be
materially and adversely affected
We rely on third-party suppliers for our raw materials. Although we purchased raw materials
from over 460 suppliers in 2006, our ten largest suppliers in 2006 supplied approximately 32.9% of
our orders for raw materials. If any of our major suppliers fails to deliver our required raw
materials in time for our production, and we are unable to find the required raw materials from
other suppliers in a timely manner and on acceptable terms, there will be a delay in our provision
of products and services to our customers. Such delays would damage our relationship with our
customers and may materially and adversely affect our business operations.
We maintain limited insurance coverage and any significant product liability claim could have a
material and adverse effect on our financial condition
We currently do not maintain any product liability insurance for our products and services,
nor do we carry any business interruption insurance, third-party liability insurance for personal
injuries, or environmental damage insurance for environmental emissions or accidents on our
properties or relating to our operations. There is no assurance that there will not be any product
liability claims against us in relation to our RF products. Furthermore, we cannot assure you that
we will not experience any major accidents in the course of our operations, which may cause
significant property damage and personal injuries. The occurrence of any such accidents and their
consequential losses may not be adequately covered, or at all, by our insurance policies. Losses
incurred, or payments we may be required to make, may have a material and adverse effect on our
financial condition.
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The interest of our principal shareholders may differ from your interest and their vote may
disadvantage our minority shareholders
Since
the completion of our initial public offering in March 2006, several of our current principal
shareholders continue to be our largest shareholders with the following equity interests in our
company as of the date of this annual report:
•
Guoren Industrial with 24.0%;
•
Heng Xing Yue Investments Limited, or HXY Investments, with 18.3%; and
•
Drag Investments with 10.3%.
In addition, two of our principal shareholders, Mr. Gao and Professor Zhuang, who beneficially
own 24.0% and 10.3%, respectively, of our company immediately upon completion of our initial public
offering, are our chairman and chief executive officer, and our director and chief technology
officer, respectively. They will be able to exercise substantial control over our business by
voting at shareholders' meetings or board meetings on matters of significance, such as:
•
composition of our board of directors;
•
selection of our senior management;
•
amount and timing of dividends and other distributions;
•
our overall strategic and investment decisions;
•
issuance of securities and adjustment to our capital structure;
•
amendment to our memorandum and articles of association; and
•
other corporate actions requiring approval of our shareholders, including election and
removal of directors, merger, consolidation or sale of our assets, or any other change of
control event that may benefit our other shareholders generally.
The interest of any of these principal shareholders may differ from your interest. There is no
assurance that any of these principal shareholders will vote in a way that benefits you. If
circumstances arise in which the interest of any of these principal shareholders conflicts with the
interest of other holders of our shares or ADSs, you as a minority shareholder could be
disadvantaged.
The major shareholder of one of our consolidated PRC subsidiaries has a veto right on some matters
under PRC law and may vote his shares or exercise his veto right in a manner adverse to our
interests
Professor Zhuang, our director and chief technology officer, together with his son, is the
20%-shareholder of one of our consolidated PRC subsidiaries, Quanzhou Lake Microwave Co., Ltd., or
Lake Microwave. Conflict of interests between his duties to, and interest in, our company and our
consolidated subsidiary may arise. We cannot assure you that, when any conflict of interest arises,
Professor Zhuang will act completely in our interest or that any conflict of interest will be
resolved in our favor. Also, under PRC law, minority shareholders of foreign-invested joint
ventures, such as Lake Microwave, have veto power on certain issues such as share transfer, capital
increase and amendment to their articles of association. We cannot assure you that Professor Zhuang
will not exercise his influence over Lake Microwave in a manner that may conflict with our interest
or that he will not vote his shares or exercise his veto right in a manner adverse to our
interests.
Our primary source of funds for dividend and other distributions from our operating subsidiary in
China is subject to various legal and contractual restrictions and uncertainties, and our ability
to pay dividends or make other distributions to our shareholders is negatively affected by those
restrictions and uncertainties
We are a holding company established in the Cayman Islands and conduct our core business
operations through our principal operating subsidiary, Shenzhen GrenTech, in China. As a result,
our profits available for distribution to our shareholders are dependent on the profits available
for distribution from Shenzhen GrenTech and its subsidiaries. If Shenzhen GrenTech or its
subsidiaries incur debt on their own behalf, the debt instruments may restrict their ability to pay
dividends or make other distributions, which in turn would limit our ability to pay dividends on
our shares and ADSs. Under current PRC law, because we are incorporated in the Cayman Islands, our
PRC subsidiary, Shenzhen GrenTech, is regarded as a wholly foreign-owned enterprise in China.
Although dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises
and sino-foreign joint ventures, are not subject to any PRC corporate withholding tax, PRC law
permits payment of dividends only out of net income as determined in accordance with PRC accounting
standards and regulations. Determination of net income under PRC accounting standards and
regulations may differ from determination under U.S. GAAP in significant aspects, such as the use
of
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different principles for recognition of revenues and expenses. In addition, if any
undistributed profits of our PRC subsidiary, Shenzhen Grentech, are used to increase its registered
capital so that our equity interests in our PRC subsidiary are increased, approval of the PRC
government is required. Under PRC law, Shenzhen GrenTech, a wholly foreign-owned enterprise, is
required to set aside a portion of its net income each year to fund designated statutory reserve
funds. These reserves are not distributable as cash dividends. As a result, our primary internal
source of funds for dividend payments from Shenzhen GrenTech is subject to these and other legal
and contractual restrictions and uncertainties, which in turn may limit or impair our ability to
pay dividends to our shareholders. Moreover, any transfer of funds from us to Shenzhen GrenTech,
either as a shareholder loan or as an increase in registered capital, is subject to registration
with or approval by PRC governmental authorities. These limitations on the flow of funds between us
and Shenzhen GrenTech could restrict our ability to act in response to changing market conditions.
Some of our production and research and development facilities and offices are situated on
properties under short-term leases or with defective titles and our operating costs may increase if
we are not able to renew the existing leases or if such leases can only be renewed on less
favorable terms
The production and research and development facilities of Shenzhen GrenTech and Shenzhen
Lingxian are currently situated on properties leased from independent third parties. They occupy an
aggregate gross floor area of approximately 5,213.5 square meters. Our leases for these facilities
range from one to two years in original lease terms and are due to expire between June 2007 and
December 2007. Our total rental payment for these leased properties in 2006 was approximately
RMB6.3 million (US$0.8 million).
We are in the process of constructing our new research and production facilities in Shenzhen
High Technology Industrial Park, which is expected to be completed by December 2007 or shortly
thereafter. Upon completion of the construction, we expect to relocate our existing facilities
from the leased premises to Shenzhen High Technology Industrial Park. Even though the
construction of our new facilities in Shenzhen High Technology Industrial Park has been on
schedule, we may experience construction delays, in which case we will need to renew our leases
with short notice. We have no assurance that the leases will be renewed on terms and conditions
that are acceptable to us
.
If these leases cannot be renewed, we will have to find other
appropriate premises. Although our equipment and machinery may be relocated without undue financial
difficulties, such relocation may disrupt our current operations or otherwise have an adverse
effect on our financial condition. Alternatively, if the existing leases can only be renewed on
less favorable terms, our operating costs will increase and thus our results of operations could be
adversely affected.
For some of the properties leased by us for office use, we are unable to ascertain whether or
not their respective landlords have valid title to them or legal rights to lease them. If the
relevant leases become invalid for any reason and we have to relocate to other office premises, we
may incur additional costs and expenses and experience business disruptions as a result.
Investor confidence and market price of our ADSs may be adversely impacted if we or our independent
registered public accountants are unable to attest to the adequacy of the internal controls over
our financial reporting as of December 31, 2007, as required by Section 404 of the U.S.
Sarbanes-Oxley Act of 2002
We are subject to the reporting requirements of the U.S. Securities and Exchange Commission,
or SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules
requiring public companies such as ourselves, to include a report of management of their internal
control structure and procedures for financial reporting in their annual reports on Form 10-K or
Form 20-F, as the case may be, that contain an assessment by management of the effectiveness of
their internal controls over financial reporting. In addition, independent registered public
accountants of these public companies must attest to and report on management's assessment of the
effectiveness of their internal controls over financial reporting. These requirements will first
apply to our annual report on Form 20-F for the fiscal year ending on December 31, 2007. Our
management may not conclude that our internal controls over financial reporting are effective.
Moreover, even if our management does conclude that our internal controls over financial reporting
are effective, if our independent registered public accountants are not satisfied with our internal
control structure and procedures, the level at which our internal controls are documented,
designed, operated or reviewed, or if the independent registered public accountants interpret the
requirements, rules or regulations differently from us, they may decline to attest to our
management's assessment or may issue a report that is qualified. Any of these possible outcomes
could result in an adverse reaction in the financial marketplace due to a loss of investor
confidence in the reliability of our financial statements, which could negatively impact the market
price of our ADSs.
Risks Relating to Our Industry
Our business might become subject to new regulatory restrictions, which may restrict the way in
which we conduct our business and subject us to severe penalties, and we may be materially and
adversely affected by any change in the composition of the primary telecommunication operators in
China
We are subject to regulation by PRC law with respect to the products we manufacture and sell
in China. We must obtain regulatory approvals from the national and local government authorities
before we may manufacture and sell our products. MII is the primary central government agency
responsible for regulating the PRC wireless communication industry and has broad
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discretion and authority to regulate our industry in China. Introduction of any new
transmission protocol will require the approval of MII and other regulatory bodies. MII has
adopted, and may adopt in the future, regulations that impose stringent standards on the wireless
communication industry in China, with which we must comply. New regulations or readjustment of
previously implemented regulations could require us to change our business plan, increase our costs
or limit our ability to sell our products or services. Our failure to comply with these regulations
may subject us to various penalties, including fines and suspension or discontinuation of our
operations. Therefore, enactment by the PRC government of new laws or regulations or a change in
the interpretation of existing laws or regulations may also materially and adversely affect our
business.
The PRC government has considerable control over the structure and overall development of the
telecommunication industry in China. It also maintains substantial ownership in all major
telecommunication operators in China. Prior to 1994, PRC government-controlled entities held a
monopoly over the telecommunication networks across China. In order to introduce competition into
the telecommunication industry, the PRC government in 1994 separated China's telecommunication
business into four independent sectors: fixed-line, wireless, satellite and paging. In 2002, the
PRC government further separated the then China Telecom group into two companies along geographical
boundaries, with the portion in southern China as the current China Telecom group and the northern
portion as the current China Netcom group. In early 2005, the PRC government decided to swap some
of the senior management members among China's largest telecommunication operators. In mid-2005,
there was speculation among industry analysts, as well as comments by some senior officers of
China's largest telecommunication operators, regarding a potential restructuring of the PRC
wireless communication industry in advance of the issuance of 3G licenses. According to some
commentators, the PRC government believes that there are too many national wireless operators to
receive 3G licenses. If these market speculations prove to be true and the PRC government
reorganizes, splits or merges one or more of China's main telecommunication operators, including
our two principal group customers, the China Unicom group and the China Mobile group, such
restructuring could disrupt our existing relationship with our current customers and result in
changes in supplier and sourcing policies of these companies, all of which have been critical to
our business growth and profitability.
Risks Relating to Business Operations in China
Changes in China's political and economic policies and conditions could cause a substantial decline
in the demand for our products and services
Historically, we derived almost all of our revenues from a single market, mainland China. We
anticipate that mainland China will continue to be our primary production and sales base in the
near future and currently almost all of our assets are located in China and all of our services are
performed in China. While the PRC government has pursued economic reforms to transform its economy
from a planned economy to a market-oriented economy since 1978, a large part of the PRC economy is
still being operated under varying degrees of control by the PRC government. By imposing industrial
policies and other economic measures, such as restrictions on lending to certain sectors of the
economy, control of foreign exchange, taxation and restrictions on foreign participation in the
domestic market of various industries, the PRC government exerts considerable direct and indirect
influence on the development of the PRC economy. Many of the economic reforms carried out by the
PRC government are unprecedented or experimental and are expected to be refined and improved. Other
political, economic and social factors may also lead to further adjustments of the PRC reform
measures. This refining and adjustment process may not necessarily have a positive effect on our
operations and our future business development. For example, the PRC government has in the past
implemented a number of measures intended to slow down certain segments of the PRC economy that the
government believed to be overheating, including placing additional limitation on the ability of
commercial banks to make loans by raising bank reserve-against-deposit rates. Our operating results
may be materially and adversely affected by changes in the PRC economic and social conditions and
by changes in the policies of the PRC government, such as measures to control inflation, changes in
the rates or method of taxation and the imposition of additional restrictions on currency
conversion.
Changes in foreign exchange regulation in China may affect our ability to pay dividends in foreign
currencies
We currently receive all of our operating revenues in Renminbi. Currently, Renminbi is not a
freely convertible currency and the restrictions on currency exchanges in China may limit our
ability to use revenues generated in Renminbi to fund our business activities outside China or to
make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion
of Renminbi into foreign currencies. Over the years, the PRC government has significantly reduced
its control over routine foreign exchange transactions under current accounts, including trade- and
service-related foreign exchange transactions, foreign debt service and payment of dividends. In
accordance with the existing foreign exchange regulations in China, our PRC subsidiary, Shenzhen
GrenTech, is able to pay dividends in foreign currencies, without prior approval from the PRC State
Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The
PRC government may, however, at its discretion, restrict access in the future to foreign currencies
for current account transactions and prohibit us from converting our Renminbi-denominated earnings
into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay us dividends in
foreign currency without prior approval from SAFE. In addition, conversion of Renminbi for most
capital account items, including direct investments, is still subject to government approval in
China and companies are required to open and maintain separate foreign exchange accounts for
capital account items. This restriction may limit our ability to invest earnings of Shenzhen
GrenTech.
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Fluctuation in the value of Renminbi could adversely affect the value of, and dividends payable on,
our shares and ADSs in foreign currency terms
The value of Renminbi is subject to changes in PRC government policies and depends to a large
extent on China's domestic and international economic, financial and political developments, as
well as the currency's supply and demand in the local market. For over a decade from 1994, the
conversion of Renminbi into foreign currencies, including the U.S. dollar, was based on exchange
rates set and published daily by the People's Bank of China, the PRC central bank, based on the
previous day's interbank foreign exchange market rates in China and exchange rates on the world
financial markets. The official exchange rate for the conversion of Renminbi into U.S. dollars
remained stable until Renminbi was revalued in July 2005 and allowed to fluctuate by reference to a
basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi was be
permitted to fluctuate within a band against a basket of foreign currencies. As a result, as of May
1, 2007, the Renminbi has appreciated approximately 7.4% against the U.S. dollar since July 2005.
There remains significant international pressure on the PRC government to adopt a substantially
more liberalized currency policy, which could result in a further and more significant appreciation
in the value of Renminbi against the U.S. dollar. Further revaluations of Renminbi against the U.S.
dollar may also occur in the future. Since our income and profits are denominated in Renminbi, any
appreciation of Renminbi would increase the value of, and any dividends payable on, our shares and
ADSs in foreign currency terms. Conversely, any depreciation of Renminbi would decrease the value
of, and any dividends payable on, our shares and ADSs in foreign currency terms.
The uncertain legal environment in China could limit the legal protections available to you
The PRC legal system is a civil law system based on written statutes. Unlike the common law
system, the civil law system is a system in which decided legal cases have little precedential
value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and
regulations to provide general guidance on economic and business practices in China and to regulate
foreign investment. Our PRC subsidiary, Shenzhen GrenTech, is a wholly foreign-owned enterprise and
is subject to laws and regulations applicable to foreign investment in China in general and laws
and regulations applicable to wholly foreign-owned enterprises in particular. China has made
significant progress in the promulgation of laws and regulations dealing with economic matters such
as corporate organization and governance, foreign investment, commerce, taxation and trade.
However, the promulgation of new laws, changes of existing laws and abrogation of local regulations
by national laws may have a negative impact on our business and prospects. In addition, as these
laws, regulations and legal requirements are relatively recent and because of the limited volume of
published cases and their non-binding nature, the interpretation and enforcement of these laws,
regulations and legal requirements involve significant uncertainties. These uncertainties could
limit the legal protections available to foreign investors, including you. For example, it is not
clear if a PRC court would enforce in China a foreign court decision brought by you against us in
shareholders' derivative actions.
Moreover, the enforceability of contracts in China, especially with governmental entities, is
relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations,
we might not have adequate remedies. Such uncertainties or inability to enforce our contracts could
materially and adversely affect our revenues and earnings.
Outbreak of SARS or other epidemics could materially and adversely affect our overall operations
and results of operations
From March to July 2003, mainland China, Hong Kong, Singapore, Taiwan and some other areas in
Asia experienced an outbreak of a new and contagious form of atypical pneumonia known as severe
acute respiratory syndrome, or SARS. Our operating results for 2003 were adversely affected by this
outbreak. A recurrent outbreak, or an outbreak of a similarly contagious disease, such as the H5N1
avian flu, could potentially disrupt our operations to the extent that any one of our employees is
suspected of having the infection or that any of our facilities is identified as a possible source
of spreading the virus or disease. We may be required to quarantine employees who are suspected of
having an infection. We may also be required to disinfect our facilities and therefore suffer a
suspension of production of indefinite duration. Any quarantine or suspension of production at any
of our facilities will adversely affect our overall operations. In addition, any such outbreak will
likely restrict the level of economic activities in the affected areas, which could materially and
adversely affect our business and results of operations.
Recent regulations relating to offshore investment activities by PRC residents may limit our
ability to acquire PRC companies and adversely affect our business and prospects
In October 2005, SAFE issued a circular concerning foreign exchange regulations on investments
by PRC residents in China through special purpose companies incorporated overseas. The circular
states that, if PRC residents use assets or equity interests in their domestic entities as capital
contribution to establish offshore companies or inject assets or equity interests of their PRC
entities into offshore companies to raise capital overseas, such PRC residents must register with
local SAFE branches with respect to their overseas investments in offshore companies and must also
file amendments to their registrations if their offshore companies experience material events, such
as changes in share capital, share transfer, mergers and acquisitions, spin-off transactions or use
of assets in China to guarantee offshore obligations. Our shareholders have completed the relevant
SAFE registration procedures as currently required.
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As it is uncertain how SAFE will interpret or implement its circular, we cannot predict how
this circular and other SAFE circulars will affect our business operations or future strategies.
For example, we may be subject to more stringent review and approval process with respect to our
foreign exchange activities, such as remittance of dividends and foreign currency-denominated
borrowings, which may adversely affect our business and prospects.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT
Our legal and commercial name is China GrenTech Corporation Limited. Our principal executive
offices are located at 16th Floor, Zhongyin Tower, Caitian North Road, Futian District, Shenzhen
518026, People's Republic of China. Our telephone number is (86-755) 83501796. Our registered
offices are located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman
KY1-1111, Cayman Islands. We have appointed CT Corporation System, 111 Eighth Avenue,
13
th
Floor, New York, New York 10011, United States of America, with telephone number
1-212-894-8940, as our agent for service of processes for actions brought under the U.S. securities
laws.
The diagram below illustrates our current corporate structure:
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(1)
The remaining 1% interest in Shenzhen Lingxian is owned by Ms. Xiujun Zhang, an employee of
ours.
(2)
The remaining 20% interest in Lake Communication is owned by Mr. Haifan Zhuang, son of
Professor Zhuang.
(3)
The remaining 20% interest in Lake Microwave is owned by Lake (Hong Kong) Technology Limited,
an affiliated company of Professor Zhuang.
We were incorporated on December 3, 2003 in the Cayman Islands as an exempted company with
limited liability under the Cayman Islands Companies Law. We hold, through our wholly owned
subsidiary, GrenTech (BVI) Limited, or GrenTech BVI, 100% of the equity interest of Shenzhen
GrenTech. Shenzhen GrenTech was formed on July 5, 1999 by Mr. Gao and Professor Zhuang, as a
domestic limited liability company in China. Subsequent to our incorporation, we converted Shenzhen
GrenTech into a wholly foreign-owned enterprise under PRC law in order to benefit from various tax
and other incentives available to foreign-invested enterprises in China.
Since our inception in 1999, we have been focused on the development and application of our RF
technologies for commercial uses. In 2000, we produced and commercialized our first integrated
repeater. In 2001, we began the testing of CDMA repeaters, which we subsequently began selling to
the China Unicom group later that year. In 2003, we completed our first PHS network coverage
project. In March 2007, we were among the first PRC enterprises to obtain relevant government
approvals for the development and production of TD-SCDMA repeaters and trunk amplifiers.
We conduct our business in China through our indirect wholly-owned subsidiary, Shenzhen
GrenTech, and our other indirect majority-owned subsidiaries:
•
Shenzhen Lingxian;
•
Lake Communication; and
•
Lake Microwave.
Shenzhen Lingxian
Shenzhen Lingxian was formed in February 2002 by Shenzhen GrenTech as a domestic limited
liability company in China. Shenzhen Lingxian purchases RF parts and components from Lake
Communication and manufactures semi-finished repeaters for Shenzhen GrenTech. As of December 31,
2005, we owned 99% of the equity interest in Shenzhen Lingxian and Ms. Xiujun Zhang, one of our
employees, owned the remaining 1% equity interest.
Lake Communication
Lake Communication was formed in August 1989 by Mr. Haifan Zhuang, son of Professor Zhuang, as
a collectively owned enterprise in China and was subsequently converted and registered as a limited
liability company in 1999. Lake Communication specializes in RF part and component production. In
order to strengthen our production capabilities, Shenzhen GrenTech acquired an 82% equity interest
in Lake Communication in December 1999. In November 2003, Shenzhen GrenTech disposed of an
aggregate 10% equity interest in Lake Communication as part of the consideration for its
acquisition of the equity interest in Lake Microwave, described below, and acquired an additional
8% equity interest in Lake Communication. As of December 31, 2006, we indirectly owned an 80%
equity interest in Lake Communication and the remaining 20% equity interest in Lake Communication
was owned by Mr. Haifan Zhuang. As of December 31, 2006, substantially all of the RF parts and
components produced at Lake Communication were purchased by Shenzhen Lingxian for use in its
production of semi-finished repeaters.
Lake Microwave
Lake Microwave was formed in March 1993 by Lake Microwave Communication Equipment Co., Ltd. as
a Sino-foreign equity joint venture. Lake Microwave focuses on the research and development of RF
technologies, including the design and development of RF integrated circuits and other new RF
technologies. It also produces RF parts and components exclusively for sale to third party
purchasers. To strengthen our expertise in RF integrated circuits and RF technology, Shenzhen
GrenTech acquired a 51% equity interest in Lake Microwave in November 2003, and in June 2004
GrenTech BVI acquired a 29% equity interest in Lake Microwave. As of December 31, 2006, we
indirectly owned 80% of the equity interest in Lake Microwave and the remaining 20% equity interest
of Lake Microwave was owned by Lake (Hong Kong) Technology Limited, an affiliated company of
Professor Zhuang. Lake Microwave primarily produces the RF parts and components we use for sale to
wireless operators, wireless communication equipment manufacturers and other providers of wireless
coverage products and services.
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BUSINESS
Overview
We are a leading provider of wireless coverage products and services in China. We believe that
we are also a leading developer of radio frequency, or RF, technology in China. RF is the
fundamental technology that enables wireless communication products to transmit and receive
signals. Our core research and development efforts in RF technology and our integrated design,
engineering and production processes have allowed us to design, develop and produce in-house our
two main product lines, namely, (1) wireless coverage products, which are supplied to
telecommunications operators, and (2) base station RF parts and components, which are supplied to
base station equipment manufacturers.
We have a strong in-house RF technology research and development capability. Our team of 468
researchers and technicians with extensive experience in the wireless communication industry in
China are based in Shenzhen and Quanzhou. We have 23 registered patents and 36 pending patent
applications with the Patent Office of the National Intellectual Property Office of China. Our RF
expertise has provided a platform from which we intend to further broaden our product offerings.
Our integrated development, engineering and production capabilities provide us with a distinct
competitive advantage over our competitors in China by allowing us to quickly respond to customized
design requests from our customers while keeping down our production costs.
Our wireless coverage products enable telecommunication operators to expand the reach of their
wireless communication networks to areas with little or weak coverage, such as buildings, highways,
railways, tunnels and remote regions. Our wireless coverage products include indoor coverage
products and outdoor coverage products, as well as base station coverage extension products. To
date, we have developed over 200 models of wireless coverage equipment. We provide most of our
wireless coverage products and services to local affiliates of the two leading wireless operators
in China, the China Unicom group and the China Mobile group. Since 2004, we have also provided a
portion of our wireless coverage products and services to the China Netcom group and the China
Telecom group. According to Infosage Analysis, we were the second largest provider of wireless
coverage products and services in China in 2006 with an estimated market share of 15.6%. In recent
years, the wireless coverage market in China has benefited from increased capital expenditures by
PRC wireless operators. Further, the capital expenditures of the wireless coverage industry in
China is expected to reach RMB5.6 billion in 2007, RMB5.9 billion in 2008 and RMB6.2 billion in
2009, according to Infosage Analysis. We believe that the increasing capital expenditures will
afford us an opportunity to grow our revenues in the wireless coverage market.
Our RF parts and components are supplied to base station equipment manufacturers. These
customers use our RF parts and components in their base station manufacturing. To date we have
become a qualified supplier of RF parts and components to six major domestic and foreign base
station manufacturers, which are Huawei Technologies Co., Ltd, ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Siemens AG Communications and
TD-Tech Ltd. We have developed over 20 types of base station RF modules. Since 2006 we have begun
supplying base station RF modules to Alcatel Shanghai Bell Co., Ltd, ZTE Corporation and Siemens AG
Communications in bulk quantities. With rising production costs incurred by base station equipment
manufacturers, more foreign base station equipment manufacturers have chosen to procure base
station RF parts and components mainly in China in order to reduce their costs. We believe the
demand for base station RF parts and components will grow rapidly and our revenues from base
station RF modules will become a major revenue contributor for us in coming periods.
Our revenues were RMB566.5 million in 2004, RMB716.3 million in 2005 and RMB832.8 million
(US$106.7 million) in 2006. Our gross profit was RMB324.6 million in 2004, RMB388.2 million in
2005 and RMB395.8 million (US$50.7 million) in 2006. Our net income was RMB146.6 million in 2004,
RMB181.4 million in 2005 and RMB148.8 million (US$19.1 million) in 2006. Our operating income
increased from RMB207.5 million in 2004 to RMB225.0 million in 2005 and RMB179.2 million (US$23.0
million) in 2006, with operating income margins of 36.7% in 2004, 31.4% in 2005 and 21.5% in 2006.
Our Wireless Coverage Products and Services
Our principal business is the provision of wireless coverage products and services in China
with our self-developed RF technology. In 2004, 2005 and 2006, revenues generated from the
provision of wireless coverage products and services accounted for approximately 94.2%, 95.5% and
95.3% of our revenues, respectively.
Wireless Coverage Products
We produce a wide range of wireless coverage products, including repeaters, trunk amplifiers,
base station amplifiers, tower amplifiers and related accessories. The principal functions of
wireless coverage products are to extend wireless coverage and improve radio signal quality. Our
wireless coverage products support various transmission protocols, including CDMA, GSM, PHS and
digital trunk communications. We have completed our research and development for various 3G network
coverage products. In 2006, Our TD-SCDMA repeaters and trunk amplifiers passed the joint trials
conducted respectively by several base station manufacturers, namely, Datang Mobile Communications
Equipment Co., Ltd, China Putian and TD Tech Ltd, with
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satisfactory results. We participated in the formulation of TD-SCDMA repeater standard by
China Telecommunication Technology Labs, or CTTL, and wireless coverage network management standard
by China Mobile group. In March 2007, we were among the first PRC enterprises to obtain relevant
government approvals for the development and production of TD-SCDMA repeaters and trunk. We have
been selected to build wireless coverage systems for the 2008 Beijing Olympics, which we expect
will further enhance our brand image and strengthen our business relationship with China Mobile
group.
We use our wireless coverage products in three principal function areas: indoor distribution,
outdoor coverage and base station coverage extension. We provide a customized solution for each
project, taking into account factors such as existing coverage of the base stations, target
coverage requirements, unique geographic and topographic features of the vicinity and other
project-specific conditions.
Indoor Coverage.
In order to achieve effective coverage and distribution in indoor
environments, such as high-rise buildings, underground areas and elevators, we use antennas,
couplers, trunk amplifiers, repeaters and other accessories to construct a complete indoor coverage
distribution system that enables evenly distributed emissions of radio signals from the base
stations to cover the entire facility. Our indoor coverage products support various transmission
protocols, such as CDMA and GSM networks (1,800 MHz and 900 MHz), PHS, TD-SCDMA and other networks.
We also provide point of interface, or POI, products that are capable of supporting multiple
protocols simultaneously, which offers effective coverage platform solutions in subways, indoor
stadiums and other large indoor facilities.
Outdoor Coverage.
We design our outdoor coverage products to provide wireless coverage in
specified geographic and topographic regions. Depending on the particular coverage requirements,
our outdoor coverage products may consist of antennas and repeaters and other accessories to
transmit and extend radio signals from base stations to blind and weak spots or areas where network
coverage does not exist or is weak. Our outdoor coverage products are typically used in areas such
as highways, railways, subways and tunnels.
Base Station Coverage Extension.
Our base station coverage extension products are typically
attached to base stations. We use base station amplifiers and tower amplifiers to extend a base
station's coverage in all its surrounding directions or to increase its coverage distance in
designated directions. Our base station coverage extensions are typically used in remote outdoor
environments, such as rural regions, seashores and mountainous areas.
Our Services
Our integrated design, engineering and production processes allow us to provide wireless
coverage services to our customers. The services we provide include:
Design Services.
At the outset of each project, our design team implements a series of tests
to evaluate our customer's specific network coverage on the project site and identify any network
deficiencies. These tests include magnetic environment, base station signals and coverage tests.
Once the testing is complete, our design team, working closely with our sales and marketing team,
which is familiar with the customer and its needs, prepares and submits a detailed design plan to
our customer for the proposed wireless coverage products and services. This process allows us to
develop solutions that are tailored to each specific customer's requirements. Upon finalization of
our design plan, our customer confirms their instructions to proceed with the product development,
engineering and installation.
Installation of Wireless Coverage Products.
Once we receive confirmation for the design plan
from our customer, we proceed with product development and engineering, and begin discussions with
the property owner or the manager of the building, in collaboration with our customer, to arrange
the installation of the wireless coverage products. After we engineer, produce and assemble the
products, we deliver them from our production facility to the project site. In general, we hire
third-party contractors to carry out the initial installation under the supervision of our project
design and technical service team. We use more than 100 contractors across China, all of whom are
independent third parties. After completion of the initial installation process and the connection
of our products to the customers' base stations, we test the system to evaluate its performance and
make adjustments to optimize its functionality. We test the products at the customer's premises to
ensure that they function properly before our customer issues the completion certificate. After the
issuance of the completion certificate, the inspection of our installed wireless coverage products
begins with further testing of our products by our customer.
Project Warranties.
We provide service warranties to our wireless coverage customers for a
period typically ranging from one to three years following the final inspection of our wireless
coverage products. During the warranty period, we agree to repair or replace defectively installed
products and to provide other warranty services to our customers, such as a centralized
Internet-based system to monitor the performance of our wireless coverage products and regular
on-site inspections of our installed wireless coverage products. In addition, we provide other
warranty services such as online technical support and telephone hotline support to our customers.
Our objective is to respond to our customers within 24 hours after receipt of any technical support
request.
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Our Sales Cycle
The sales cycle for our wireless coverage products can be divided into the following phases:
Bidding Process.
Our nationwide sales and marketing team actively pursues business
opportunities across all provinces and municipalities in China. The process begins when a wireless
operator requests proposals from us for wireless coverage products and services. After we complete
a preliminary evaluation of the project, including its feasibility and profitability, we submit
bids to the potential customer. In this bidding process, we typically compete with a number of
national, regional and local wireless coverage product and service providers. Historically, our
bids include price quotations with detailed breakdowns by equipment components and service
components. Warranty and maintenance are directly related to the equipment components.
China Mobile group, in an effort to shift to a more centralized procurement model in order to
encourage more competitive pricing, announced during the fourth quarter of 2006 that it was going
to adopt a new procurement policy whereby the bidding processes for wireless coverage equipment and
for services will be separately conducted, and procurement decisions made by the parent company and
local affiliates, respectively. Under the new policy, providers of wireless coverage products such
as ourselves may not win the bid for the servicing contracts even after winning the bid for
equipment contracts, or vice versa. This change in China Mobile's overall procurement policy may
cause us to lose revenue with respect to any single wireless coverage project if we cannot win both
equipment contract and service contract for the project.
Wireless operators in China select the winning bid based on a number of factors and
considerations, including:
•
pricing;
•
overall financial strength and operational scale;
•
research and development capabilities;
•
quality of products in terms of performance, functionality and reliability;
•
proposed payment schedule; and
•
range and standards of services to be provided, including after-sale services.
Typically, wireless operators in China request that bids also include the following terms:
•
specifications contained in customers' bid invitations;
•
quality control and random inspection of products;
•
operational manuals and staff training; and
•
other commercial terms, such as delivery, packaging, insurance and spare parts.
If we win the bid, the operator generally issues a written letter of acceptance. Occasionally,
the operator gives us verbal notice only. The design, engineering, implementation and installation
stages begin after the operator confirms our winning bid. Despite our industry practice, according
to the PRC Law on Invitation and Submission of Bids and the PRC Contract Law, a letter of
acceptance issued by the bid-inviting party or a verbal confirmation of acceptance by the
bid-inviting party, together with its bid invitation materials and our bid-tendering materials,
constitutes a legally binding contract between the bid-inviting party and the winning bidder. We
believe that, upon the acceptance of our bid by our customers, we have a legally enforceable right
against our customers as a matter of contract law. However, we have not had any disputes to date
with our customers in respect of any of our successful bids confirmed verbally or in writing by our
customers.
Initial Inspection of Installed Wireless Coverage Products.
After completion of the
installation process, we test the system to evaluate its performance and make adjustments to
optimize its functionality. Upon completion of the installation of our wireless coverage products
for a project, we require our customer to issue a completion certificate to confirm completion of
the initial installation. We are often engaged in a number of projects with one customer at the
same time. To reduce the administrative burden of managing multiple projects, our customers often
group projects together and issue completion certificates for all the projects at the same time,
resulting in the delay of receipt of completion certificates until the completion of the last
project.
Contract Signing.
The current industry practice in China is to formally sign a sale and
purchase contract after the initial installation of wireless coverage products on a project, with
confirmation of completion of the initial installation evidenced through the issuance of a
completion certificate by our customer. Although the design plan sets out the number and details of
products to be used for a specific project, the actual number of products used in general varies
due to the actual circumstances
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encountered and can only be confirmed after the completion of the initial installation. Our
sale and purchase contracts, which do not follow a single form, specify, among other things, the
specific type of wireless products used, pricing terms, product warranty terms, quality
specifications, penalty provisions for late delivery and payment terms. While our contracts with
particular customer groups typically contain similar terms, contractual terms vary significantly
from customer group to customer group.
Additional Inspection and Warranty Period.
After the issuance of the completion certificate,
the inspection of our installed wireless coverage products starts, by which our customer performs a
further testing of our wireless coverage products for a project. Often, our contracts do not
specify the date by which an inspection must be performed. Sometimes, the inspection may be delayed
by as long as six to 12 months after issuance of the completion certificate. When our project
passes the inspection, our warranty period begins. Most of our customers conduct two inspections
prior to the beginning of the warranty period. The second inspection usually occurs six to 12
months after the initial inspection. Some of our customers conduct one inspection before the
warranty period begins.
Payment.
Our sale and purchase contracts generally provide for a fixed price and permit our
customers to pay in installments upon the occurrence of contractually stipulated payment events
during the sales cycle. Contractual terms for the installment payments vary between our customers.
Typical payment events include delivery of our products, signing of the sale and purchase contract,
satisfactory preliminary inspection, satisfactory final inspection and expiration of our warranty
period. At the occurrence of each payment event, customers are generally required to pay a
percentage of the contract price. Although the typical payment terms are up to 30 days after the
occurrence of each payment event, customers may not promptly pay the installment and generally take
longer to make the payment. For more details on payment from our customers, please see "Item 5.
Operating and Financial Review and Prospectus—Liquidity and Capital Resources—Accounts Receivable
and Receivable Selling."
Selected Completed Projects
We completed 8,413 projects in 2004, 9,429 projects in 2005 and 10,539 projects in 2006. The
following list represents select wireless coverage projects for the three years ended December 31,
2006. These projects demonstrate different applications of our wireless coverage products, such as
for office buildings, shopping centers, hotels, airports, highways, tunnels and scenic areas, as
well as different geographic locations.
Project
Location
Customer
Completion date
Indoor coverage
Shangri-La Hotel Chengdu
Chengdu
China Unicom group
September 2006
Jiangbei District Court
Jiangbei District
China Telecom group
September 2006
Hulunbei'er Hospital
Hulunbei'er
China Mobile group
April 2006
ER Hill Rest Home
Inner Mongolia
China Mobile group
December 2005
East Asia Sports Meet Stadium
Macau
China Unicom group
August 2005
The People's Bank of China Building
Beijing
China Telecom group
November 2004
Shanghai World Trade Shopping Mall
Shanghai
China Telecom group
October 2004
China Mobile group's Beijing Communication Center
Beijing
China Mobile group
May 2004
Outdoor coverage
Haila'er Airport
Hulunbeier
China Mobile Group
October 2006
Vanke City Garden Residential Area
Dalian
China Unicom group
December 2005
Base station coverage extension
Wenzhou Nanlu Island Seafront coverage
Zhejiang
China Mobile group
August 2005
Wantoubu Ocean
Guangxi
China Unicom group
June 2004
Jinding Lake
Beijing
China Mobile group
May 2004
Our RF Parts and Components
In addition to the provision of wireless coverage products and services, we also develop,
manufacture and supply RF parts and components for base stations and repeaters. RF parts and
components are essential building blocks for all forms of wireless communication products. They
provide the fundamental channel for transmitting and receiving radio signals. RF parts and
components can be classified into active and passive modules. Active modules contain electronic
components such as transistors and diodes and require external power to operate. Their principal
functions are to amplify and alter radio signals. Passive modules do not contain any electronic
components. They rely on a combination of integrated circuits and magnetic fields emitted by their
components to function. Their principal functions are to filter, combine and split RF signals. We
produce both active and passive modules.
Our active modules include high-linear RF power amplifiers, low-noise amplifiers,
frequency-hopping modules and high-stability/low-phase noise vibrators. Among our active modules,
we believe that our RF power amplifiers are distinguished by their high linearity and power
efficiency standards.
Our passive modules include filters, duplexers, multi-frequency splitters, combiners and
couplers and antenna. Compared to traditional filters, our patented filters are able to generate a
more powerful electromagnetic force with which to transmit
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microwave signals and are capable of significantly reducing the level of external and internal
interference that disrupts wireless transmissions.
Base Station RF Parts and Components
Since the fourth quarter of 2005, we have focused on developing base station RF parts and
components. RF parts and components are major building blocks of base station and also the most
crucial step in the manufacturing of base stations. Its costs account for more than 50% of the
overall production costs of base stations. We believe the shifting of procurement for base station
RF parts and components to China has become a trend and will accelerate the demand for base station
RF parts and components in China, from which we expect to benefit. Since 2006 we have begun
supplying base station RF modules to Alcatel Shanghai Bell Co., Ltd, ZTE Corporation and Siemens AG
Communications in bulk quantities. We expect that revenues from base station RF modules to become a
major revenue contributor for us in coming periods.
Production of RF parts and components is a complex process which involves the following
procedures:
•
We first go through stringent certification processes to become a certified supplier of
base station equipment manufacturers. Each equipment manufacturer has its unique
certification process, the principal conditions of which include production capacity,
management efficacy, quality control, environment protection, and overall reputation. To
date we have been certified by six major base station equipment manufacturers.
•
We next obtain technology certification from our equipment manufacturer customers and
conduct product development according to the customer specifications. All of our RF
products and components are customized for each client's unique specifications.
•
We then provide samples for certification by our base station equipment manufacturer
customers. We have to date developed more than 20 types of RF modules and RF subsystem
products for various equipment manufacturer customers.
•
Finally, we obtain purchase orders with trial quantities and if our customers are
satisfied with the trials, we will proceed to bulk production.
Repeater RF Parts and Components
The majority of the repeater RF parts and components that we produce are used in the
manufacture of our own repeaters. In 2003, we began to sell a portion of our repeater RF parts and
components to other repeater equipment manufacturers. Our RF parts and components support a wide
range of communication protocols including CDMA, GSM, PHS, TD-SCDMA, WCDM and other wireless
communication protocols.
Production
Production Facilities
We have production facilities in Shenzhen and Quanzhou. We plan the utilization of our
production capacity based on projected orders from customers for our wireless coverage products and
RF products.
As of December 31, 2006, the production capacity and utilization rate of our Shenzhen and
Quanzhou production facilities were as follows:
Production facilities
Type of products
Capacity
Utilization
(sets per month)
(sets per month)
Shenzhen
Wireless coverage products
2,400
2,049
RF parts and components
for base stations
15,000
10,000
Quanzhou
RF parts and components
for repeaters
18,000
10,700
Shenzhen Production Facilities.
Our facilities in Shenzhen of Guangdong Province have 16
production lines for the manufacture of various wireless coverage products and base station RF
parts and components.
Quanzhou Production Facilities.
Our Quanzhou production facilities have six production lines,
which principally produce various components of RF parts and components for repeaters. They are
located in Lake Scientific and Technological Park, Quanzhou, Fujian Province.
Production Process
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Our integrated design, engineering, production and quality control capabilities enable us
to customize products to meet specific customer requirements and to increase production
efficiencies. To minimize component costs and enable us to implement our low cost strategy, we
produce our RF parts and components with our own low-cost proprietary production process and rely
on strict control of our production process. In addition, our production personnel are intensively
involved in product design to ensure that production considerations are addressed early in the
design process and to minimize the number of products that fail to meet our quality control
standards.
Our production processes may be divided into two primary categories and consist of numerous
individual steps throughout the entire process. The categories include (1) production of our RF
parts and components, and (2) production of wireless coverage products with our own RF parts and
components. The production process for our RF parts and components may be generally divided into
the following steps:
•
integrated circuit board processing;
•
covering and welding;
•
manufacturing and assembly;
•
testing; and
•
quality control.
Most of our completed RF parts and components for repeaters are used in the production of our
wireless coverage products. We sell our base station RF module directly to equipment
manufacturers. The general steps for the production of our wireless coverage products are wiring,
assembly, functional testing and quality control. After the completion of the wireless coverage
products, we install the products according to the design plans approved by our customers.
Production is highly labor intensive as it involves manual labor to assemble the modules and
products. In order to produce high-quality and precise products that meet our customers'
specifications, we employ highly skilled labor. We combine various production equipment, such as
spectrum analyzers, signal generators and vector network analyzers, according to our manufacturing
process technologies to produce our modules and products. Only a small portion of our production
processes, including integrated circuit board processing and covering and welding, is automated.
Quality Control
We place considerable emphasis on quality control. We adhere to a strict system of quality
control over our operations, from sourcing of raw materials to production, packaging and inventory
storage to sale, delivery and installation. We have established various quality-control checkpoints
at different stages of our production process to closely monitor the quality of our production and
to ensure that our products meet all our internal benchmarks and customers' specifications. In
2000, we were ISO9001-certified for our research and development, production and quality control
processes at our research and development facilities as well as at our production facilities in
Shenzhen and Quanzhou. We have also developed and now bulk produce base station RF modules that
are in compliance with the European Union's ROHS national enforcement body, which means that
products that we manufacture contains the agreed levels of lead,
cadmium, mercury and
other chemicals.
These RF modules are incorporated into base stations that are sold in Europe.
Quality Control for Raw Materials.
We purchase raw materials only from suppliers on our
approved vendor list and only those suppliers that pass our assessment are admitted to our approved
vendor list. Our staff in the purchasing department assess various aspects of a supplier, including
its overall ability, technical capability, quality control over its production process and its
financial health. In some cases, our customers require us to purchase raw materials from their
approved list of suppliers. In such event, suppliers designated by our customers are also subject
to our assessment and approval. Raw materials, upon delivery, are subject to incoming inspection by
our quality control team. Raw materials that fail to pass our incoming inspection are returned to
the suppliers. Suppliers who experience repeated returns are removed from our approved vendor list.
Raw materials provided by our customers' designated suppliers are also subject to the same incoming
inspection procedures.
Quality Control During Production.
At various stages of the production process, semi-finished
products are tested to ensure their quality and compliance with all internal production benchmarks
before proceeding to the next stage of the production process.
Final Testing Before Delivery.
Following completion of the production process, our products
are inspected and tested thoroughly to ensure that all customers' specifications are met before our
products are delivered.
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Testing at Customer Site.
After completion of the installation process, we test the wireless
coverage products to evaluate its performance and make adjustments to optimize its functionality.
Our customers will also perform further testing of our wireless coverage products after
installation.
Warranty.
For our wireless coverage products, we usually provide warranties for one to three
years following the final inspection by our customers. During the warranty period, we are
responsible for any quality defects in our products. For our RF parts and components, our customers
will examine our products and are entitled to return any RF parts and components that do not comply
with their prescribed specifications at the time of delivery. We also provide warranty ranging
from one to three years during which period we provide free repairs for returned products with
quality defects.
We have established a dedicated technical service team that provides after-sale services
principally to our wireless coverage customers. Our goal is to ensure that we deal with inquiries
and complaints of our customers in a prompt and satisfactory manner. In cases where customers
report defects of our products during our warranty period, we send technical staff to our
customers' sites to carry out repairs at no cost to the customers. We do not, however, maintain any
product liability insurance. For a discussion on the risks associated with our lack of product
insurance coverage, please refer to "Item 3. Key Information—Risk Factors—Risks Relating to Our
Company—We maintain limited insurance coverage and any significant product liability claim could
have a material and adverse effect on our financial condition."
Research and Development
We have strong in-house RF technology research and development capabilities. As of December
31, 2006, our in-house research and development team had 468 engineers and technicians from the
wireless communication industry in China. Our key research and development experts have over 10
years of experience each in the telecommunication industry. We have two research and development
facilities located in Shenzhen and Quanzhou. Our research and development activities focus on new
generation RF core technology, new product development, functionality enhancement and manufacturing
process improvement.
RF Technology
RF is the fundamental technology that enables wireless telecommunications products to transmit
and receive signals. Our capabilities span a wide range of RF technologies, covering the complete
radio frequency from 350 MHz to 50 GHz. Our technology allows our RF-based wireless coverage
products to support a wide range of communication protocols including CDMA, GSM, PHS, 3G and
digital trunk communications. We have made significant innovations in a number of core RF
technologies, particularly those relating to filters and power amplifiers. Our filters are able to
generate a more powerful electromagnetic force with which to transmit microwave signals and
significantly reduce the level of external and internal interference that disrupts wireless
transmissions. Our RF power amplifiers are distinguished by their high linearity and power
efficiency standards.
In our efforts to commercialize our RF technology, we have formulated several of our own
design and development standards, including those relating to filters, power amplifiers, antennas
and next-generation RF integrated circuits and multiple chip module technologies. In response to
the industry demand for production of small volumes of a large variety of RF parts and components,
we have developed our own production techniques, such as an automatic covering technique, which
manufactures these products in a more efficient manner. Furthermore, we are developing an automatic
testing platform that enables us to conduct various tests throughout our production process. In
addition, in the course of our research and development, we have accumulated a database of basic
testing data, and have established our own integrated circuit board format, design technique, and
testing and adjustment techniques.
We devote substantial resources to the development of RF integrated circuits and multiple chip
module technologies, which are regarded as new generation RF technologies. We believe that the
trend in wireless communications is toward the use of higher frequency bandwidth and compact
multi-functional individual wireless communication devices. In light of this trend, we are actively
conducting research to explore possible ways to miniaturize our RF parts and components by using RF
integrated circuits and multiple chip module technologies. RF integrated circuits products are
integrated circuits that perform the same functions as RF parts and components. RF integrated
circuits will be further integrated into multiple chip module components to produce new generation
RF parts and components. Multiple chip module components are substantially more compact in size as
compared to current forms of RF parts and components.
Research and development expenditures for each of the three years ended December 31, 2006 were
RMB16.3 million, RMB30.6 million and RMB47.7 million (US$6.1 million), respectively, representing
approximately 2.9%, 4.3% and 5.7% of our revenues and 13.9%, 18.8% and 22.0% of our total operating
expenses, respectively.
Research and Development Facilities
We have two research and development facilities located in Shenzhen and Quanzhou. Our
Shenzhen-based research and development facility primarily focuses on the development of
fundamental RF technologies, wireless network coverage products
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and base station RF products. Our Quanzhou-based research and development facility focuses on
the research of RF integrated circuits and multiple chip module technology and repeater RF modules.
Sales, Marketing and Key Customers
Sales and Marketing Team
As of December 31, 2006, we had 362 sales and marketing professionals located across China in
28 offices covering 30 provinces and municipalities. We require our sales and marketing
professionals to undergo extensive and ongoing training to constantly refresh their product
knowledge and to keep them apprised of the latest trends and developments in the PRC wireless
communication industry. Through the efforts of our sales and marketing team over the past few
years, we became, as reported by Infosage Analysis, the second largest supplier of wireless
coverage products and services in China in 2006.
Because of the technical nature of our product offerings, we emphasize close collaboration
between our sales and marketing team and our project design and technical service team in order to
provide optimal service to our wireless coverage customers. As of December 31, 2006, we had 743
engineers and technicians on our project design and technical service team servicing these
customers. These professionals perform network testing and evaluation, formulation of design plan
and implementation of wireless coverage projects. We also rely on them for after-sale technical
services to our wireless coverage customers.
We also have a dedicated sales and marketing team for equipment manufacturer customers of our
RF parts and components, all 14 members of which have extensive technical knowledge and are
familiar with customer specifications and demands. They are also responsible for providing
after-sale technical services to our equipment manufacturer customers.
In order to encourage our sales and marketing team to pursue new business opportunities, we
offer incentive bonus programs that pay performance-based, year-end cash bonuses.
Pricing
The PRC market for wireless coverage products and services and other RF products is highly
price-sensitive. In our business, prices tend to vary based on a number of factors, including:
•
type, quantity and composition of RF products;
•
internal target gross margin objectives;
•
region in which the products are sold; and
•
current market conditions, including the prevailing prices offered by our competitors.
We typically participate in bidding to win orders for our products. We determine our pricing
primarily on the basis of the above listed factors, with appropriate consideration given to the
size of transaction and the significance of the business opportunity to our growth. We impose
minimum requirements internally for gross profit margins in our bidding processes. We believe that
economies of scale in our operations, coupled with our proprietary RF technologies and our
integrated design, development, engineering and production processes, allow us to price our
products and services competitively.
Key Customers
Our two largest customers are the China Unicom group and the China Mobile group. Since 2004,
we have also provided wireless coverage products and services to the China Telecom group and the
China Netcom group. The following table sets forth our revenues attributable to our sales to the
China Unicom group, the China Mobile group, the China Telecom group and the China Netcom group in
absolute terms and as a percentage of our revenues for the periods specified:
Year ended December 31,
2004
2005
2006
(RMB)
(%)
(RMB)
(%)
(RMB)
(US$)
(%)
(in millions, except for percentages)
Wireless coverage products:
China Unicom group
345.8
61.0
%
322.9
45.1
%
298.7
38.3
35.9
%
China Mobile group
157.3
27.8
241.6
33.8
277.1
35.5
33.3
China Telecom group
19.3
3.4
69.5
9.7
89.2
11.4
10.7
China Netcom group
8.2
1.5
36.8
5.1
69.2
8.9
8.3
Overseas customers
—
—
—
—
10.0
1.3
1.2
Others
3.0
0.5
23.4
3.3
56.6
7.2
6.8
Subtotal
533.6
94.2
%
694.2
97.0
%
800.8
102.6
96.2
%
RF products:
Equipment manufacturers
32.9
5.8
%
22.1
3.1
%
32.0
4.1
3.8
%
Total
566.5
100.0
%
716.3
100.0
%
832.8
106.7
100.0
%
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We interact directly with the local operational units of our national customers in our
day-to-day business operations. The current procurement policies and practices of the China Unicom
group, the China Telecom group and the China Netcom group allow their local operational units
considerable autonomy in choosing their wireless coverage products and services. We typically
contract with these local affiliates for the products and services we provide. In our sales and
marketing and contractual negotiation, we treat each of these local affiliates as separate
customers. With the introduction of the centralized procurement policy by China Mobile group,
purchasing decisions for equipment providers will be made by the national headquarters of China
Mobile group, although we will continue to contract directly with its local operational units after
the decisions are made for equipment procurement.
Although it is our business practice to interact with local affiliates separately, they are,
nevertheless, under the common control of their parent company, and in our customer concentration
analysis, we consider the national group each as a single customer. In some instances, procurement
decisions are made by the parent company, an example of which is the centralized procurement of
wireless coverage equipment by China Mobile group. There have also been instances where decisions
made by one local affiliate affect the decisions of other local affiliates within the national
group.
We intend to further strengthen our relationship with the China Unicom group and the China
Mobile group, and at the same time, further develop relationships with other major
telecommunication operators in China, including the China Telecom group and the China Netcom group.
To accomplish that goal, we have identified specific members of our sales and marketing team as our
dedicated customer relationship contacts to service our existing and potential customers. Our new
marketing efforts began to yield results during the first half of 2004 when we were able to
generate bulk sales from the China Telecom group and the China Netcom group. In that year, we won
an aggregate of approximately 400 PHS network coverage projects from the China Telecom group and
the China Netcom group in over 20 provinces. In 2005, we won an aggregate of 1,149 PHS network
coverage projects from the China Telecom group and the China Netcom group in 24 provinces. In 2006,
we generated approximately RMB89.2 million (US$11.4 million) and RMB69.2 million (US$8.9 million)
from the China Telecom group and the China Netcom group, respectively, accounting for approximately
10.7% and 8.3%, respectively, of our revenues in the year.
For further information about our reliance on the China Unicom group and the China Mobile
group, please refer to "Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We
derive a significant portion of our revenues from the China Unicom group and the China Mobile group
and our revenues could decline significantly if either of them reduces its purchases of, or fails
to pay for, our wireless coverage products and services."
In addition, we have become a qualified supplier of RF parts and components to six major
domestic and foreign base station manufacturers, which are ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Huawei Technologies Co., Ltd,
Siemens AG Communications and TD-Tech Ltd. We have begun bulk production for Alcatel Shanghai Bell
Co., Ltd, ZTE Corporation and Siemens AG Communications in 2006.
Suppliers and Raw Materials
The raw materials used to produce our products mainly include various electronic components,
metal cases for modules and wireless coverage products, electronic cables, packaging materials and
other accessories. We source most of our raw materials inside China except for some electronic
components that are purchased from sales agents of foreign companies in China. We procure raw
materials from companies that have satisfied our supplier review and have been selected through a
competitive bidding process. Base on their products supplied to us, our suppliers are divided into
three categories: core suppliers, major suppliers and general suppliers. We have established
different performance criteria and scope of cooperation for each category of suppliers. All of our
suppliers are subject to stringent review procedures by our team of specialists in supplier
certification, which covers the areas of technology, quality, response time, pricing, environmental
protection and social responsibility. We currently have nine core suppliers for our core
manufacturing processes of mechanical processing, electronic plating and modules. All of these
suppliers are leaders in their respective sectors and have a proven track record of supplying to
globally-renowned companies. In the near future we plan to separate source the supplies of our
research and development projects from those for mass production, streamline the existing
organization of suppliers and establish price management systems, in order to build a company-wide
logistics information platform. In some cases, our customers require us to purchase raw materials
from their approved suppliers. Our raw material purchases are paid in Renminbi and typically have a
credit term of 90 days. As we have an extensive list of suppliers, we do not rely on any single
supplier or group of suppliers to provide any of our raw materials. In 2004, 2005 and 2006,
purchases from our top five raw material suppliers accounted for approximately 25.8%, 29.1% and
19.3% of our total purchases of raw materials, respectively.
Competition
The wireless coverage market in China is very competitive and is characterized by rapid
technological advancements,
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frequent development of new products, and downward pricing trends over the life of a product.
In their requests for proposals, PRC telecommunication operators typically request a complete
analysis and proposal for the design, installation and warranty. The provision of wireless coverage
products and services requires the skills and efforts of a large number of technical personnel to
put together the design plan, to supervise the installation by third parties and to provide
after-sale services. Compared with international providers, PRC domestic providers have the
advantage of having a lower cost base and, as such, currently dominate the market in China.
According to Infosage Analysis, there were more than 70 providers of wireless coverage products and
services in China as of December 31, 2006, compared to 150 as of December 31, 2005. Competition
among these wireless coverage product and service providers over the past five years has resulted
in the emergence of a few dominant players. According to Infosage Analysis, the top three providers
of wireless coverage products and services in China were all PRC companies and included Comba
Telecom Systems Holdings Limited, or Comba, Wuhan Research Institute of Posts and
Telecommunications, or WRI, and us. Together, we accounted for approximately 50% of the total
market share in 2006, with Comba, us and WRI representing 18.9%, 15.6% and 14.3% of the total
market in terms of the contract amount, respectively.
The competitive environment of the PRC wireless coverage market has undergone the following
changes in recent years and, we expect, will continue to experience similar changes:
•
steadily increasing market demand;
•
increasing technical requirements;
•
increasing number of transmission protocols, from GSM and CDMA to other protocols such as PHS and TD-SCDMA;
•
expanding customer base, beginning with the China Mobile group and the China Unicom
group, and now including new entrants, the China Telecom group, the China Netcom group and
others; and
•
increasing anticipation and planning for a potential issuance of 3G licenses and the
triggering of expanded market opportunities that are expected to attract new competitors to
enter into the wireless coverage market.
We believe that the key factors considered by customers when choosing a vendor for wireless
coverage products and services include the vendor's overall capabilities, such as ability to
provide integrated coverage solutions, research and development capability, products quality, scope
and flexibility of product offering, project design and installation capability, after-sale service
capability, pricing, financial strength, as well as the customer's previous experience and
relationships with the vendor. We believe that our in-house RF technology research and development
capability, our fully integrated production capability and our ability to provide integrated
wireless coverage solutions to our customers give us a competitive advantage over our main
competitors, Comba and WRI. On the other hand, we have a shorter operating history than both Comba
and WRI and, therefore, a shorter historical relationship with the China Unicom group and the China
Mobile group relative to them. In order to remain competitive and grow our business, we must
strengthen our relationships with our existing customers, develop relationships with new customers
and expand into new products and markets.
The market for RF parts and components is also competitive in China. We believe the entry
barrier for base station RF modules is higher compared to the entry barrier for wireless coverage
products, because of higher capital requirements, longer development cycles and more stringent
technical requirements. We mainly compete with Andrew Corporation, Radio Frequency Systems,
Powerwave Technologies, Inc., Wuhan Fingu Electronic Technology Co., Ltd. and Mobi Antenna
Technologies (Shenzhen) Co., Ltd. in China.
In the mid- to lower-end market for RF parts and components, we and other suppliers tend to
compete on speed of supply largely because customers in this market sector generally require supply
on short notice. Although overseas manufacturers may have more advanced technologies, they often
lack a sales network and/or sufficient technical support in China. Among domestic manufacturers, we
have a competitive edge due to our strength in RF technology, our low production cost and our
relatively strong financial position. To date we have become a qualified supplier of RF parts and
components to six major domestic and foreign base station manufacturers, which are ZTE Corporation,
Datang Mobile Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Huawei
Technologies Co., Ltd, Siemens AG Communications and TD-Tech Ltd. Although these arrangements will
stabilize our market and incentivize our research and development efforts, we do not expect them to
reduce our research and development expenses.
In addition, China has gradually lifted its import restrictions, lowered import tariffs and
relaxed foreign investment restrictions after its entry into the World Trade Organization in
December 2001. This has led to increased competition from foreign wireless equipment companies,
such as Andrew Corporation, Sagem Communication, Allgon Mobile Communications, Inc. and Powerwave
Technologies, Inc., which are significantly larger and financially stronger than us. Many of our
foreign competitors have established PRC-based manufacturing facilities to lower production costs,
which has further intensified price competition in the marketplace.
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Property
Owned Property
We own the land use rights to the underlying parcel of land for our Quanzhou production
facilities. We own the total site area of approximately 7,591 square meters for a term of 50 years
expiring on August 25, 2054. The site area consists of a gross floor area of 6,149 square meters
and various ancillary structures located at Lake Scientific and Technological Park in Quanzhou City
of Fujian Province in China. We occupy the property for manufacturing, research and office
purposes.
Currently, our research and development and production facilities in Shenzhen are located on
properties leased from independent third parties. However, we intend to move our research and
development and production facilities onto a property that we will own inside Shenzhen High
Technology Industrial Park with a total site area of approximately 19,570 square meters. We
executed the relevant sale and purchase agreement in January 2006 with the Shenzhen land bureau.
Leased Property
We also lease properties for our sales offices as well as for our manufacturing, research and
administrative purposes from time to time. Our leases for the properties shown in the table below
generally have a term of one to four years and are due to expire between July 2006 and October
2009. Under most of our leases, we have a right of first refusal to renew them on similar terms and
for similar periods as the previous contracts. The following table sets forth information of our
leased properties in mainland China as of December 31, 2006:
Use purpose
Total area
(square meters)
Production
3,450.5
Production/Research and development/Office
500.0
Research and development
1,763.0
Warehouse
3,245.0
Office
16,544.6
Total
25,503.1
Our total rental payments in 2006 were RMB16.4 million (US$2.1 million).
Intellectual Property Rights
We rely on copyright, patent, trademark and other intellectual property law, nondisclosure
agreements and technical know-how to protect our intellectual property and proprietary rights. We
have entered into confidentiality and licensing agreements with our employees, suppliers and
distributors. Our senior employees and employees who work in our research and development
department and other technical departments are required to sign agreements acknowledging that we
own the rights to all technology, inventions, trade secrets, works of authorship, developments and
other processes generated in connection with their employment with us or their use of our resources
or relating to our business or our property and that they must assign any ownership rights that
they may claim in those works to us. As substantially all of our business is currently conducted in
mainland China, we have not taken any action outside mainland China to protect our intellectual
property.
As of the date hereof, we have 23 registered patents and 32 pending patent applications with
the Patent Office of the National Intellectual Property Office of China, including our repeaters,
filters and antennas as well as W-LAN technology and products.
We have five registered trademarks, four registered with China's Trademark Office of the State
Administration for Industry and Commerce and one registered in Hong Kong. We have also filed
applications for registration of seven trademarks in China. In addition, we are the registered
owner of the domain name, www.grentech.com.cn. We also own the copyright to the computer software
"GrenTech Complete Internet Business Platform v4.1" which is registered in China and relates to our
wireless coverage product monitoring.
In 2004, 2005 and 2006, we generated revenues of RMB366.4 million, RMB453.6 million and
RMB441.3 million (US$56.5 million), respectively, from the sales of our patented products,
representing 64.7%, 63.3% and 53.0% of our revenues, respectively. We are not aware of any
infringement or unauthorized use of our intellectual property rights. We will take appropriate
legal actions to protect our rights if there is any unauthorized use or infringement of our rights
in the future. To date, we have not been sued for infringement of intellectual property rights by
any third party.
Insurance
We have casualty insurance coverage on our property, our goods in transit, and our employees'
personal risks. We do not have insurance coverage on our other assets, inventories, interruption of
business or product liabilities.
30
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Employees
As of December 31, 2006, we had a total of 2,485 full-time employees. A breakdown of our
employees by function and location as of the same date is set forth below:
Shenzhen
Quanzhou
Total
Management and administrative
349
46
395
Research and development
419
49
468
Production and quality control
323
194
517
Project design and technical service
743
743
Sales and marketing
358
4
362
Total
2,192
293
2,485
In order to maintain quality, knowledge and skill levels of our employees, we place a strong
emphasis on training. We provide training to our employees periodically, ranging from introductory
training for new employees, technical training, performance enhancement training, professional
enhancement training, team-building and communications training.
As required by PRC regulations, we participate in statutory retirement plans organized by the
respective PRC municipal governments in the areas where we operate. We have no obligation beyond
the monthly contributions of 8% to 9% of basic staff salaries. Our contributions to the statutory
retirement plans are charged to the consolidated statement of income as and when incurred. In
addition to the benefits that we are required to provide to our employees pursuant to PRC
regulations, we also provide workplace accident insurance. The total amount of contributions we
made to employee benefit plans in 2004, 2005 and 2006 was RMB4.0 million, RMB8.5 million and
RMB11.7 million (US$1.5 million), respectively.
None of our employees are currently unionized, but they have the statutory right under PRC law
to join or organize workers' unions in China. We have not experienced any significant difficulty in
recruiting employees nor have had any significant staff compensation or labor disputes. We consider
our relations with our employees to be good.
We enter into employment contracts with most of our officers, managers and employees, which
contain a non-compete clause both for the period of their employment with our company and generally
for two years thereafter.
Legal Proceedings
We are not currently a party to any material litigation and are not aware of any pending or
threatened material litigation.
Industry Regulation in China
The PRC government regulates the various aspects of the research, development and production
of radio transmission equipment and installation of wireless coverage equipment in China. MII and
its counterparts in the local governments are the principal regulators of the telecommunication and
related industries in China.
Research, Development and Production of Radio Transmission Equipment
In order to engage in the research and development business for a new type of radio
transmission equipment in China, an entity must file with the Radio Management Bureau of MII In
order to conduct a radio transmission with equipment under research and development, the entity
must set up a temporary station in accordance with relevant regulations for that purpose.
A manufacturer of radio transmission equipment in China must file a product type certificate
and a product type code for its radio transmission equipment with the Radio Management Bureau of
MII. The manufacturer must mark the product type approval code on the labels of its finished
equipment. Without prior authorization from the PRC government, manufacturers may not produce or
sell any model of radio transmission equipment with specifications lower than those required in the
approval certificate. Unless the type of radio transmission equipment has been approved by the
Radio Management Bureau, the manufacturer may not produce, sell, use or advertise such equipment in
China. The manufacturer may, however, produce radio transmission equipment for the export market
without such approval from the Radio Management Bureau.
Connection of Radio Communication Equipment with a Public Telecommunication Network
China has a network access license system to regulate the connection of radio communication
equipment with a public telecommunication network. Without a network access license issued by MII,
radio communication equipment may not be connected to a public telecommunication network or sold in
China. Network access licenses have a term of three years. A manufacturer that wishes to continue
production and sale of radio communication equipment beyond the three-year term may apply to extend
the license for an additional three-year term. The manufacturer must affix the network access
license marks on its
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radio communication equipment as well as on its packaging and advertising materials. The
manufacturer must apply for a new network access license if there is any change to the equipment
that is inconsistent with the scope of the network access license.
Installation of Wireless Coverage Equipment
Installation of wireless coverage equipment constitutes construction work under the
regulations in China. Construction companies are subject to various on-going qualification
requirements and must obtain a construction enterprise qualification certificate from the relevant
authorities in China.
China classifies construction companies into three categories, namely,
•
lead project contractors,
•
specialized contractors, and
•
service subcontractors.
A lead project contractor may carry out the entire project by itself and may subcontract
ancillary work to specialized contractors or service subcontractors. Specialized contractors may
carry out an entire project undertaking alone and may subcontract labor work to service
subcontractors. Service subcontractors may undertake labor work from lead project contractors and
specialized contractors. The PRC regulations impose different qualifications on lead project
contractors, specialized contractors and service subcontractors. Each qualification is further
divided into various grades in accordance with a set of specific criteria.
Qualification certificates of construction companies are subject to the annual review and
renewal. The administrative authorities have the authority to close down companies that undertake
construction projects without proper qualification certificates and to impose a fine of 2% to 4% of
the contract value so involved. Illegal gains so received are also subject to forfeiture. For
companies undertaking projects beyond the permitted scope of their respective quality grading, the
administrative authorities may stop such illegal activities and impose a fine of 2% to 4% of the
contract value so involved. The government may also order offending companies to suspend and
restructure their operations and downgrade their qualifications. Serious offenders may have their
construction enterprise qualification certificates revoked and any illegal gains forfeited.
Our Compliance with Regulations
Shenzhen GrenTech produces, sells and engages in research and development activities relating
to RF technology and other wireless coverage products. Accordingly, Shenzhen GrenTech is required
to obtain and has obtained product type approval certificate and product type approval code for
radio transmission equipment issued by MII.
Shenzhen GrenTech is the only corporate vehicle through which we conduct our business of
wireless coverage products and services. Shenzhen GrenTech has obtained a construction enterprise
qualification certificate and is qualified in China to engage in electronic engineering projects
such as communication and integrated information network projects. We also ensure that all
contractors we select for our installation work have proper construction enterprise qualification
certificates.
Shenzhen Lingxian primarily produces semi-finished RF products, which are not regarded as
communication equipment under PRC law.
Lake Microwave and Lake Communication develop, manufacture and sell RF parts and components,
which are not regarded as communication equipment under PRC law.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
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ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our audited consolidated financial statements and related notes
included in this annual report on
Form 20-F
. The audited consolidated financial statements have
been prepared in accordance with U.S. GAAP. The following discussion and analysis contain
forward-looking statements that involve risks and uncertainties.
OVERVIEW
We are a leading provider of wireless coverage products and services in China. We believe that
we are also a leading developer of radio frequency, or RF, technology in China. RF is the
fundamental technology that enables wireless communication products to transmit and receive
signals. Our core research and development efforts in RF technology and our integrated design,
engineering and production processes have allowed us to design, develop and produce in-house our
two main product lines, namely, (1) wireless coverage products, which are supplied to
telecommunications operators, and (2) base station RF parts and components, which are supplied to
base station equipment manufacturers.
We have a strong in-house RF technology research and development capability. Our team of 468
researchers and technicians with extensive experience in the wireless communication industry in
China are based in Shenzhen and Quanzhou. We have 23 registered patents and 36 pending patent
applications with the Patent Office of the National Intellectual Property Office of China. Our RF
expertise has provided a platform from which we intend to further broaden our product offerings.
Our integrated development, engineering and production capabilities provide us with a distinct
competitive advantage over our competitors in
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China by allowing us to quickly respond to customized
design requests from our customers while keeping down our production costs.
Our wireless coverage products enable telecommunication operators to expand the reach of their
wireless communication networks to areas with little or weak coverage, such as buildings, highways,
railways, tunnels and remote regions. Our wireless coverage products include indoor coverage
products and outdoor coverage products, as well as base station coverage extension products. To
date, we have developed over 200 models of wireless coverage equipment. We provide most of our
wireless coverage products and services to local affiliates of the two leading wireless operators
in China, the China Unicom group and the China Mobile group. Since 2004, we have also provided a
portion of our wireless coverage products and services to the China Netcom group and the China
Telecom group. According to Infosage Analysis, we were the second largest provider of wireless
coverage products and services in China in 2006 with an estimated market share of 15.6%. In recent
years, the wireless coverage market in
China has benefited from increased capital expenditures by PRC wireless operators. Further,
the capital expenditures of the wireless coverage industry in China is expected to reach RMB5.6
billion in 2007, RMB5.9 billion in 2008 and RMB6.2 billion in 2009, according to Infosage Analysis.
We believe that the increasing capital expenditures will afford us an opportunity to grow our
revenues in the wireless coverage market.
Our RF parts and components are supplied to base station equipment manufacturers. These
customers use our RF parts and components in their base station manufacturing. To date we have
become a qualified supplier of RF parts and components to six major domestic and foreign base
station manufacturers, which are Huawei Technologies Co., Ltd, ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Siemens AG Communications and
TD-Tech Ltd. We have developed over 20 types of base station RF modules. Since 2006 we have begun
supplying base station RF modules to Alcatel Shanghai Bell Co., Ltd, ZTE Corporation and Siemens AG
Communications in bulk quantities. With rising production costs incurred by base station equipment
manufacturers, more foreign base station equipment manufacturers have chosen to procure base
station RF parts and components mainly in China in order to reduce their costs. We believe the
demand for base station RF parts and components will grow rapidly and our revenues from base
station RF modules will become a major revenue contributor for us in coming periods.
KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
The following are key factors that affect our financial condition and results of operations.
They are important to the understanding of our business:
Expenditures by Wireless Operators and base station equipment manufacturers
Our business is largely dependent on the demand for our wireless coverage products and services
from wireless operators in China. Accordingly, the amount of wireless network capital expenditures
by our customers, especially our two largest customers, the China Unicom group and the China Mobile
group, has had and will continue to have a material impact on our revenues. In addition, revenues
from the sales of our RF parts and components have accounted for an increasing percentage of our
sales in 2005 and 2006. As a result, we expect the growth in the domestic demand for these products
will continue to drive our revenue growth.
Highly Competitive Market
We operate in a highly competitive and fragmented market. According to Infosage Analysis,
there were over 70 providers of wireless coverage products and services in China as of December 31,
2006. The top three players, including us, accounted in aggregate for approximately 50% of the
total market share in 2006. We also face increasing competitive pressure from domestic and foreign
manufacturers of RF parts and components such as Andrew Corporation, Radio Frequency Systems,
Powerwave Technologies, Inc., Wuhan Fingu Electronic Technology Co., Ltd. and Mobi Antenna
Technologies (Shenzhen) Co., Ltd. We expect competition to intensify as new competitors enter our
markets. In our industry, most of the contracts are awarded through a bidding process and customers
tend to be very price-sensitive. Accordingly, the pricing decisions of our competitors directly
impact our ability to secure contracts to grow our business.
Our Business Practice with Wireless Operators and Its Implication on Our Financial Condition
and Results of Operations
We generally begin working on a wireless coverage project upon winning a bid but before
signing a formal contract. Our customers are not required to pay for our products and installation
services until after the signing of the formal contract, which typically takes place when we
complete the initial installation of the wireless coverage products and our customer issues a
completion certificate. Furthermore, our contracts with wireless operators generally provide a
fixed price and permit them to pay the purchase price in installments upon the occurrence of
various payment events, such as the signing of the contract, issuance of the preliminary and final
inspection certificates and expiration of the warranty period. Our arrangements with our wireless
operator customers are consistent with industry practices in China. As a result of these practices,
an understanding of our revenue recognition policy and accounts receivable cycle is critical to the
understanding of our results of operations.
Revenue Recognition Policy and Accounts Receivable Cycle
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We derive revenues principally from the provision and sale of wireless coverage products and
services and, to a lesser extent, from the sale of RF parts and components.
We recognize revenues when:
•
the risk and rewards are transferred;
•
delivery has occurred;
•
persuasive evidence of an arrangement exists;
•
price to the buyer is fixed and determinable;
•
collectibility is reasonably assured; and
•
we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.
Our wireless coverage product and service contracts each involve multiple service elements,
consisting of delivery of wireless coverage products and installation services. As a result, we
allocate revenues to each element based on the relative fair values of the individual elements,
such as the sale price for the element when it is regularly sold on a stand-alone basis or
third-party price for similar element. We recognize revenues attributable to the delivery of the
wireless coverage products when:
•
our customer has executed and signed a sales and purchase contract;
•
our customer has issued a completion certificate to indicate its acceptance of our products;
•
we have delivered and completed the initial installation of the wireless coverage products at our customer's premises;
•
we have an enforceable legal right to receive the amount attributable to the delivered
products and such right is not contingent upon our customer's issuances of the preliminary
and final acceptance of the installation service; and
•
the risk and reward of ownership and title of the delivered products have been
transferred to our customer.
Revenues attributable to the installation service element of our wireless coverage product and
service contracts is initially deferred and we recognize them only when:
•
we have rendered the services;
•
our customer has issued a preliminary inspection certificate to indicate its preliminary
acceptance of the installation services we have provided;
•
we have an enforceable legal right to receive the amount attributable to the installation
service element of the contract and such right is not contingent upon the issuance by our
customers of the final inspection certificate of the installation service; and
•
our remaining obligation relating to our customer's final inspection and acceptance of
the installation services is considered inconsequential or perfunctory.
Under the payment terms of our contracts and as a customary practice of the wireless coverage
industry in China, we allow our customers to pay the contract amount in installments upon the
occurrence of certain events, such as the signing of the sale and purchase contract and the
issuance of the completion certificate, the issuance of the preliminary inspection certificate, the
issuance of the final inspection certificate, and the expiration of the warranty period. The
installment terms of our contracts range from six months to three years. On a weighted average
basis, under our contracts, we receive approximately 43% of the contract value upon the signing of
the contract and the issuance of the completion certificate, approximately 38% upon the issuance of
the preliminary inspection certificate, approximately 16% upon the issuance of the final inspection
certificate and approximately 3% upon the expiration of the warranty period. To the extent revenue
recognized under a contract is not yet paid, we record it as an account receivable. We record the
portion of the amounts due under our contract payment terms in excess of the revenue recognized as
deferred income, which is included in other payables. We classify amounts due under our contracts
beyond one year as long term accounts receivable and we discount them at the prevailing interest
rate as published by the People's Bank of China, the PRC central bank. We have not experienced any
material credit losses on our wireless coverage product and service contracts. We make provisions
for estimated settlement discounts we may provide to our customers and record them as a reduction
in revenues in the same period when we recognize such revenues. We base our provisioning for
estimated settlement discounts on our best estimate of
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the amount of discounts we may provide to
customers as an incentive to them to promptly settle the contract amounts in light of historical
settlement experience. In addition, we will review our settlement discounts periodically to
ascertain that these settlement discounts are sufficient but not excessive.
Our settlement discounts amounted to RMB1.4 million in 2004. We wrote back RMB6.8 million and
RMB5.1 million (US$0.7 million) in 2005 and 2006 respectively. We sold an aggregate of RMB117.7
million (US$15.1 million) of our accounts receivable to banks in 2006. Our sale of accounts
receivable was with limited-recourse where we receive 100% of the
face value of accounts receivable sold, net of bank fees.
We must, however, keep at the bank a time deposit as a pledge in the amount of 20% of the aggregate
accounts receivable we sold to the bank that remain unsettled by our customers at all times. See "—
Liquidity and Capital Resources — Accounts Receivable and Receivable Selling" for additional
information on our accounts receivable position and our receivable selling arrangements. See "—
Revenues — Provision of Wireless Coverage Products and Services" for additional discussions on our
policy of recognizing wireless coverage products and services revenues. The gap of time between our
recognition of revenues and the occurrence of various payment events has created a long accounts
receivable cycle. The time difference between payment events
typically ranges from six months to three years. In addition, our accounts receivable cycle
can be further lengthened if our customers do not promptly make installment payments upon the
occurrence of the related payment events.
We recognize revenues from the sale of stand-alone RF parts and components when the risk and
reward of ownership and title of these parts and components and products have been transferred to
our customers, which typically coincides with delivery and acceptance of these parts and components
and products by our customers.
Liquidity Concern Arising out of Our Accounts Receivable Cycle and Revenue Cycle
Our contract practice described above has resulted in a significant working capital demand for
the operation of our business. This includes, among other things, a substantial build-up of
inventories, in particular, finished goods, and long accounts receivable cycle. Our revenue cycle
also impacts our liquidity needs. We tend to recognize more revenues and collect most of them
during the fourth quarter of the year. In 2004, 2005 and 2006, our collections in the fourth
quarter constituted 54.5%, 53.0% and 53.8% of our total collections during the respective years.
However, we commence our production and arrange installation of products for a significant number
of projects beginning in the second quarter of a year and typically deliver and install much more
during the third and fourth quarters. As a result of our revenue cycle and our long accounts
receivable cycle, we tend to have more working capital toward the end of the year and the first
part of the subsequent year and tend to have less working capital during the middle part of the
year, especially the third quarter. Our ability to rely on cash generated from our operations to
finance our working capital and other needs of our operations is therefore substantially limited.
Accordingly, we are highly dependent on bank financing and the sale of accounts receivable to fund
our working capital requirements and to support our liquidity. Historically, we have principally
relied on short-term bank loans to finance our working capital needs. As of December 31, 2004,
2005 and 2006, we had an aggregate of RMB164.8 million, RMB160.6 million and RMB336.1 million
(US$43.1 million), respectively, of short-term bank loans outstanding. As of December 31, 2006, we
had an aggregate of RMB479.4 million (US$61.4 million) in short-term bank loans and bills payable
facilities, of which RMB336.1 million (US$43.1 million) in bank loans had been drawn and RMB50.4
million (US$6.5 million) in bills payable had been utilized. As of December 31, 2006, RMB52.8
million (US$6.7 million) in bank loans and RMB40.1 million (US$5.1 million) in bills payable
remained committed but not yet drawn or utilized. In addition, as of the same date, we had accounts
receivable selling arrangements in the aggregate of RMB420.0 million (US$53.8 million), of which
RMB161.8 million (US$20.7 million) had been drawn and RMB258.2 million (US$33.1 million) remained
committed but not yet utilized. Utilization of the unutilized bill payables facilities and account
receivable selling arrangements requires pledge of bank deposit in an amount equal to 30% and 20%
respectively of the amount to be utilized. We expect to continue to rely on bank loans, including
bills payable, and the sale of our accounts receivable to finance our working capital needs as we
grow our business. See "— Liquidity and Capital Resources — Accounts Receivable and Receivable
Selling" for a discussion on our accounts receivable position and our bank borrowing and receivable
selling arrangements.
Significant Quarterly Fluctuations of Our Results of Operations
We have historically generated substantially less revenues in the first quarter of a year. Our
customers usually perform completion inspections, issue completion certificates and sign sale and
purchase contracts with us for the vast majority of our projects in the last two weeks of June and
December each year. This is because our customers generally use the same team to manage different
aspects of a project, including bidding, contracting and payment, and their work is performed in
accordance with their internal annual and semi-annual project management processes. As a result,
our customers prefer performing completion inspections and signing contracts for all installed
projects at the same time. Our principal customers are publicly traded companies and their project
management process is also influenced by their semi-annual reporting obligations. As a result, our
revenues in the first quarter are much less than the second quarter, and our revenues in the third
quarter are much less than the fourth quarter. We have therefore historically reported net losses
in the first and third quarters, reflecting a combination of (1) the increased costs of performing
our ongoing wireless coverage contracts as a result of the growth in volume of contracts and (2)
lower levels of revenues generated during the first and third quarters. In 2004, 1.5%, 41.1%, 8.3%
and 49.1% of our annual revenues were generated in the first, second, third and fourth quarters,
respectively, and we reported net losses of RMB20.7 million and RMB7.7 million in the first and
third quarters, respectively. In 2005, 1.2%, 24.3%, 21.8% and 52.7% of our annual revenues were
generated in the first, second, third and fourth quarters, respectively, and we reported a net loss
of RMB32.3 million in the first quarter. In 2006, 1.8%, 21.6%,
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Table of Contents
22.5% and 54.1% of our annual
revenues were generated in the first, second, third and fourth quarters, respectively, and we
reported a net loss of RMB35.7 million (US$4.6 million) in the first quarter. As the volume of our
contracts grows, we expect to continue to generate losses, particularly in the first quarter when
revenue levels have been historically low. You should read "Item 3. Key Information—Risk
Factors—Risks Relating to Our Company—We historically recognized significantly lower revenues in
the first quarter, which sometimes resulted in net losses in the first quarter, and our revenues
may fluctuate significantly from quarter to quarter in the future, resulting in quarterly net
losses" for additional disclosure.
The following table sets forth our unaudited consolidated statements of income data for each
of the 12 quarters ended December 31, 2006:
Three months ended
March 31,
June 30,
Sept. 30,
Dec. 31,
March 31,
June 30,
Sept. 30,
Dec. 31,
March 31,
June 30,
Sept. 30,
Dec. 31,
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
(in
thousands of RMB)
Revenues
8,624
233,089
46,814
277,977
8,272
173,888
156,042
378,068
14,796
179,976
187,729
450,294
Cost of revenues
(4,144
)
(95,693
)
(19,850
)
(122,243
)
(3,871
)
(73,807
)
(75,915
)
(174,471
)
(6,787
)
(90,505
)
(98,659
)
(241,089
)
Gross profit
4,480
137,396
26,964
155,734
4,401
100,081
80,127
203,597
8,009
89,471
89,070
209,205
Operating expenses:
Research and
development costs
(4,325
)
(3,468
)
(3,842
)
(4,691
)
(5,820
)
(6,935
)
(7,455
)
(10,406
)
(8,393
)
(8,306
)
(13,882
)
(17,090
)
Sales and
distribution expenses
(13,003
)
(16,324
)
(18,594
)
(23,114
)
(19,566
)
(23,078
)
(25,980
)
(22,865
)
(24,138
)
(26,606
)
(25,905
)
(36,299
)
General and
administrative
expenses
(6,847
)
(7,397
)
(7,920
)
(7,580
)
(9,846
)
(9,015
)
(10,407
)
(11,789
)
(11,109
)
(10,967
)
(11,377
)
(22,491
)
Total operating
expenses
(24,175
)
(27,189
)
(30,356
)
(35,385
)
(35,232
)
(39,028
)
(43,842
)
(45,060
)
(43,640
)
(45,879
)
(51,164
)
(75,880
)
Operating income/(loss)
(19,695
)
110,207
(3,392
)
120,349
(30,831
)
61,053
36,285
158,537
(35,631
)
43,592
37,906
133,325
Other (expense)/income
Interest income
463
1,008
924
1,611
583
1,127
371
1,132
859
5,761
8,108
4,458
Interest expense
(6,300
)
(13,016
)
(7,029
)
(13,047
)
(5,438
)
(11,253
)
(10,104
)
(9,310
)
(8,897
)
(6,369
)
(4,063
)
(8,697
)
Investment income
5
894
—
—
—
159
—
—
238
—
—
—
Foreign currency
exchange gain/(loss)
—
—
—
—
—
—
—
5,584
1,101
—
(6,333
)
(4,643
)
Grant income
150
—
100
466
—
100
250
16,382
127
100
—
7,443
Total other
(expense)/income
(5,682
)
(11,114
)
(6,005
)
(10,970
)
(4,855
)
(9,867
)
(9,483
)
13,788
(6,571
)
(508
)
(2,288
)
(1,439
)
Income/(loss) before
income tax
benefit/(expense) and
minority interests
(25,377
)
99,093
(9,397
)
109,379
(35,686
)
51,186
26,802
172,325
(42,202
)
43,084
35,618
131,885
Income tax
(expense)/benefit
4,188
(3,629
)
1,551
(18,130
)
2,728
(7,449
)
(7,093
)
(14,283
)
5,931
(3,583
)
(5,043
)
(15,582
)
Income/(loss) before
minority interests
(21,189
)
95,464
(7,846
)
91,249
(32,958
)
43,737
19,709
158,042
(36,271
)
39,501
30,575
116,303
Minority interests,
net of tax
447
(5,379
)
127
(6,312
)
655
(3,276
)
(1,443
)
(3,022
)
533
(68
)
162
(1,894
)
Net Income/(loss)
(20,742
)
90,085
(7,719
)
84,937
(32,303
)
40,461
18,266
155,020
(35,738
)
39,433
30,737
114,410
Dividends, accretion
to redemption value
and of foreign
currency rate
movements on
mandatorily redeemable
convertible preference
shares
(877
)
(878
)
(877
)
(877
)
(904
)
(903
)
166
(787
)
(909
)
360
—
—
Net Income/(loss)
available to ordinary
shareholders
(21,619
)
89,207
(8,596
)
84,060
(33,207
)
39,558
18,432
154,233
(36,647
)
39,793
30,737
114,410
We anticipate that we will continue to experience significant fluctuations in revenues,
cost of revenues and other results of operations from quarter to quarter during any year if our
wireless communication operator customers continue their current contract practice in the future.
This quarterly fluctuation of revenues and operating results has affected and is likely to continue
to affect our cash flow and working capital positions.
Revenues
We derive our revenues from the provision of wireless coverage products and services and, to a
lesser extent, the sale of RF parts and components. We expect that our revenues attributable to
our RF parts and components will continue to increase in the future as we continue to launch new
products and modules and as we expect the market demand for our parts and components to continue to
grow.
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Table of Contents
The following table sets forth our revenue contribution by revenue source and as a percentage
of our revenues for the periods indicated:
Year
ended December 31,
2004
2005
2006
RMB
%
RMB
%
RMB
US$
%
(in
millions, except for percentages)
Wireless
coverage solutions
Sale
of wireless coverage products
503.9
88.9
%
614.5
85.8
%
679.6
87.1
81.6
%
Installation
services
30.1
5.3
69.3
9.7
108.9
14.0
13.1
RF
parts and components
32.9
5.8
22.0
3.1
32.0
4.1
3.8
(Provision)/write
back for settlement discounts
(1.4
)
(0.2
)
6.8
0.9
5.1
0.6
0.6
Others
1.0
0.2
3.7
0.5
7.2
0.9
0.9
Total
566.5
100.0
%
716.3
100.0
%
832.8
106.7
100.0
%
Provision of Wireless Coverage Products and Services.
The provision of wireless coverage
products and services has historically been the single largest contributor to our revenues, and we
expect this trend to continue in the near future. Our wireless coverage products and services
contracts each involve multiple service elements, consisting of delivery of wireless coverage
products and installation services. Our wireless coverage products include repeaters, trunk
amplifiers, base station amplifiers and tower amplifiers, all of which we develop and manufacture
in-house. Our wireless coverage products also include various accessories such as coaxial cables
and antennas for installation. These accessories are purchased from third-party vendors. In 2004,
2005 and 2006, accessories included as a part of our product sales accounted for approximately
29.8%, 26.4% and 33.9% of our revenues, respectively.
We provide most of our wireless coverage products and services to two major customer groups,
the China Unicom group and the China Mobile group. Since 2004, we have also provided wireless
coverage products and services to PHS networks of the China Telecom group and the China Netcom
group. Despite our efforts to diversify our customer base, we expect the China Mobile group and the
China Netcom group will continue to be our largest revenue contributors in the near future.
Although we do not believe that the telecommunication operators in China will significantly reduce
their investments in wireless coverage products and services in the near future under normal
circumstances, the much reported potential restructurings of the PRC telecommunication industry,
however, could materially disrupt or slow down investment plans of the operators subject to such
restructurings.
Sale of RF Parts and Components.
Our RF parts and components include RF parts and components
for base stations and repeaters. We consume a substantial portion of our repeater RF parts and
components internally for incorporation into our wireless coverage products. In 2003, we began
selling a portion of our repeater RF parts and components to third-party customers, such as
wireless coverage equipment manufacturers and wireless operators. During the fourth quarter of
2005, we begun to develop base station RF parts and components. We are the qualified supplier of
base station RF parts and components to six major domestic and foreign base station manufacturers,
which are ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., Alcatel Shanghai Bell
Co., Ltd, Huawei Technologies Co., Ltd, Siemens AG Communications and TD-Tech Ltd. We have begun
bulk production for ZTE Corporation, Alcatel Shanghai Bell Co., Ltd and Siemens AG Communications
in 2006. Our sales of RF parts and components amounted to RMB32.9 million in 2004, RMB22.0 million
in 2005 and RMB32.0 million (US$4.1 million) in 2006. We recognize revenues from the sale of RF
parts and components at the time of transfer of the risks and rewards of ownership of these
products, which coincides with our delivery of the products and transfer of title.
Cost of Revenues
Our cost of revenues consists of our cost of hardware and cost of related services. Our cost
of revenues increased from RMB241.9 million in 2004 to RMB328.1 million in 2005 and RMB437.0
million (US$56.0 million) in 2006. Our cost of revenues as a percentage of revenues was 42.7%,
45.8% and 52.5% in 2004, 2005 and 2006, respectively. Although we expect unit production cost to
continue to decrease in the future, we expect our cost of revenues as a percentage of revenues to
continue to increase in the near future primarily because we expect that the unit pricing of our
products will decrease as a result of intense market competition, a downward pricing trend over the
life of our maturing products, and an increasing percentage of the lower-margin products in our
overall product mix.
The following table sets forth our cost of revenues contribution by category and as a
percentage of total cost of revenues for the periods indicated:
Year
ended December 31,
2004
2005
2006
RMB
%
RMB
%
RMB
US$
%
(in
millions, except for percentages)
Cost
of hardware
220.4
91.1
%
277.3
84.5
%
352.8
45.2
80.7
%
Cost
of services
21.5
8.9
50.8
15.5
84.2
10.8
19.3
Total
241.9
100.0
%
328.1
100.0
%
437.0
56.0
100.0
%
Cost of Hardware.
Cost of hardware includes our direct cost in manufacturing our wireless
coverage products and RF parts and components, depreciation and amortization, purchase costs of raw
materials and outsourced ancillary products from suppliers and manufacturers, as well as overhead
such as compensation, bonuses and travel expenses of our own engineers and technicians engaged in
the production process of our wireless products. Our cost of hardware also includes allowance for
warranties. We accrue estimated warranty costs that we expect to incur during the warranty periods
when we are required to provide free repair and replacement for defectively installed products. Our
warranties generally extend for a period of 12 months to three years. We determine our allowance
for warranties
38
Table of Contents
charged to expense in 2004, 2005 and 2006 amounted to 1.4%, 1.3% and 0.9%of our revenues,
respectively. Our actual warranty expenditures in 2004, 2005 and 2006 were RMB5.7 million, RMB9.5
million and RMB7.7 million (US$1.0 million), respectively.
Cost of Services.
Our cost of services primarily includes costs that we incur to hire third
parties to install our wireless coverage products.
Operating Expenses
Our operating expenses consist of research and development costs, sales and distribution
expenses and general and administrative expenses. In anticipation of our increased selling efforts,
our increased research and development during the next few years for our base station RF parts and
components, 3G-related products and services and our additional requirements as a public reporting
issuer in the United States, we expect our operating expenses to increase, but we cannot accurately
quantify these increases at this time. The following table sets forth our operating expenses
contribution by category and as a percentage of our total operating expenses for the periods
indicated:
Year
ended December 31,
2004
2005
2006
RMB
%
RMB
%
RMB
US$
%
(in millions, except for percentages)
Research and development costs
16.3
13.9
%
30.6
18.8
%
47.7
6.1
22.0
%
Sales and distribution expenses
71.0
60.6
91.5
56.1
113.0
14.5
52.2
General and administrative expenses
29.8
25.5
41.1
25.1
55.9
7.2
25.8
Total operating expenses
117.1
100.0
%
163.2
100.0
%
216.6
27.8
100.0
%
Research and Development Costs.
These include the remuneration of our research and
development staff, depreciation and maintenance expenses for research and development equipment,
raw material costs and rental costs for premises used for our research and development activities.
Our research and development costs are expensed as incurred. We incur research and development
costs primarily in connection with the development of RF parts and components and wireless coverage
products, including 3G-related products and RF technology. Our research and development costs
accounted for 2.9%, 4.3% and 5.7% of our revenues in 2004, 2005 and 2006, respectively. We expect
our research and development costs to continue to increase as a percentage of revenues in the near
future as we plan to hire additional research and development staff and purchase additional
equipment primarily to develop RF technology and new products.
Sales and Distribution Expenses.
These include marketing and promotion expenses, remuneration
and expenses of our sales staff, the operational expenses of our marketing offices and a portion of
our freight costs. Our sales and distribution expenses accounted for 12.5%, 12.8% and 13.6% of our
revenues in 2004, 2005 and 2006, respectively. We expect our sales and distribution expenses as a
percentage of our revenues to increase in the near future because we intend to develop and expand
our base station RF parts and components, 3G and other new product markets and to extend our market
reach overseas. Our current sales and marketing plans continue to focus on the PRC wireless
operators, especially those expected to use our 3G wireless coverage product offerings. We are also
expending a portion of our marketing resources, including hiring of additional marketing staff, to
increase our sales of RF parts and components to base station equipment manufacturers. We intend to
carefully evaluate the cost and benefit associated with any of our overseas market expansion
activities and do not currently expect any material increases in our sales and distribution
expenses as a result of our overseas expansion plan.
General and Administrative Expenses.
This expense category includes the remuneration of
administrative staff, daily operational expenses, depreciation of fixed assets and allowance for
accounts receivable. Our general and administrative expenses accounted for 5.2%, 5.7% and 6.7% of
our revenues in 2004, 2005 and 2006, respectively. We make allowance for accounts receivable to the
extent that we consider the collection of such accounts receivable to be doubtful. Our accumulated
allowance for doubtful accounts as of each of December 31, 2004, 2005 and 2006 accounted for 0.6%
of our gross accounts receivable. We expect our general and administrative expenses to increase
moderately as a percentage of our revenues in the near future as we hire additional personnel and
incur additional costs in connection with the expansion of our business. We intend to carefully
evaluate the cost and benefit associated with any of our overseas expansion activities and do not
currently expect any material increases in our general and administrative expenses as a result of
our overseas expansion plan. Furthermore, as a public reporting issuer in the United States, we
incurred approximately RMB8.6 million (US$1.1 million) in expenses relating to the improvements to
our internal control procedures in order to achieve compliance with requirements of the
Sarbanes-Oxley Act.
Interest Expense
Our interest expense primarily consists of (1) interest that we incur in bank borrowings, (2)
fees and discount charges incurred in connection with the sale of our accounts receivable, (3)
finance charges we incur on bills financing and (4) interest payable under the exchangeable bonds
issued by several of our ordinary shareholders to our preference shareholders with us as the
guarantor of such bonds. We incurred less interest expense in 2006 compared to 2004 and 2005
because we used a portion of our net proceeds of our initial public offering to fund our working
capital needs. In addition, we were no longer required to accrue interest expense with respect to
the exchangeable bonds as those bonds were exchanged into existing ordinary shares held by our
ordinary shareholders
39
Table of Contents
upon the completion of our initial global offering.
Our bills financing include bills payable issued by us and acceptance drafts issued by our
financing banks in favor of our vendors and suppliers as payments for goods and services we
purchase from them, and bills receivable discount facilities. Our bills payable allow our vendors
and suppliers to receive payments in cash from our banks upon presentation in 30 to 180 days.
Pursuant to our financing arrangements with banks in China, we must pay the amount outstanding
under each bill payable to the bank on or prior to the stipulated presentation date. The aggregate
amount of bills payable that may be outstanding to our credit from time to time is subject to the
total line of credit established in our credit facility agreements with our banks. We negotiate and
renew our bank credit facility agreements with our banks on an annual basis in line with the
current banking industry practice in China.
The table below sets forth the components of our interest expense for the periods indicated:
Year
ended December 31,
2004
2005
2006
(RMB)
(RMB)
(RMB)
(US$)
(in thousands)
Bank loan interest
5,534
9,290
13,709
1,757
Receivable
discounting fee
14,966
11,076
8,666
1,110
Financial
charges on bills financing
4,590
1,043
1,082
139
Interest
on exchangeable
bonds
(1)
13,706
14,117
3,341
428
Others
(2)
596
579
1,228
157
Total
39,392
36,105
28,026
3,591
(1)
In 2003, several of our ordinary shareholders, including Guoren Industrial, HXY Investments
and Drag Investments, issued an aggregate of US$20.7 million of 5% exchangeable bonds to our
preference shareholders, Actis China, Standard Chartered Private Equity and JAFCO, which bonds
are exchangeable into our ordinary shares held by these ordinary shareholders. These
exchangeable bonds are redeemable at an amount equal to their principal amount plus 8%
interest. Because we guarantee the bonds, we have accounted for the interest payment
obligation on the exchangeable bonds as our obligation. These exchangeable bonds were
exchanged into ordinary shares held by our ordinary shareholders upon the completion of our
initial global offering in 2006.
(2)
Others mainly consist of bank fees.
Income Tax Expense
In general, our subsidiaries established in the Shenzhen Special Economic Zone were subject to
an income tax rate of 15% while our subsidiaries established in other areas of China were subject
to an income tax rate of 27% or 33% during the three years ended December 31, 2006. Shenzhen
GrenTech, our principal operating subsidiary, was exempted from the PRC income tax for two years
starting from its first profit-making year after offsetting available tax losses carried forward
from prior years. After the two years of tax exemption, it received a 50% reduction of its regular
income tax liabilities in the three years thereafter. The Shenzhen tax authorities determined that
the first profit-making year of Shenzhen GrenTech was 2001. For the year ended December 31, 2006,
the income tax rate applicable to Shenzhen GrenTech was 7.5%. For more details, see "Item 3. Key
Information—Risk Factors—Risks Relating to Our Company—If we lose certain government tax
concessions, our profitability may be materially and adversely affected."
Minority Interests, Net of Tax
Minority interests, net of tax, represent the portion of our income that is attributable to
the shareholding in our consolidated subsidiaries that we do not own. These subsidiaries include
Shenzhen Lingxian, Lake Communication and Lake Microwave.
Critical Accounting Policies
We prepare financial statements in accordance with U.S. GAAP, which requires us to make
estimates and assumptions that affect the reported amounts of our assets and liabilities, to
disclose contingent assets and liabilities on the date of the financial statements, and to disclose
the reported amounts of revenues and expenses incurred during the financial reporting period. We
continue to evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we believe to be
reasonable under the circumstances. We rely on these evaluations as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies discussed below to
be critical to an understanding of our financial statements as their application assists management
in making their business decisions.
Revenue Recognition.
We derive revenues from the provision of wireless coverage products and
installation services, and, to a
40
Table of Contents
lesser extent, the sale of RF parts and components. We recognize
revenues when we consider the following criteria met:
•
the risk and rewards are transferred;
•
delivery has occurred;
•
persuasive evidence of an arrangement exists;
•
price to the buyer is fixed and determinable;
•
collectibility is reasonably assured; and
•
we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.
Our sale of wireless coverage products is accounted for as a unit of accounting that is
separate from our provision of installation services. Our installation services include initial
installation, connection of the products to the customers' base stations and subsequent testing of
the connection. We recognize revenues from provision of installation services when we have rendered
the services in full and received the preliminary inspection certificate. We generally use our
contracts to determine the existence of an arrangement. We regard our products to be rendered and
accepted upon issuance of the completion certificate, and regard our installation services to be
delivered and accepted upon issuance of the preliminary inspection certificate. Our sale and
purchase contracts are generally fixed-fee arrangements although they permit our customers to
settle the contract sum in installments upon occurrence of various payment events. We assess
collectibility based primarily on the creditworthiness of the customer as determined by our credit
checks and analysis as well as by the customer's payment history.
A wireless coverage product and service contract involves multiple service elements consisting
of delivery of wireless coverage products and the provision of installation services. We allocate
the entire fee from the arrangement to each element based on objectively determined fair value,
such as sale price for the component when it is regularly sold on a stand-alone basis or
third-party price for similar component. In addition, our sale and purchase contracts for wireless
coverage products and services typically contain separate pricing for our products and our
installation services. Changes in the elements of an arrangement and our ability to establish
vendor-specific objective evidence for those elements could affect the timing of our revenue
recognition.
When we recognize our revenues from the provision of wireless coverage products and services,
we also deduct an estimated settlement discount that we may give to our customers in the future.
The settlement discount is based on our past billing and collection experience with our customers
and our negotiation with customers. We determine such discount separately on a contract by contract
basis. If actual settlement discounts made differ from our estimates, an additional provision or
write back is made upon settlement.
In 2004, our settlement discounts amounted to RMB1.4 million. In 2005 and 2006, we wrote back
RMB6.8 million and RMB5.1 million (US$0.7 million), respectively, as our customers did not make
earlier settlements in response to our offer of settlement discounts.
Allowance for Doubtful Accounts.
Our wireless coverage customers pay by installments,
creating long accounts receivable cycles. We provide for an allowance for doubtful accounts based
on our best estimate of the amount of losses that could result from the inability or intention of
our existing customers not to make the required payments. We generally review the allowance by
taking into account factors such as historical experience, age of the accounts receivable balances
and economic conditions. We have not written off any significant bad debts since our inception in
1999 largely due to the strong credits of our wireless operator customers as well as our close
monitoring and management of our accounts receivable.
Inventories.
Our inventories comprise raw materials, work in progress and finished goods. We
state our inventories at the lower of cost or market value. We determine the cost of our
inventories by using the weighted average cost method. Cost of work in progress and finished goods
consists of direct materials, direct production cost and a proportional allocation of our
production overhead. We determine the net realizable value of our inventories on the basis of
anticipated sales proceeds less estimated selling expenses. At each balance sheet date, we identify
inventories that are worth less than cost and write them down to their net realizable value and the
difference is charged to our cost of revenues of that year. The amounts of write-down of
inventories to net realizable value as of December 31, 2005 and 2006 were RMB0.5 million and RMB0.7
million (US$0.1 million), respectively. These write-downs related to RF parts and components in our
inventory. We did not make any inventory write-downs in 2004.
Finished goods make up the majority of our inventories. Our high level of finished goods is
primarily the result of the way we recognize our revenues from our provision of wireless coverage
products and services. Our revenue recognition policy requires us to expense our finished goods in
inventory at the point when the sale of products has been recognized as revenue. As a result, a
considerable portion of our finished goods represents products that were delivered to our
customers' sites pending initial installation or that were installed pending the issuance of
completion certificates and the signing of the sale and purchase contracts. These finished goods
amounted to RMB156.8 million, RMB186.7 million and RMB233.9 million (US$30.0 million) as of
December 31,
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Table of Contents
2004, 2005 and 2006, respectively. Also included in finished goods are deferred
installation costs related to wireless coverage products delivered and installed for which the
related preliminary inspection certificates have not been issued at the respective
year-end dates. We deliver our finished goods to our customers' sites in accordance with the
bids we won and the project designs approved by our customers. You should read "Business — Our
Wireless Coverage Products and Services — Our Sales Cycle — Contract Signing" for additional
information and analysis on our bidding and contracting practice. In addition, we control our
installation costs by entering into fixed-price contracts with our installation contractors for
wireless coverage products.
Allowance for Warranties.
We account for estimated warranty cost as part of our cost of
revenues at the time we recognize related revenues. We accrue estimated warranty costs that we may
incur during the warranty periods when we are required to provide free repair and replacement for
defectively installed products. Our warranties generally extend for a period of 12 months to three
years. We determine our allowance for warranties primarily based on historical trends of warranty
costs adjusted for specific conditions that may arise under each contract and the number of
contracts under warranty at each financial year-end. Although we believe that the level of our
allowance for warranties is appropriate, actual claims incurred in the future could differ from our
estimates.
Valuation of Long-lived Assets.
We review periodically the carrying amounts of long-lived
assets, including property, plant and equipment and intangible assets with finite useful lives, to
assess whether they are impaired. We test these assets for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable, such as change of
business plan, obsolescence, and continuous loss suffered. When such a decline has occurred, we
adjust the carrying amount to the estimated fair value. We measure the recoverability of assets by
comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected
to be generated by the asset, or, for identifiable intangibles with finite useful lives, by
determining whether the amortization of the intangible asset balance in the remaining life can be
recovered through undiscounted future cash flows. In determining estimates of future cash flows,
significant judgment in terms of projection of future cash flows and assumptions is required. If
the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Fair value is measured by discounting forecasted operating cash flow or market value if
readily determinable. Changes in estimates could have a major impact on the assessment of the value
of our assets and could require us to book additional impairments.
Results of Operations
The following table sets forth our results of operations as a percentage of our revenues for
the periods indicated:
Year
ended December 31,
2004
2005
2006
Revenues
100.0
%
100.0
%
100.0
%
Cost
of revenues
(42.7
)
(45.8
)
(52.5
)
Gross profit
57.3
54.2
47.5
Operating expenses:
Research and development costs
(2.9
)
(4.3
)
(5.7
)
Sales and distribution expenses
(12.5
)
(12.8
)
(13.6
)
General and administrative expenses
(5.2
)
(5.7
)
(6.7
)
Total operating expenses
(20.6
)
(22.8
)
(26.0
)
Operating income
36.7
31.4
21.5
Other (expense)/ income:
Interest income
0.7
0.4
2.3
Interest expense
(7.0
)
(5.0
)
(3.4
)
Investment income
0.2
—
—
Foreign currency exchange gain/(loss)
—
0.8
(1.2
)
Grant income
0.1
2.3
0.9
Total other (expense)/income
(6.0
)
(1.5
)
(1.3
)
Income before income tax expense and minority interests
30.7
29.9
20.2
Income tax expense
(2.8
)
(3.6
)
(2.2
)
Income before minority interests
27.9
26.3
18.0
Minority interests, net of tax
(2.0
)
(1.0
)
(0.2
)
Net income
25.9
25.3
17.9
Dividends, accretion to redemption values and foreign
exchange rate movements on mandatorily redeemable
convertible preference shares
(0.6
)
(0.5
)
(0.1
)
Net income available to ordinary shareholders
25.3
%
24.8
%
17.8
%
2006 compared to 2005
Revenues.
Our revenues increased by RMB116.5 million, or 16.3%, to RMB832.8 million (US$106.7
million) from RMB716.3 million in 2005. The increase in 2006 was primarily attributable to
increased sales of wireless coverage products to the China Mobile group, the China Telecom group
and the China Netcom group. Our sales to the China Mobile group in 2006 increased by RMB35.5
42
Table of Contents
million (US$4.5 million), or 14.7%, over our sales to that group in 2005; our sales to the China
Telecom group in 2006 increased by RMB19.7 million (US$2.5 million), or 28.3%, over our sales to
that group in 2005; and our sales to the China Netcom group in 2006 increased by RMB32.4 million
(US$4.2 million), or 88.0%, over our sales to that group in 2005. During the same period, our sales
to the China Unicom group in 2006 decreased by RMB24.2 million (US$3.1 million), or 7.5%. Our
sales of wireless coverage products to the China Telecom group and the China Netcom group consisted
of PHS products. These two fixed-line telecommunication operators have not been licensed to own or
operate any GSM or other wireless networks. In addition, our sales of RF parts and components in
2006 increased by RMB10.0 million (US$1.3 million), or 45.5%, compared to 2005. Revenues from
overseas sales of wireless coverage products in the amount of RMB10.0 million (US$1.3 million)
further contributed to our overall revenue growth.
Cost of Revenues.
Cost of revenues increased by RMB108.9 million (US$14.0 million), or 33.2%,
to RMB437.0 million (US$56.0 million) in 2006 from RMB328.1 million in 2005, compared to an
increase of 16.3% in our overall revenues. The increase in cost of revenues was primarily
attributable to an increase of RMB75.5 million, or 27.2%, in our cost of hardware during this
period. Our cost of service also increased by RMB33.4 million (US$4.3 million), or 65.7%, from
RMB50.8 million in 2005 to RMB84.2 million (US$10.8 million) in 2006. The increase in our overall
cost of revenues primarily reflects the increase in the total number of units sold.
Gross Profit.
As a result of the foregoing, gross profit increased by 1.9% to RMB395.8 million
(US$50.7 million) in 2006 from RMB388.2 million in 2005. Gross profit margin in 2006 decreased to
47.5% from 54.2% in 2005, primarily reflecting a decrease in the average selling price of our
products, which was in turn attributable to (1) the declining unit price of certain of our maturing
products and (2) an increasing percentage of lower-margined products such as PHS products and RF
parts in our overall product offerings.
Research and Development Costs.
Our research and development costs increased by RMB17.1
million, or 55.7%, to RMB47.7 million (US$6.1 million) in 2006 from RMB30.6 million in 2005,
principally reflecting an increase of RMB11.7 million (US$1.5 million) in salary and compensation
for our research staff. We added additional personnel to our research team in 2006 to focus on the
development of RF parts and components and 3G products.
Sales and Distribution Expenses.
Sales and distribution expenses increased by RMB21.4
million, or 23.5%, to RMB112.9 million (US$14.5 million) in 2006 from RMB91.5 million in 2005. The
increase was primarily attributable to an increase in remuneration for our sales and marketing
staff of RMB10.3 million (US$1.4 million), which principally reflects the additional sales
personnel that were hired in 2006 and increases in the remuneration for certain sales personnel in
order for us to better attract and retain talents. Marketing expenses increased by RMB3.6 million
(US$0.5 million) and telecommunications costs increased by RMB3.2 million (US$0.4 million) in 2006,
also reflecting the hire of additional sales personnel and the expansion of our business volume.
General and Administrative Expenses.
General and administrative expenses increased by 36.3%
to RMB55.9 million (US$7.2 million) in 2006 from RMB41.1 million in 2005. The increase in general
and administrative expenses was primarily attributable to expenses relating to the enhancement in
our internal control system over financial reporting, as well as increases in legal, auditing,
consulting and other logistical expenses related to our initial public offering in 2006.
Operating Income.
As a result of the foregoing, our operating income decreased by 20.4% to
RMB179.2 million (US$23.0 million) in 2006 from RMB225.0 million in 2005. Our operating margin in
2006 was 21.5% compared to 31.4% in 2005.
Other Expense/Income.
Our interest income increased to RMB19.2 million (US$2.5 million) in
2006 from RMB3.2 million in 2005 primarily due to the increased amount of deposit and increases in
interest rates. Our interest expense decreased to RMB28.0 million (US$3.6 million) in 2006 from
RMB36.1 million in 2005 primarily resulting from the conversion of our exchangeable bonds to equity
at the time of our initial public offering in March 2006. We also reported a foreign currency
exchange loss of RMB9.9 million (US$1.3 million) primarily due to appreciation of the Renminbi in
2006. Our other income included the net investment income from our equity investments of
approximately 4.7% in Quanzhou Commercial Bank. Our investment income increased by RMB0.1 million
(US$0.01 million) during this period. Grant income decreased to RMB7.7 million (US$1.0 million) in
2006 from RMB16.7 million in 2005 as the number of our projects eligible for government subsidies
decreased in 2006.
Income Tax Expense.
In 2006, we recognized an income tax expense of RMB18.3 million (US$2.3
million) as compared to RMB26.1 million in 2005. Our income tax expense decreased by RMB7.8 million
(US$1.0 million) from 2005 to 2006 in part due to a decrease in our profit before tax and, to a
smaller extent, a decrease in the profit before tax of certain of our subsidiaries that were
subject to an income tax rate ranging from 27% to 33%. As a result, our effective tax rate reduced
to 10.9% in 2006 from 12.2% in 2005.
Minority Interests.
Minority interests were RMB1.3 million (US$0.2 million) in 2006, as
compared to RMB7.1 million in 2005. This decrease was due to a decrease in profit before tax of
certain subsidiaries as well as a decrease in equity interest from 10% to 1% held by the minority
shareholder in Shenzhen Lingxian since 2005.
43
Table of Contents
Net Income.
As a result of the foregoing, our net income decreased by 18.0% to RMB148.8
million (US$19.1 million) in 2006 from RMB181.4 million in 2005.
Dividends, Accretions to Redemption Values and Foreign Exchange Rate Movements on Mandatorily
Redeemable Convertible
Preference Shares.
In April 2006, our directors declared dividends totaling RMB0.5 million
(US$0.1 million) to holders of our mandatorily redeemable convertible preference shares. In
addition, accretion of our mandatorily redeemable convertible preference shares to redemption value
was RMB0.4 million (US$0.05 million) up to the conversion of the shares in April 2006.
2005 compared to 2004
Revenues.
Our revenues increased by 26.4% to RMB716.3 million (US$88.8 million) in 2005 from
RMB566.5 million in 2004. The increase in 2005 was primarily attributable to our increased sales of
wireless coverage products as a result of sales and marketing efforts targeted at the China Mobile
group, the China Telecom group and the China Netcom group in 2005. Our sales to the China Mobile
group in 2005 increased by RMB84.3 million (US$10.4 million), or 53.6%, over our sales to that
group in 2004; our sales to the China Telecom group in 2005 increased by RMB50.2 million (US$6.2
million), or 260.1%, over our sales to that group in 2004; and our sales to the China Netcom group
in 2005 increased by RMB28.6 million (US$3.5 million), or 348.8%, over our sales to that group in
2004. Our sales of wireless coverage products to the China Telecom group and the China Netcom group
consisted of PHS products. These two fixed-line telecommunication operators have not been licensed
to own or operate any GSM or other wireless networks. Our sales to the China Unicom group in 2005
decreased by RMB22.9 million (US$2.8 million), or 6.6%, from our sales to that group in 2004
largely due to slow-down in investments by the China Unicom group in wireless coverage products. In
addition, our sales of RF-based wireless access products in 2005 increased by RMB2.7 million
(US$0.3 million), or 270.0%, over our sales of those products in 2004. Our sales of RF parts and
components in 2005 decreased by RMB10.9 million (US$1.4 million), or 33.1%, from our sales of those
products in 2004. However, this decrease in sales of RF parts and components was partially offset
by an increase of RMB9.7 million (US$1.2 million) in our sales of additional wireless coverage
products to other suppliers of wireless coverage products and services in 2005.
Cost of Revenues.
Cost of revenues increased by RMB86.1 million (US$10.7 million) or 35.6% to
RMB328.1 million (US$40.7 million) in 2005 from RMB241.9 million in 2004. Our cost of revenues
increased primarily because of our increase in sales volume. Our cost of service increased by
RMB29.3 million (US$3.6 million), or 136.3%, from RMB21.5 million in 2004 to RMB50.8 million
(US$6.3 million) in 2005. In 2005, we experienced a substantial increase in our sales of our PHS
wireless coverage products to the China Telecom group and the China Netcom group. In addition to
this increase in sales, our cost of revenues in 2005 also increased substantially as we had to
employ additional installation teams to install more products sold to the China Telecom group and
the China Netcom group, and our cost of hardware increased by RMB56.9 million (US$7.1 million), or
25.8%, from RMB220.4 million in 2004 to RMB277.3 million (US$34.4 million) in 2005.
Gross Profit.
Gross profit increased by 19.6% to RMB388.2 million (US$48.1 million) in 2005
from RMB324.6 million in 2004. Gross profit margin in 2005 decreased to 54.2% from 57.3% in 2004
primarily because we had a significant increase in 2005 in sales of our lower-priced PHS wireless
coverage products to the China Telecom group and the China Netcom group as compared to our overall
increase in 2005 in sales of our higher-priced GSM and CDMA products. The increase in our cost of
service in 2005 also contributed to the decrease in our gross profit margin.
Research and Development Costs.
Our research and development costs increased by 87.5% to
RMB30.6 million (US$3.8 million) in 2005 from RMB16.3 million in 2004 primarily due to increases in
salary and other compensation as a result of an increase in the number of our research and
development personnel. A significant portion of our increase in research and development costs
resulted from our efforts to develop RF parts and components for use in base stations of two major
domestic equipment manufacturers, which are ZTE Corporation and Datang Mobile Communications
Equipment Co., Ltd, as well as our research and development of 3G products. We spent approximately
RMB10.2 million (US$1.3 million) in materials and equipment for research and development in 2005
and our increase in salary and compensation for research and development accounted for
approximately RMB3.0 million (US$0.4 million) in 2005.
Sales and Distribution Expenses.
Sales and distribution expenses increased by 28.8% to
RMB91.5 million (US$11.3 million) in 2005 from RMB71.0 million in 2004. The increase was primarily
attributable to the expansion of our sales force. In 2005, we increased our marketing to the China
Mobile group, the China Telecom group and the China Netcom group. We also increased our overseas
expansion efforts. Remuneration for our sales and marketing staff increased by RMB7.9 million
(US$1.0 million), additional office rental and utilities increased by RMB1.7 million (US$2.0
million), telecommunication and delivery costs increased by RMB3.1 million (US$0.4 million) and
travel related costs increased by RMB2.5 million (US$0.3 million) in 2005.
General and Administrative Expenses.
General and administrative expenses increased by 38.0%
to RMB41.1 million (US$5.1 million) in 2005 from RMB29.7 million in 2004. The increase in general
and administrative expenses was primarily attributable to an increase in salaries and other
remuneration by RMB3.7 million (US$0.5 million) as a result of our hiring of additional
administrative staff, an increase in office rental and related utilities by RMB2.0 million (US$0.2
million) as a result of additional office space we rented, and an increase in our provision for
doubtful accounts by RMB1.9 million (US$0.2 million) due to an increase in our accounts receivable
in 2005.
44
Table of Contents
Operating Income.
Our operating income increased by 8.5% to RMB225.0 million (US$27.9
million) in 2005 from RMB207.5 million in 2004. Our operating margin in 2005 was 31.4% compared to
36.6% in 2004.
Other Expense/Income.
Interest income decreased to RMB3.2 million (US$0.4 million) in 2005
from RMB4.0 million in 2004
primarily due to a decrease in interest income by RMB0.8 million (US$0.1 million) from our
bank deposits. Interest expense decreased to RMB36.1 million (US$4.5 million) in 2005 from RMB39.4
million in 2004 primarily due to a decrease of RMB2.8 million (US$0.3 million) in receivable
selling expenses in 2005. We also had a foreign currency exchange gain of RMB5.6 million (US$0.7
million) associated with our exchangeable bonds primarily due to appreciation of the Renminbi in
2005. We received a one-time nonrefundable grant from the Shenzhen government of RMB16.7 million
(US$2.1 million) in 2005 as a reward for some of the new wireless products we developed and sold.
Other income included our net investment income from our equity investments of approximately 4.7%
in Quanzhou Commercial Bank. Our investment income decreased by RMB0.7 million (US$0.1 million)
between 2004 and 2005.
Income Tax Expense.
We had an income tax expense of only RMB16.0 million in 2004 as a result
of a tax refund of RMB12.8 million we received from the Shenzhen tax authorities in 2004 due to the
revision of our two-year tax exemption period as determined by the tax authorities. In 2005, we
recognized an income tax expense of RMB26.1 million (US$3.2 million). Our income tax expense
increased by RMB10.1 million (US$1.3 million) between 2004 and 2005 in part due to an increase in
our profit before tax and the absence of tax refunds in 2005. An increase in our effective tax rate
from 9.2% in 2004 to 12.2% in 2005 further attributed to the increase in our income tax expense
during this period.
Minority Interests.
Minority interests were RMB7.1 million (US$0.9 million) in 2005, compared
to RMB11.1 million in 2004, primarily due to a decrease in equity interest from 10% to 1% held by
the minority shareholder in Shenzhen Lingxian.
Net Income.
Net income increased by 23.7% to RMB181.4 million (US$22.5 million) in 2005 from
RMB146.6 million in 2004.
Dividends, Accretions to Redemption Values and Foreign Exchange Rate Movements on Mandatorily
Redeemable Convertible Preference Shares.
In December 2005, our directors declared a 5% dividend
based on the face value of our mandatorily redeemable convertible preference shares totaling RMB2.1
million (US$0.3 million). In addition, in 2005, accretion of our mandatorily redeemable convertible
preference shares to redemption value was RMB1.3 million (US$0.2 million).
Liquidity and Capital Resources
In line with the industry practice, we typically have long receivable collection cycle. As a
result, our cash provided by our sales in any given year may not be sufficient to fully meet our
operating cash requirements in that year. We anticipate that our operations may continue to
encounter such timing differences in cash flows in the near term. We used and will continue to use
available financing means, including short-term bank loans and receivable selling arrangements, to
provide sufficient cash inflows to balance such timing differences in our cash flows. We also
anticipate that near-term working capital and other capital requirements will increase due to our
increased sales activities, increased research and development efforts related primarily to 3G
products as well as RF parts and components, and our efforts to comply with the requirements as a
listed company in the United States, including the requirements of the Sarbanes-Oxley Act. We
anticipate meeting such increase in our near-term working capital and other capital requirements
primarily through our internally generated cash and financing means available to us, including
short-term bank loans and sales of accounts of receivable.
As of December 31, 2006, we had available undrawn bank borrowing facilities in the aggregate
of RMB52.8 million (US$6.8 million), unutilized bill payables facilities in the aggregate of
RMB40.1 million (US$5.1 million) and unutilized accounts receivable selling arrangements in the
aggregate of RMB258.2 million (US$33.1 million). Utilization of the unutilized bill payables
facilities and amount receivable selling arrangements requires pledge of bank deposit in an amount
equal to 30% and 20%, respectively, of the amount to be utilized.
In the event that we may be required to raise additional funds to meet any currently
unanticipated working capital or capital expenditure requirements, we expect to rely on the same
sources of funding, together with capital markets financings.
The following table summarizes our cash flows for the periods indicated:
Year ended December 31,
2004
2005
2006
(RMB)
(RMB)
(RMB)
(US$)
(in thousands)
Net cash/provided by/ (used in) operating activities
218,244
(112,611
)
(114,778
)
(14,707
)
Net cash used in investing activities
(74,337
)
(20,900
)
(243,150
)
(31,157
)
Net cash (used in)/provided by financing activities
(22,963
)
(40,813
)
708,514
90,787
Cash and cash equivalents at the end of year
302,932
128,608
467,423
59,895
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Net cash of RMB114.8 million (US$14.7 million) was used in operating activities in 2006, as
compared to net cash used in operating activities of
RMB112.6 million in 2005 and net cash provided by operating
activities of RMB218.2 million in 2004. Our net income in 2004, 2005 and 2006 was RMB146.6 million,
RMB181.4 million and RMB148.8 million (US$19.1 million), respectively. The slight increase in the
outflow of cash used in operating activities in 2006 primarily
reflects the net effect of (1) an
increase of RMB142.2 in collections from customers from RMB345.6 million in 2005 to RMB487.8
million in 2006; (2) a decrease of RMB62.4 in sales of account receivables from RMB180.1 million in
2005 to RMB117.7 million in 2006; and (3) an increase in the cash outlay for our
procurement of materials and research and development projects of RMB81.9 million.
We had a net investing cash outflow of RMB243.2 million (US$31.2 million) in 2006 as compared
to RMB20.9 million in 2005. The significant increase in net investing cash outflow was due to (1)
an increase of RMB182.0 million in pledged time deposits in 2006 compared to 2005; (2) an increase
of RMB30.7 million in capital expenditures in 2006 compared to 2005, primarily reflecting purchase
of additional plant and equipment for production and development of base station RF products and
capital expenditures in the amount of RMB9.2 million relating to the purchase of land for the
construction of our new research and manufacturing facilities in Shenzhen.
We had a net cash inflow of RMB708.5 million (US$90.8 million) from financing activities in
2006 as compared to RMB40.8 million of net financing cash outflow in 2005, reflecting the net
effect of (1) proceeds from our initial global offering after deducting our expenses in the amount
of RMB649.0 million; (2) increased short-term borrowing in 2006 in the amount of RMB237.9 million;
(3) an increase of RMB51.0 million in the amount of dividends paid; and (4) an increase of RMB58.2
million in the principal payments of short-term bank loans.
Accounts Receivable and Receivable Selling
We generally begin working on a wireless coverage project upon winning a bid but before the
signing of a formal contract. Our sale and purchase contracts generally permit our customers to pay
their purchase price in installments upon the occurrence of stipulated payment events, such as the
signing of the sale and purchase contract, preliminary inspection, final inspection and the
expiration of our warranty period under the sale and purchase contract. To the extent revenue
recognized under a contract is not yet paid, we record it as an account receivable, net of any
accounts receivable we sold to third parties. As a result, a long accounts receivable cycle results
from the length of time between our recognition of revenues and the occurrence of various payment
events. The period between each payment installment varies and typically ranges from six months to
three years and the portion of the purchase price in each installment also varies.
The following table describes the concentration of our gross accounts receivable by customers
and as a percentage of our gross accounts receivable balance as of December 31, 2006:
As
of December 31, 2006
(RMB)
(US$)
(%)
(in
millions, except for percentages)
China
Unicom group
406.0
52.0
40.4
%
China
Mobile group
303.4
38.9
30.2
China
Telecom group
99.0
12.7
9.9
China
Netcom group
66.8
8.6
6.6
Others
129.8
16.6
12.9
Total
1,005.0
128.8
100.0
%
The following table sets forth an aging analysis for our gross accounts receivable balances,
determined from the time that the revenue is recognized, as of the dates indicated.
As
of December 31,
2004
2005
2006
(RMB)
(%)
(RMB)
(%)
(RMB)
(US$)
(%)
(in
millions, except for percentages)
Less
than one year
262.2
69.7
%
526.7
75.1
%
700.9
89.8
69.7
%
Between
one to two years
100.6
26.7
154.0
22.0
231.3
29.7
23.0
Between
two to three years
12.2
3.3
17.0
2.4
68.0
8.7
6.8
Over
three years
1.1
0.3
3.9
0.5
4.8
0.6
0.5
Total
376.1
100.0
%
701.6
100.0
%
1,005.0
128.8
100.0
%
To the extent revenues recognized under a contract are not yet paid, they are recorded as
accounts receivable in our balance sheet, net of amounts sold to third parties. Out of our gross
accounts receivable of RMB376.1 million, RMB701.6 million and RMB1,005.0 million (US$128.8 million)
outstanding as of December 31, 2004, 2005 and 2006, respectively, RMB118.2 million, RMB246.1
million and RMB353.5 million (US$45.3 million), or 31.4%, 35.1% and 35.2% of our gross accounts
receivable, represented gross accounts receivable that had passed the contractual payment dates in
the respective periods and were subject to payment by our customers. We made allowances for the
doubtful accounts representing 100% of our accounts receivable
46
Table of Contents
contractually due had an age of not more than 6 months as of December 31, 2006. Our gross
accounts receivable that had not passed the relevant payment events represented 68.6%, 64.9% and
64.8% of our gross accounts receivable outstanding as of December 31, 2004, 2005 and 2006,
respectively.
We calculate our accounts receivable days as the average beginning and ending accounts
receivable balance for the year, divided by the revenues during the year, multiplied by 360. Our
accounts receivable days are long in absolute terms, approximately 260 days, 271 days and 369 days
for 2004, 2005 and 2006, respectively. We believe that they are typical of industry standards with
respect to wireless coverage projects in the PRC market. During the early stages of our company, we
were restrained from aggressive collection efforts in order to remain competitive with the
incumbents in the market. Since the beginning of 2004, however, we have taken measures, including
expansion of our sales team, to facilitate our accounts receivable collection process. While these
measures taken by us has improved our receivable collections, our accounts receivable days in 2006
still increased by 98 days to 369 days primarily as a result of (1) an increased proportion of our
yearly revenues being generated in the third and fourth quarters of 2006, (2) a 16.3% increase in
our total revenues from 2005 to 2006 and (3) reduced sales of our accounts receivable to receivable
purchasing banks in 2006 as compared to 2005.
Within our sales team, we have also established monitoring procedures on our accounts
receivable. Compensation of sales personnel has also been linked to collection efforts, with strong
collection efforts rewarded and poor collection efforts penalized. As a result of our enhanced
collection efforts, our customers settled RMB403.1 million, RMB345.6 million and RMB487.8 million
(US$62.5 million) in accounts receivable due to us in 2004, 2005 and 2006, respectively.
With regard to our contract terms, we have taken a more aggressive role in negotiating with
our customers by requiring a higher percentage of contract value paid upon the completion of the
preliminary inspection by our customers. For example, we were allowed in 2006 to collect 82% of
our total contract value when preliminary inspection certificate is issued, compared to 80.0% in
2005.
As a measure to further reduce our level of accounts receivable and to alleviate the
associated risks, we have sold some of our accounts receivable to PRC domestic banks in China. We
expect to continue to sell our accounts receivable in the future at terms acceptable to us to meet
our working capital needs and to improve our liquidity. As of December 31, 2006, we had accounts
receivable selling facilities in the aggregate of RMB258.2 million (US$33.1 million) that were
committed but not yet utilized.
In June 2004, we entered into our first limited recourse receivable selling agreement with an
independent PRC domestic bank for the sale of our accounts receivable. Subsequently, we entered
into additional limited-recourse receivable selling agreements with one other independent PRC
domestic bank. Most of these agreements had a term of no more than one year. Pursuant to these
limited recourse receivable selling agreements, we agreed to use our reasonable efforts to persuade
our customers to settle the accounts receivable we sold to these banks. In addition, we were
responsible for servicing the accounts receivable sold until the maturity of these accounts
receivable, which in general was 12 months from their sale under the receivable selling agreements.
We were also required to place with the banks a pledged time deposit in an amount of not less than
20% of the accounts receivable sold as security for payment of the relevant accounts receivable by
our customers. The banks were entitled to offset from our pledged time deposits up to 20% of any
uncollectible accounts receivable that we sold to the banks. The banks would refund any balance of
our pledged time deposits to us upon expiration of the receivable selling agreement or upon
settlement of the accounts receivable that we sold to the banks. For accounts receivable sold under
these receivable selling agreements, we were required to pay discount charges, commission fees or
interest calculated on a monthly basis and a one-time handling or service fee. The monthly discount
charges represent the interest calculated on a daily basis in respect of the balance of accounts
receivable we sold to the banks by reference to the base rate published by the People's Bank of
China, the PRC central bank, on the date of the receivable selling agreement. The one-time handling
or service fees ranged from 0.4% to 1% of the amount of accounts receivable that we sold to the
banks. Our banks did not encounter any significant default in repayments by customers on the
account receivables that we sold to the banks in the past recent years.
Inventories
Our inventories comprise raw materials, work in progress and finished goods. Finished goods
make up the majority of our inventories. Our high level of finished goods results primarily from
the way we recognize revenues from the provision of wireless coverage products and services.
Because we recognize our revenues only after satisfaction of relevant revenue recognition criteria,
such as signing of sale and purchase contracts and issuance of completion certificates, we do not
expense our finished goods in our inventory until we recognize the relevant revenues. Our work in
progress inventory is generally minimal as we typically have a short production lead time. We use
raw materials primarily in the production of our wireless coverage products and RF parts and
components. We manage raw materials according to our production plan.
47
Table of Contents
The following table sets forth an inventory balance breakdown by category as of the dates
indicated:
As
of December 31,
2004
2005
2006
(RMB)
(RMB)
(RMB)
(US$)
(in
thousands)
Raw
materials
43,799
55,572
65,395
8,380
Work
in progress
4,991
4,057
5,135
658
Finished
goods
247,614
310,507
363,876
46,626
Total
296,404
370,136
434,406
55,664
A considerable portion of our finished goods consists of finished goods and their related
installation costs delivered to our customers' sites that are not yet installed or have been
installed but for which formal contracts are yet to be signed and/or completion certificates are
yet to be issued. These finished goods and their related installation costs amounted to RMB156.8
million, RMB186.7 million and RMB233.9 million (US$30.0 million) as of December 31, 2004, 2005 and
2006, respectively.
The following table describes an aging analysis of our inventory by major category as of
December 31, 2006:
Finished
goods
Work
in progress
Raw
materials
Total
(RMB)
(US$)
(%)
(RMB)
(US$)
(%)
(RMB)
(US$)
(%)
(RMB)
(US$)
(%)
(in
thousands, except for percentages)
Age
Less
than one year
357,435
45,801
98.2
%
5,135
658
100
%
65,395
8,380
100
%
427,965
54,839
98.5
%
One
to two years
6,441
825
1.8
—
—
—
—
—
—
6,441
825
1.5
Total
363,876
46,626
100
%
5,135
658
100
%
65,395
8,380
100
%
434,406
55,664
100.0
%
We did not have inventories over two years old as of December 31, 2006.
Borrowings
As of December 31, 2006, we had total short-term credit facilities of RMB479.6 million
(US$61.4 million) from eight domestic banks, of which we had drawn RMB336.1 million (US$43.1
million) in bank loans and RMB50.4 million (US$6.5 million) in bills payable. As of December 31,
2006, we had available undrawn bank- committed facilities in the aggregate of RMB92.9 million
(US$11.9 million) and unutilized accounts receivable selling arrangements in the aggregate of
RMB258.2 million (US$33.1 million). Our bills payable allow our vendors and suppliers to receive
payment in cash from our banks upon presentation in 30 to 180 days. Pursuant to our financing
arrangements with banks in China, we must pay the amount under each bill payable to the bank on or
prior to the stipulated presentation date. We negotiate and renew our bank credit facility
agreements with our banks on an annual basis in line with the current banking industry practice in
China. The weighted average interest rate for our bank borrowings was 5.6% as of December 31, 2006.
Of the total outstanding amount of RMB336.1 million (US$43.1 million) drawn in bank loans under
these facilities, RMB176.1 million (US$22.6 million) was unsecured and RMB160.0 million (US$20.5
million) was secured by a pledge of part of our bank deposits and accounts receivable. The total
outstanding amount of RMB50.4 million (US$6.5 million) used in bills payable under these facilities
was secured by RMB22.0 million (US$2.8 million) as pledged time deposits.
Part of our short-term loans are revolving facilities with a term of one year, which may be
extended for terms of one year each with lender consent.
Apart from the above, we have not granted any security interest or entered into any guarantees
or similar commitments to secure or guarantee payment obligations of any third parties. In
addition, we do not have any other written options on financial or non-financial assets. We expect
to continue to rely on bank loan financing and receivable selling arrangements to finance our
capital expenditure and working capital needs as we grow our business.
Capital Expenditures and Contractual Commitments
Our capital expenditures consist of purchases of property, plant and equipment, such as
equipment and machinery, motor vehicles and office equipment. In 2004, 2005 and 2006, our capital
expenditures were RMB46.1 million, RMB41.0 million and RMB80.8 million (US$10.3 million),
respectively. The significant increase in capital expenditures in 2006 primarily related to
purchase of additional machinery and equipment for the production and development of base station
RF parts and components as well as aggregate expenditures in the amount of RMB9.2 million relating
to the purchase of land for our new research and manufacturing facilities in Shenzhen. We expect
to continue to increase our planned capital expenditures in order to expand our production capacity
and to acquire additional research and development equipment. We intend to fund such expenditures
with cash from our operations, bank loans and accounts receivable selling arrangements.
The following table sets forth our obligations and commitments to make future payments under
contracts and commitments as of December 31, 2006:
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Table of Contents
As of December 31, 2006
Payment Due by Period
Less than
Total
1 Year
1-3 Years
After 3 Years
RMB
US$
RMB
US$
RMB
US$
RMB
US$
(in millions)
Short-term bank loans
336.1
43.1
336.1
43.1
—
—
—
—
Long-term debt
—
—
—
—
—
—
—
—
Bills payable
78.6
10.1
78.6
10.1
—
—
—
—
Operating lease commitments
10.0
1.3
6.9
0.9
3.1
0.4
—
—
Other capital commitments
219.6
28.1
219.6
28.1
—
—
—
—
Total contractual obligations
644.3
82.6
641.2
82.2
3.1
0.4
—
—
Off-Balance Sheet Arrangements and Contingent Liabilities
As of December 31, 2006, our accounts receivable sold to banks but not yet settled by our
customers amounted to RMB144.0 million (US$18.5 million). We were subject to a limited recourse
for these accounts receivable pursuant to which we pledged to the banks deposit of not less than
20% of the accounts receivable sold as guarantee for payment by our customers. As of December 31,
2006, the pledged deposit amounted to RMB32.3 million (US$4.1 million).
As of December 31, 2006, our commitments under operating leases for operating premises
amounted to RMB10.0 million (US$1.3 million), of which RMB6.9 million, RMB1.9 million and RMB1.2
million is due for payment in 2007, 2008 and 2009.
As of December 31, 2006, our commitments for future purchase of property, plant and equipment
amounted to RMB219.6 million (US$28.1 million), which is predominately related to the construction
of our new facilities in Shenzhen.
We do not have any other off-balance sheet guarantees, any other outstanding derivative
financial instruments, interest rate swap transactions or foreign currency forward contracts. We do
not engage in trading activities involving non-exchange traded contracts.
Inflation
Inflation in China has not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in the consumer price index in
China was 3.9% in 2004, 1.8% in 2005 and 1.5% in 2006.
Quantitative and Qualitative Disclosure about Market Risk
Foreign Exchange Risk.
Virtually all of our revenues and expenses are denominated in
Renminbi. However, a portion of the proceeds from our initial public offering has been placed in
U.S. dollar deposit accounts. Any appreciation in Renminbi exchange rate against U.S. dollars
would result in a foreign exchange loss to us. For the year ended December 31, 2006, we recorded a
foreign exchange loss of RMB9.9 million (US$1.3 million) predominately related to such U.S. dollar
bank deposits.
Interest Rate Risk.
All of our indebtedness accrues interest at fixed rates of interest. As a
result, we believe we have no significant exposure to fluctuations in interest rates.
Credit Risk.
Since we commenced our operations in 1999, we have not had to write off any
significant bad debts. However, we have long accounts receivable cycles and long collection
periods. For a further discussion of these issues, please refer to "Item 3. Key Information—Risk
Factors—Risks Relating to Our Company—We often begin work on a project before we have a contract
for our products and services, which may materially and adversely affect our cash flows from
operating activities and liquidity" and "—We have long accounts receivable cycles and long
collection periods and our liquidity and cash flows from operations will deteriorate if our
accounts receivable cycles or collection periods continue to lengthen."
Corporate Structure
We are a holding company, and we rely principally on dividends and other distributions on
equity paid by our PRC operating subsidiaries for our cash requirements, including the funds
necessary to service any debt we may incur, financing we may need for operations other than through
our PRC subsidiaries and the payment of dividends by us. Under the PRC laws, Shenzhen GrenTech, as
a wholly foreign-owned enterprise, and Shenzhen Lingxian and Lake Communication, both as domestic
limited liability companies in China, must allocate at least 10% of their after-tax profit to their
statutory general reserve fund until the balance of the fund has reached 50% of their registered
capital. In addition, Shenzhen Lingxian and Lake Communication, as domestic limited liability
companies, were required to transfer between 5% and 10% of their after-tax profit to the statutory
public welfare reserve fund. Beginning January 1, 2006, however, Shenzhen Lingxian and Lake
Communication are no longer subject to such public welfare reserve requirement due to the amendment
of PRC Company Law which became effective on January 1, 2006. Shenzhen GrenTech, as a wholly
foreign owned enterprise, has complete discretion in allocating its after-tax profit to its
employee welfare reserve fund. Lake Microwave, as a sino-foreign joint venture, has discretion in
allocating any portion of its after-tax profits to its
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statutory general reserve fund, enterprise
development reserve fund and employee welfare reserve fund. These reserve funds are not
distributable as cash dividends. Any limitation on the payment of dividends by our PRC subsidiaries
could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends, and otherwise fund and conduct our businesses, as we have disclosed in
"Item 3. Key Information—Risk Factors—Risks Relating to Our Company—Our primary source of funds
for dividend and other distributions from our operating subsidiary in China is subject to various
legal and contractual restrictions and uncertainties, and our ability to pay dividends or make
other distributions to our shareholders is negatively affected by those restrictions and
uncertainties."
Taxation
Under the current laws of the Cayman Islands, we are not subject to Cayman Islands tax on
income or capital gain. We derived almost all of our revenues in 2006 from our principal PRC
operating subsidiary, Shenzhen GrenTech.
Because Shenzhen GrenTech was recognized by Shenzhen municipal government as an advanced
technology enterprise in December 2004, Shenzhen GrenTech applied for and was granted on December
13, 2005 an extension of its 50% relief from income tax for an additional three-year period
commencing from January 1, 2006. Shenzhen Lingxian is currently applying for recognition as an
advanced technology enterprise. If we receive the government approval, Shenzhen Lingxian will be
subject to the 50% reduced corporate income tax rate of 7.5% for the three financial years from
January 1, 2007 to December 31, 2009.
On March 16, 2007, the National People's Congress of the PRC passed the Enterprise Income Tax
Law, which law will take effect as of January 1, 2008. In accordance with the enterprise income
tax law, a unified enterprise income tax rate of 25%, a unified deduction measure and standard and
unified tax preferential treatment will be applied to both foreign invested and domestic
enterprises and an income tax rate of 15% will be provided to advanced technology enterprises
recognized by the government authorities. The new law also provides for transitional measures for
enterprises established prior to the promulgation of the new law and eligible for lower tax rate
preferential treatment in accordance with the then prevailing tax laws and administrative
regulations. These enterprises will gradually become subject to the new, unified tax rate over a
five-year period; enterprises eligible for regular tax reductions or exemptions may continue to
enjoy tax preferential treatments after the implementation of the new law and until their
preferential treatment expire. The preferential treatment period of enterprises which have not
enjoyed any preferential treatments for the reason of not having made any profits, however, shall
be deemed as starting from the implementation of the new law. In addition, foreign companies
headquartered in China may be classified as PRC resident enterprises and their worldwide income may
be subject to tax under the new law. Given that the new law has been promulgated only recently,
its implementation has yet to be further clarified in practice.
Upon expiration of these tax benefits, both Shenzhen GrenTech and Shenzhen Lingxian will be
subject to the then current corporate income tax rate applicable to enterprises established in the
Shenzhen Special Economic Zone. For more details, please see "Item 3. Key Information—Risk
Factors—Risks Relating to Our Company—If we lose certain government tax concessions, our
profitability may be materially and adversely affected."
Recent Accounting Pronouncements
FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxes
. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in our financial statements in accordance
with SFAS No. 109,
Accounting for Income Taxes
. FIN 48 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the
fiscal years beginning after December 15, 2006. We are in the process of evaluating the impact of
adopting this Interpretation on our financial condition, results of operations and cash flows.
Staff Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements
In September 2006, the Securities and Exchange Commission issued SAB 108,
Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
.
SAB 108 provides guidance on how prior year misstatements should be taken into consideration when
quantifying misstatements in current year financial statements for purposes of determining whether
the current year's financial statements are materially misstated. SAB 108 requires registrants to
apply the new quantification guidance to errors in existence at the beginning of the fiscal year
ending after November 15, 2006 by correcting errors determined to be material under this new
quantification method through a one-time cumulative effect adjustment to beginning-of-year retained
earnings. We adopted SAB 108 in our consolidated financial statements as of October 31, 2006. No
material adjustment was recorded by us upon adoption of SAB 108.
SFAS No. 156, Accounting for Servicing of Financial Assets – an amendment of SFAS No. 140
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In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets – an
amendment of SFAS No. 140.
This Statement amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting
for separately recognized servicing assets and servicing liabilities. This Statement
requires an entity to, among other things, recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a servicing contract
under certain specific situation(s). This Statement is effective in years beginning after
September 15, 2006. We are in the process of evaluating the impact of adopting this Statement on
our financial condition, results of operations and cash flows.
SFAS No. 157, Fair value measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This Statement defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. This Statement applies to other accounting pronouncements that require fair
value measurements and does not require any new fair value measurements. This Statement will be
effect in years beginning after November 15, 2007. We are in the process of evaluating the impact
of adopting this statement on our financial condition results of operations and cash flows.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an
amendment of SFAS No. 115
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities – Including an amendment of SFAS No. 115.
This Statement permits entities to
choose to measure many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. This Statement is effective in years beginning after
November 15, 2007. We are in the process of evaluating the impact of adopting this Statement on
our financial condition, results or operations and cash flows.
EITF Issue. 04-14, Accounting for Purchases and Sales of Inventory with the Same Counterparty
In September 2005, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No. 04-13,
Accounting for Purchases and Sales of Inventory with the Same Counterparty.
EITF 04-13 provides
guidance as to when purchases and sales of inventory with the same counterparty should be accounted
for as a single exchange transaction. EITF 04-13 also provides guidance as to when a nonmonetary
exchange of inventory should be accounted for at fair value. EITF 04-13 will be applied to new
arrangements entered into, and modification or renewals of existing arrangements occurring after
January 1, 2007. The adoption of EITE 04-13 is not expected to have a material effect on our
consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Executive Officers
The following table sets forth information regarding our directors and executive officers as
of the date hereof.
Directors
and Executive Officers
Age
Position
Yingjie Gao
51
Chairman
of the Board and Chief Executive Officer
Kunjie Zhuang
70
Director
and Chief Technology Officer
Rong Yu
42
Director, Chief Financial Officer and Principal
Accounting Officer
Liping Mao
41
Director
and Vice President
Cuiming Shi
66
Independent
Director
Xiaohu You
44
Independent
Director
Kin Kwong Mak
45
Independent
Director (Audit Committee financial expert)
Tianwen Ding
50
Vice
President
Qi Wang
41
Vice
President
Qingchang Liu
39
Vice
President
Guanyu Huang
41
Vice
President
Directors
Yingjie Gao
has served as the chairman of our board of directors and our chief executive
officer since our inception in 1999. Mr. Gao has over seven years of experience in management in
the wireless communication network coverage industry and has over 14 years of experience in
corporate operations and management in China. Prior to co-founding Shenzhen GrenTech in 1999, Mr.
Gao was the chairman and general manager of Shenzhen Tomorrow Image Design Company Limited, a
company that provides corporate image consultancy services to corporations, from 1993 to 1999. Mr.
Gao graduated from Jilin Correspondence College in 1983.
Kunjie Zhuang
has served as a director and our chief technology officer since our inception in
1999. Professor Zhuang has over 46 years of experience in RF technology research and development
and over 14 years of experience in the commercialization of RF technology. He is a well-recognized
expert in RF technology in China. Prior to co-founding Shenzhen GrenTech in 1999,
Professor
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Zhuang
was the director of Microwave Technology Discipline since 1973 at Southeast University in China.
Professor Zhuang received his bachelor's degree in radio technology from Southeast University in
1958.
Rong Yu
has served as a director of our company since December 2001. Ms. Yu was our manager of
our finance and accounting
department when she joined our company in 1999. In 2003, she became our financial controller
and vice president in charge of our financial management and accounting matters. In August 2005,
she became our chief financial officer. Before joining us in 1999, Ms. Yu taught industrial
accounting at Anhui Textiles School after receiving a bachelor's degree in industrial accounting
from Anhui College of Trade and Finance in 1987, and she also served as a finance manager for two
other companies in her previous career.
Liping Mao
has served as a director of our company since January 2007. He has also served as
our Vice President since June 2004, responsible for overseeing sales and marketing. Mr. Mao has 17
years of experience in sales and marketing in electronics and telecommunication products. Mr. Mao
joined our company in August 2000. He graduated from People's University of China in 1987 with a
bachelor's degree in law.
Cuiming Shi
has served as a director of our company since March 2006. Mr. Shi graduated in
1963 from the Department of Management Engineering at the Beijing University of Posts and
Telecommunications. From 1981 to 1987, Mr. Shi served as Deputy Director of the Department of
Postal Economic Research and as Deputy Director General of the Bureau of Finance of the Ministry of
Posts and Telecommunications. From 1987 to 1997, he was Director General of the Bureau of Finance,
Director General of the Department of Operations and Finance and Director General of the Department
of Finance of the Ministry of Posts and Telecommunications. He was previously the Chairman of the
board of directors and the chief executive officer of China Mobile (Hong Kong) Limited, a company
listed on The Stock Exchange of Hong Kong Limited and the New York Stock Exchange, and an executive
director and executive vice-president of China Unicom Limited, a company listed on The Stock
Exchange of Hong Kong Limited and the New York Stock Exchange. He is currently a consultant to
CITIC Pacific Limited and the chairman of CITIC Telecom 1616 Ltd.
Xiaohu You
has served as a director of our company since November 2004. He has been the
director of the radio engineering department of Southeast University since 1996. Mr. You currently
also serves as the head of National 3G Mobile Communications General Group, the head of National
Fourth Generation Mobile Communications General Research Group and Director of Mobile
Communications Laboratory, each at Southeast University in China. Professor You received his
bachelor's, master's and doctorate degrees from Southeast University in 1982, 1985 and 1988,
respectively.
Kin Kwong Mak
has served as a director of our company since November 2004. Mr. Mak is a fellow
member of the Association of Chartered Certified Accountants and a fellow of the Hong Kong
Institute of Certified Public Accountants. He is also a managing director of venFUND Investment
Management (Shenzhen) Limited. Mr. Mak was previously a partner of Arthur Andersen and a managing
partner of Arthur Andersen's offices in Shenzhen and Guangzhou, China from 1992 to 2001.
Executive Officers
Tianwen Ding
is a vice president of our company, responsible for overseeing our manufacturing,
quality control and supply lines departments. Mr. Ding was a director at the microwave research
division of the no. 54 division of the former PRC Ministry of Electronics Industry and the general
manager of Shenzhen Sed Communications Company Limited before he joined our company in April 2000.
Mr. Ding graduated from the Radio and Electronics department of Tsinghua University in 1982 with a
bachelor's degree in engineering and received his master's degree in engineering from China
Communication Inspection and Control Research Institute in 1985.
Qi Wang
is a vice president of our company, responsible for overseeing the operation of our
human resources department and our head office general affairs department. Between 1988 and 1999,
Mr. Wang was a department head of China Shenzhen Foreign Trade Group Corp. Ltd. and an assistant to
the general manager of Shenzhen Baoren Marketing Co., Ltd. He joined our company in July 1999. Mr.
Wang graduated with a bachelor's degree in economics from Beijing University of International
Economics and Business in 1988.
Qingchang Liu
is a vice president of our company, responsible for our corporate finance
activities. Mr. Liu has 14 years of experience in finance, securities trading and corporate
reorganizations and was involved in the corporate restructuring of, and capital raisings of, a
number of companies listed on the PRC domestic stock exchanges and the Hong Kong Stock Exchange.
Mr. Liu graduated from China College of Finance in July 1991 with a bachelor's degree in economics.
He obtained a master's degree in economics from the Shenzhen University in June 2003. Mr. Liu
joined our company in June 2000.
Guanyu Huang
is a vice president of our company responsible for base station RF business
operations. Mr. Huang joined us in October 2000 and served as Marketing Manager, Technical Support
Manager and Assistant to President previously. He studied at Harbin Maritime Engineering College
and graduated from The Open University of Hong Kong in December 2001 with a Master degree in
Business Administration.
The business address of our directors and executive officers is 16th Floor, Zhongyin Tower,
Caitian North Road, Futian District, Shenzhen, People's Republic of China, 518026.
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Board of Directors
Our board of directors currently consists of seven directors. A director is not required to
hold any shares in our company by way
of qualification. Following a declaration of interests pursuant to the provisions of our
amended and restated articles of association, any separate requirement for audit committee approval
under the applicable law or the relevant Nasdaq National Market rules, a director may vote with
respect to any contract, proposed contract or arrangement in which he or she is interested unless
he or she is disqualified by the chairman of the relevant board meeting. A director may exercise
all the powers of our company to borrow money, mortgage its undertaking, property and uncalled
capital, and issue debentures or other securities whenever money is borrowed or as security for any
obligation of our company or of any third party. We approved the establishment of three committees
of the board of directors: the audit committee, the compensation committee and the corporate
governance and nominating committee. We have also adopted a charter for each committee in
compliance with the Sarbanes-Oxley Act of 2002 and the Nasdaq corporate governance rules. Each
committee's members and functions are described below.
Audit Committee
Our audit committee consists of our three independent non-executive directors, namely Mr. Kin
Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. All of them satisfy the "independence"
requirements of the Nasdaq Marketplace Rules and meet the criteria for independence set forth in
Section 10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by
our board of directors by reference to similarly situated issuers and is in line with Rule 4350(d)
of the Nasdaq Marketplace Rules that requires the audit committees of U.S. companies to have a
minimum of three independent directors. There are, however, no specific requirements under Cayman
Islands law on the composition of our audit committee. The audit committee will oversee our
accounting and financial reporting processes and the audits of our financial statements. The audit
committee will be responsible for, among other things:
•
selecting the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent auditors;
•
reviewing and
approving all proposed related-party transactions;
•
discussing the
annual audited financial statements with management and the
independent auditors;
•
annually
reviewing and reassessing the adequacy of our audit committee
charter;
•
meeting
separately and periodically with management and the independent
auditors;
•
reviewing such other matters that are specifically delegated to our audit committee by
our board of directors from time to time; and
•
reporting
regularly to the full board of directors.
Compensation Committee
Our compensation committee consists of Mr. Yingjie Gao, Professor Kunjie Zhuang, Mr. Kin Kwong
Mak, Mr. Cuiming Shi and Professor Xiaohu You. Mr. Mak, Mr. Shi and Professor You satisfy the
"independence" requirements of the Nasdaq Marketplace Rules and meet the criteria for independence
set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was
established by our board of directors by reference to similarly situated issuers and differs from
Rule 4350(c)(3)(A)(ii) and (B)(ii) of the Nasdaq Marketplace Rules that requires the compensation
committees of U.S. companies to be comprised solely of independent directors. There are, however,
no specific requirements under Cayman Islands law on the composition of our compensation committee.
Our compensation committee assists our board in reviewing and approving the compensation structure
of our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. The compensation committee will be responsible for, among other
things:
•
reviewing and
determining the compensation package for our senior executives;
•
reviewing and
making recommendations to our board with respect to the compensation
of our directors;
•
reviewing and
approving officer and director indemnification and insurance
matters;
•
reviewing and
approving any employee loan in an amount equal to or greater than
RMB100,000; and
•
reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare
benefit plans.
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Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Mr. Yingjie Gao, Ms. Rong Yu,
Mr. Kin Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. Mr. Mak, Mr. Shi and Professor You
satisfy the "independence" requirements of the
Nasdaq Marketplace Rules and meet the criteria for independence set forth in Section
10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by our
board of directors by reference to similarly situated issuers and differs from Rule
4350(c)(4)(A)(ii) and (B)(ii) of the Nasdaq Marketplace Rules that requires the nominating
committees of U.S. companies be comprised solely of independent directors. There are, however, no
specific requirements under Cayman Islands law on the composition of our corporate governance and
nominating committee. The corporate governance and nominating committee will assist the board in
identifying individuals qualified to become our directors and in determining the composition of the
board and its committees. The corporate governance and nominating committee will be responsible
for, among other things:
•
identifying
and recommending to the board nominees for election or re-election to
the board;
•
making
appointments to fill any vacancy on our board;
•
reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and
availability of service to us;
•
identifying and recommending to the board any director to serve as a member of the
board's committees;
•
advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate governance
and on any corrective action to be taken; and
•
monitoring compliance with our code of business conduct and ethics, including reviewing
the adequacy and effectiveness of our procedures to ensure proper
compliance.
Duties of Directors
Under Cayman Islands law, our directors have a common law duty of loyalty to act honestly in
good faith with a view to our best interests. Our directors also have a duty to exercise the skill
they possess and such care and diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association. A shareholder has the right to seek
damages if a duty owed by our directors is breached. You should refer to "Description of Share
Capital — Corporate Governance" for additional information on our standard of corporate governance
under Cayman Islands law.
Employment and Service Agreements
Each of our executive directors has entered into an employment agreement and a service
agreement with us for an initial term of three years. The employment agreement relates to the
relevant executive position and the service agreement relates to the directorship. Each agreement
will continue after the initial term from year to year until terminated by such director or removed
by our shareholders as to the directorship or by our board of directors as to the relevant
executive position with three to six months' notice in writing served on the other party. Our
employment agreements with our executive management members also prohibit our management members
from illegally trading securities, restrict their use of our confidential information to their
employment with us and require them not to compete with us within two years after their employment
terminates. Our employment agreements also provide that any intellectual property created by our
management members during their employment belong to us and remain the property of our company.
Each independent director is appointed for an initial term of three years commencing from his
or her date of appointment and will continue after the initial term from year to year until
terminated by such director or removed by our shareholders with three to six months' notice in
writing served on the other party.
Officers are appointed by and serve at the discretion of our board of directors. Each
executive officer has entered into an employment agreement with us without a fixed term. Such
employment will continue in force until terminated by either party with three to six months' notice
in writing served on the other party.
Compensation of Directors and Executive Officers
All directors receive reimbursements from us for expenses which are necessarily and reasonably
incurred by them for providing services to us or in the performance of their duties. Our directors
who are also our employees receive compensation in the form of
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salaries, housing allowances, other
allowances and benefits in kind in their capacity as our employees. Our executive directors do not
receive any compensation in their capacity as directors apart from their salaries and other
remunerations as members of our management team. We pay their expenses related to attending board
meetings and participating in board functions. Our independent directors receive HK$250,000 per
person each year in office as compensation, plus reimbursement of all reasonable out-of-pocket
expenses incurred in discharging their duties, including attending board meetings and participating
in board functions.
The aggregate cash compensation and benefits that we paid to our directors and executive
officers for each of the three years
ended December 31, 2006 were approximately RMB1,977,000, RMB3,384,989 and RMB3,247,008
(US$416,064), respectively. Under our current arrangements, the aggregate remuneration and benefits
in kind which our directors and executive officers are entitled to receive in 2007 is expected to
be approximately RMB5,170,248 million, excluding any discretionary bonuses which may be paid to our
directors. No executive officer is entitled to any severance benefits upon termination of his or
her employment with our company.
Indemnification
Cayman Islands law does not limit the extent to which a company's articles of association may
provide for indemnification of officers and directors, except to the extent any such provision may
be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Pursuant to our
memorandum and articles of association, our directors and officers, as well as any liquidator or
trustee for the time being acting in relation to our affairs, will be indemnified and secured
harmless out of our assets and profits from and against all actions, costs, charges, losses,
damages and expenses that any of them or any of their heirs, executors or administrators may incur
or sustain by reason of any act done, concurred in or omitted in or about the execution of their
duties in their respective offices or trusts. Accordingly, none of these indemnified persons will
be answerable for the acts, receipts, neglects or defaults of each other; neither will they be
answerable for joining in any receipts for the sake of conformity, or for any bankers or other
persons with whom any moneys or effects belonging to us may have been lodged or deposited for safe
custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging
to us may be placed out or invested, or for any other loss, misfortune or damage which may happen
in the execution of their respective offices or trusts. This indemnity will not, however, extend to
any fraud or dishonesty which may attach to any of said persons.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been
informed that the SEC views such indemnification against public policy as expressed in the
Securities Act and is therefore unenforceable.
Share Option Scheme
Our share option scheme is a share incentive scheme which was adopted by our board of
directors and approved by our shareholders on August 25, 2005. We have not granted any share option
under our share option scheme. The purpose of this share option scheme is to recognize and
acknowledge the contributions the eligible participants had or may have made to our company. The
share option scheme will provide the eligible participants an opportunity to have a personal stake
in our company with the view to achieving the following objectives:
•
motivate the eligible participants to optimize their performance efficiency for the
benefit of our company; and
•
attract and retain or otherwise maintain an on-going business relationship with the
eligible participants whose contributions are or will be beneficial
to our long-term growth.
Eligible Participants
Under this share option scheme, our board of directors may, at its discretion, offer to grant
an option to subscribe for such number of our ordinary shares at an exercise price as our directors
may determine to:
•
any full-time
or part-time employees, executives or officers of our company or any
of our subsidiaries;
•
any
directors, including non-executive directors and independent
directors, of our company or any of our subsidiaries;
•
any advisers,
consultants and agents to us or any of our subsidiaries; and
•
such other persons who, in the sole opinion of our board of directors, will contribute or
have contributed to our development and operations and our quality of work, have shown
initiative and commitment in performing his/her duties, or have provided service or
contribution to our company for a specified length of time.
Maximum Number of Shares
The maximum number of ordinary shares in respect of which options may be granted (including
ordinary shares in respect of
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which options, whether exercised or still outstanding, have already
been granted) under this share option scheme must not in aggregate exceed 10% of the total number
of ordinary shares in issue immediately following the completion of our initial public offering,
being 625,000,000 ordinary shares.
In addition, the total number of ordinary shares issued and which may be issued upon exercise
of the options granted under this share option scheme and any other share option schemes of ours
(including both exercised and outstanding options) to each individual eligible participant in any
12-month period up to the date of grant may not exceed 1% of our shares in issue as of the date of
grant.
Our board of directors may, subject to the approval of our shareholders in a general meeting,
(i) renew this limit at any time, and/or (ii) grant options beyond the limit to eligible
participant(s) specifically identified by our board of directors. A share option scheme circular
distributed to participants will contain a generic description of the specified eligible
participant(s) who may be granted such options, the number and terms of the options to be granted,
the purpose of granting options to the specified eligible participant(s) with an explanation as to
how the options serve such purpose. However, no options may be granted under any schemes (including
this share option scheme) if the number of our shares issuable upon exercise of all outstanding
options will exceed 30% of our shares in issue from time to time.
Price of Shares
Our board of directors may, in its discretion, determine the subscription price of an ordinary
share in respect of any particular option granted under this share option scheme. However, such
subscription price cannot be less than the highest of (i) the closing price of the shares as quoted
in the Nasdaq National Market on the date of grant, (ii) the average of the closing prices of the
shares as quoted in the Nasdaq National Market for five business days immediately preceding the
date of grant, and (iii) the nominal value of a share.
Restrictions on the Times of Grant of Options
A grant of options may not be made after a price sensitive event has occurred or a price
sensitive matter has been the subject of a decision until such price sensitive information has been
disclosed to the public. In particular, no options may be granted during the one-month period
before (i) the date of the board meeting for the approval of our results for any year, half-year,
quarterly or other interim period, and (ii) our deadline to publish our results for any year, or
half-year, or quarterly or other interim period.
Transferability
An option is personal to the grantee and may be exercised or treated as exercised, as the case
may be, in whole or in part. Under the share option scheme, no grantee may, in any way, sell,
transfer, charge, mortgage, encumber or create any interest (legal or beneficial) in favor of any
third party over or in relation to any option or attempt so to do.
Exercise of Option and Duration of the Share Option Scheme
The period during which an option may be exercised will be determined by our board of
directors, in its absolute discretion. However, no option may be exercised more than 10 years after
it has been granted.
In addition, a grantee may be required to achieve any performance targets, as our board of
directors may then specify in the grant, before any options granted under the share option scheme
can be exercised.
Rights on Ceasing Employment or Death of an Employee
If the grantee of an option ceases to be an employee of our company or any of our subsidiaries
•
by any reason other than death or termination of his employment on the grounds specified
in paragraph "Right on Dismissal" in the scheme, the grantee may exercise the option up to
the entitlement of the grantee as of the date of cessation (to the extent not already
exercised) within a period of one month from such cessation; or
•
by reason of death, his personal representative(s) may exercise the option within a
period of 12 months from such cessation, which date shall be the last actual working day
with us or our subsidiary whether salary is paid in lieu of notice or not, failing which it
will lapse.
Rights on Takeover/Winding-Up
If a general offer is made to all of our shareholders and such offer becomes or is declared
unconditional during the option period of the relevant option, then the grantee of an option is
entitled to exercise the option in full (to the extent not already exercised)
at any
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time within 14
days after the date on which the offer becomes or is declared unconditional.
In the event of a voluntary winding-up of our company, we will give notice to all grantees
before a general meeting of the shareholders, and each grantee is entitled to exercise all or any
of his/her options (to the extent not already exercised), at any time not later than two business
days prior to the proposed general meeting, by giving a written notice to us together with a
remittance for the full amount of the aggregate subscription price for the shares.
Alteration of the Share Option Scheme
Our board has the authority to amend, suspend or terminate the share option scheme subject to
our shareholders' approval of amendments to the extent necessary to comply with applicable laws and
provided no such action may affect awards previously granted under the scheme.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
As of the date of this annual report, we had 625,000,000 shares outstanding. The table below
sets forth information as of the date of this annual report regarding the beneficial ownership of
our ordinary shares by each person known by us to beneficially own 5% or more of our outstanding
ordinary shares. Except as otherwise indicated, we believe each shareholder named in this table
has sole voting and investment power with respect to the shares shown as beneficially owned. None
of our shareholders listed below has voting rights that are different from any of our other
shareholders.
Shares
beneficially owned
Name
Number
%
Guoren
Industrial
(1)
150,000,000
24.0
%
HXY
Investments
(2)
114,587,375
18.3
%
Actis
China
(3)
61,730,925
9.9
%
Drag
Investments
(4)
64,290,000
10.3
%
Standard
Chartered Private
Equity
(5)
48,355,425
7.7
%
Wells
Fargo & Company
(6)
46,014,950
7.4
%
(1)
Guoren Industrial is 65% owned by Mr. Yingjie Gao and 35% owned by Mr. Fan Zhang. Mr. Zhang
is not related to or otherwise affiliated with Mr. Gao.
(2)
Represents 120,710,000 ordinary shares owned by HXY Investments. HXY Investments is a British
Virgin Islands company 27.78% owned by Mr. Guang Shi, 18.055% by Ms. Yin Huang, 18.055% by Ms.
Rong Yu, 18.055% by Mr. Qi Wang and 18.055% by Mr. Jin
Wan.
(3)
Represents 61,730,925 ordinary shares owned by Actis China. Actis China is a wholly owned
subsidiary of Actis China Fund 2, L.P., which is a limited partnership registered in England.
Its limited partners have no voting or investment control over its investments (including the
shares held by Actis China Fund 2, L.P.). Investment and voting decisions are made by Actis
China Fund 2, L.P.'s manager Actis Capital LLP through unanimous decision at meetings of Actis
Capital LLP's investment committee for Actis China Fund LLP. Actis China has entered into a
declaration of trust with Actis Executive Co- Investment Plan L.P. pursuant to which Actis
Executive Co-Investment Plan L.P. is the beneficial owner of 1.9% of the shares held by Actis
China.
(4)
Drag Investments is a British Virgin Islands company wholly owned by
Professor Kunjie Zhuang.
(5)
Represents 48,355,425 ordinary shares owned by Standard Chartered Private Equity. Standard
Chartered Private Equity is incorporated in Hong Kong and is indirectly wholly owned by
Standard Chartered PLC, a company incorporated in the United Kingdom. Standard Chartered PLC
is a widely held public company listed on the London Stock Exchange and the Hong Kong Stock
Exchange.
(6)
Wells Fargo & Company is a Delaware corporation with a diversified financial services in
banking, insurance, investments, mortgage and consumer finance.
RELATED PARTY TRANSACTIONS
Our Related-Party Transaction Policies
We have conducted our related-party transactions on normal commercial terms that are fair and
reasonable and in the interests
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of our shareholders as a whole. We believe that the terms of our
related-party transactions are comparable to the terms we could obtain from independent third
parties. Our related-party transactions are subject to the review and approval of the audit
committee of our board of directors. The charter of our audit committee as adopted by our board of
directors provides that we may not enter into any related-party transaction unless and until it has
been approved by the audit committee.
Acquisitions of Equity Interests in Lake Microwave and Lake Communication
In June 2004, GrenTech BVI, one of our consolidated subsidiaries, acquired an additional 29%
equity interest in Lake Microwave from Lake HK and, Shenzhen GrenTech
repurchased
an 8% equity interest in Lake Communication from Mr. Haifan Zhuang, for a lump sum cash
consideration of RMB1.1 million. As a result of these transactions, we indirectly own 80% and 80%
equity interests in Lake Microwave and Lake Communication, respectively.
Lease with Shenzhen Fang Sheng
We have occupied certain premises in an office building in Shenzhen owned by Shenzhen Fang
Sheng AutoBig World Management Co. Ltd., or Shenzhen Fang Sheng, which is managed by directors of
our company. The term of our lease with Shenzhen Fang Sheng is for one year, which has been
renewed each year with the current term to expire on December 31, 2007. Our yearly lease payment
paid to Shenzhen Fang Sheng is RMB1.0 million.
ITEM 8. FINANCIAL INFORMATION
Our audited consolidated financial statements are set forth beginning on page F-1. Other than
as disclosed elsewhere in this annual report, no significant change has occurred since the date of
the annual financial statements.
Legal Proceedings
We are involved in legal proceedings in the ordinary course of our business. We are not
involved in any litigation, arbitration or administrative proceedings that could have a material
adverse effect on our financial condition or results of operations, taken as a whole. So far as we
are aware, no such material litigation, arbitration or administrative proceedings are threatened.
Dividend Policy
We do not intend to pay any cash dividends on our ordinary shares in the foreseeable future.
We intend to retain most, if not all, of our available funds and any future earnings for use in the
operation and expansion of our business. Our board of directors has complete discretion as to
whether we will pay dividends in the future, subject to the approval of our shareholders. Any
future dividend declaration will be subject to various factors, including:
•
the level of
our cash and retained earnings;
•
our expected
financial performance;
•
our projected
levels of capital expenditure and other investment plans;
•
the adequacy
of our working capital; and
•
the dividend yield of similarly listed companies with similar growth prospects as well as
comparable providers of wireless coverage products and services
globally.
In addition, we are a holding company, and our cash flow depends on dividends from our
operating subsidiaries in China. The ability of our subsidiaries in China to pay dividends to us is
subject to various restrictions, including legal restrictions in China that permit payment of
dividends only out of net income determined in accordance with PRC accounting standards and
regulations. Under PRC law, Shenzhen GrenTech, as a wholly foreign owned enterprise, and Shenzhen
Lingxian and Quanzhou Lake Communication Co., Ltd., or Lake Communication, both as domestic limited
liability companies in China, must allocate at least 10% of their after-tax profit to their
statutory general reserve fund until the balance of the fund has reached 50% of their registered
capital. In addition, Shenzhen Lingxian and Lake Communication, as domestic limited liability
companies, were required to transfer between 5% and 10% of their after-tax profit to the statutory
public welfare reserve fund. As of January 1, 2006, however, Shenzhen
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Lingxian and Lake
Communication are no longer subject to such public welfare reserve requirement due to the amendment
of the PRC Company Law, which became effective on January 1, 2006. Shenzhen GrenTech, as a wholly
foreign owned enterprise, has complete discretion in allocating its after-tax profit to its
statutory welfare reserve fund. Lake Microwave, as a sino-foreign joint venture, has discretion in
allocating any portion of its after-tax profits to its statutory general reserve fund, enterprise
development reserve fund and employee welfare reserve fund. These reserve funds are not
distributable as cash dividends. You should read "Item 3. Key Information—Risk Factors—Risks
Relating to Our Company—Our primary source of funds for dividend and other distributions from our
operating subsidiary in China is subject to various legal and contractual restrictions and
uncertainties, and our ability to pay dividends or make other distributions to our shareholders is
negatively affected by those restrictions and uncertainties" for additional information on our
dividend and distribution restrictions."
The depositary has agreed to distribute to the holders of our ADSs any dividend we declare and
pay on our ordinary shares that are evidenced by ADSs to the holders of our ADSs, subject to the
terms of the deposit agreement, to the same extent as holders of our ordinary shares, less its fees
and expenses payable under the deposit agreement. The depositary may send to you anything else we
distribute on deposited securities by means it considers lawful and reasonably practical. If it
cannot make the distribution that way, the depositary may decide to sell what we distributed and
distribute the net proceeds in the same way as it does with cash or hold what we distributed if it
cannot be sold. Cash dividends on our ordinary shares will be paid in U.S. dollars.
ITEM 9. THE OFFER AND LISTING
In connection with our initial public offering, our American depositary shares, or ADSs, each
representing 25 ordinary shares, were listed and commenced trading on the NASDASQ National Market
on March 29, 2006 under the symbol "GRRF." Prior to our initial public offering, there was no
public market for our equity securities. The NASDAQ National Market is the principal trading
markets for our ADSs and ordinary shares, which are not listed on any other exchanges in or outside
the United States.
As of December 31, 2006, there were 425,799,000 ordinary shares issued and outstanding and 1
registered holders of American depositary receipts evidencing 7,968,040 ADSs. As of the date
hereof, there were 398,115,500 ordinary shares issued and outstanding and 1 registered holders of
American depositary receipts evidencing 9,075,380 ADSs. Since certain of the ADSs are held by
nominees, the above number may not be representative of the actual number of U.S. beneficial
holders of ADSs or the number of ADSs beneficially held by U.S. persons. The depositary for the
ADSs is Citibank, N.A.
The high and low marketing prices of the ADSs on the NASDAQ National Market for the periods
indicated are as follows.
Price
per ADS (US$)
High
Low
Annual
2006 (from listing date)
22.50
8.21
Quarterly
First Quarter, 2006 (from listing date)
22.50
16.88
Second Quarter, 2006
18.30
10.50
Third Quarter, 2006
14.60
8.21
Fourth Quarter, 2006
19.81
10.11
Monthly
November 2006
17.85
12.75
December 2006
19.81
15.17
January 2007
19.00
13.68
February 2007
14.23
11.71
March 2007
12.30
9.06
April 2007
11.81
9.76
ITEM 10. ADDITIONAL INFORMATION
SHARE CAPITAL
Not applicable.
MEMORANDUM AND ARTICLES OF ASSOCIATION
The section entitled "Description of Share Capital" contained in our registration statement on
Form F-1 (File No. 333-132381) filed with the Security and Exchange Commission is hereby
incorporated by reference.
MATERIAL CONTRACTS
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in this annual report on Form 20-F.
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EXCHANGE CONTROLS
We receive substantially all of our revenues in Renminbi, which is not a freely convertible
currency. Although central government's policies were introduced in 1996 to reduce restrictions on
the convertibility of Renminbi into foreign currency for current account items, conversion of
Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or
security, requires the approval of the State Administration of Foreign Exchange and other relevant
authorities.
The People's Bank of China, or PBOC, sets and publishes daily a base exchange rate with
reference primarily to the supply and demand of Renminbi against a basket of currencies in the
market during the prior day. The PBOC also takes into account other factors, such as the general
conditions existing in the international foreign exchange markets. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based
on rates set by the PBOC, which are set daily based on the previous day's interbank foreign
exchange market rates and current exchange rates in the world financial markets. From 1994 to July
20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally
stable. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on
the convertibility of Renminbi into foreign currency for current account items, conversion of
Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or
securities, requires the approval of the State Administration for Foreign Exchange and other
relevant authorities. On July 21, 2005, the PRC government introduced a managed floating exchange
rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market
supply and demand and by reference to a basket of currencies. As a result, as of May 1, 2007, the
Renminbi has appreciated approximately 7.4% against the U.S. dollar since July 2005. The PRC
government in the future may make further adjustments to the exchange rate system.
TAXATION
The following summary of the material Cayman Islands and United States federal income tax
consequences relevant to the purchase, ownership or sale of our ADSs is based upon laws and
relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. The summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to any particular investor depending on its individual
circumstances. Accordingly beneficial owners of shares should consult their own tax advisors
regarding the application of the considerations discussed below to their particular situations and
the consequences, including U.S. federal estate or gift tax laws, foreign, state, or local laws,
and tax treaties.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or
estate duty. There are no other taxes likely to be material to us levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to
any double tax treaties. There are no exchange control regulations or currency restrictions in the
Cayman Islands.
United States Federal Income Taxation
The following is a summary of the principal United States federal income tax consequences
under present law of an investment in the shares or ADSs. This summary is based upon existing
United States federal income tax law, which is subject to differing interpretations or change,
possibly with retroactive effect. This summary applies only to investors that hold the shares or
ADSs as capital assets and that have the U.S. dollar as their functional currency.
The following discussion does not deal with the tax consequences to any particular investor or
to persons in special tax situations such as
•
banks;
•
insurance companies;
•
broker dealers;
•
traders in securities that elect to mark to market;
•
partnerships and their partners;
•
tax-exempt entities;
•
holders who are not U.S. Holders;
•
persons liable for alternative minimum tax;
•
persons holding a share or ADS as part of a straddle, constructive sale, hedging,
conversion or integrated transaction; or
•
holders that actually or constructively own 10% or more of our voting stock.
* * * * * * * * * * * * * * * * * * * * *
Prospective purchasers are urged to consult their tax advisors about the United States federal,
state and local tax consequences to them of the purchase, ownership and disposition of shares or
ADSs.
* * * * * * * * * * * * * * * * * * * * *
The discussion below of the United States federal income tax consequences to "U.S. Holders"
will apply if you are the beneficial owner of shares or ADSs and you are for United States federal
income tax purposes:
•
an individual citizen or resident of the United States;
•
a corporation (or other entity treated as a corporation for United States federal
income tax purposes) organized in or under the laws of the United States, any state thereof
or the District of Columbia;
•
an estate whose income is subject to United States federal income taxation regardless
of its source;
•
a trust that is subject to the primary supervision of a court within the United States
and the control of one or more United States persons; or
•
a trust that has a valid election in effect under applicable U.S. Treasury regulations
to be treated as a United States person.
If a partnership holds shares or ADSs, the tax treatment of a partner will generally depend
upon the status of the partner and the activities of the partnership. If you are a partner of a
partnership holding shares or ADSs, you should consult your tax advisors.
The discussion below is written on the basis that the representations contained in the deposit
agreement are true and that the obligations in the deposit agreement and any related agreement will
be performed in accordance with the terms. If you hold ADSs, you generally will be treated as the
owner of the underlying ordinary shares represented by those ADSs for United States federal income
tax purposes. Accordingly, deposits or withdrawal of shares for ADSs will not be subject to United
States federal income tax.
U.S. Holders
Taxation of Dividends and Other Distributions on the Shares or ADSs
Subject to the passive foreign investment company rules discussed below, all our distributions
to you with respect to the shares or ADSs, other than certain pro rata distributions of our shares
or ADSs, will be includible in your gross income as ordinary dividend income when you, in the case
of shares, or the depositary, in the case of ADSs, receive the distribution, but only to the extent
that the distribution is paid out of our current or accumulated earnings and profits as determined
under United States federal income tax principles. Because we do not intend to determine our
earnings and profits on the basis of United States federal income tax principles, any distribution
paid will generally be treated as a "dividend" for United States federal income tax purposes. The
dividends will not be eligible for the dividends-received deduction allowed to corporations. To the
extent that the amount of the distribution exceeds our current and accumulated earnings and
profits, it will be treated first as a tax-free return of your tax basis in your shares or ADSs,
and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed
as capital gain.
Dividends may be taxed at the lower applicable capital gains rate provided that (1) the ADS or
ordinary shares, as applicable, are readily tradable on an established securities market in the
United States, (2) we are not a passive foreign investment company (as discussed below) for either
our taxable year in which the dividend was paid or the preceding taxable year, and (3) certain
holding period requirements are met. Under recently published Internal Revenue Service authority,
common or ordinary shares, or ADSs representing such shares, are considered for purposes of clause
(1) above to be readily tradable on an established securities market in the United States if they
are listed on the Nasdaq National Market.
A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign
tax credit in respect of any foreign withholding taxes imposed on dividends received on the shares
or ADSs. A U.S. Holder who does not elect to claim a foreign tax credit for foreign income tax
withheld, may instead claim a deduction, for United States federal income tax purposes, in respect
of such withholdings, but only for a year in which such holder elects to do so for all creditable
foreign income taxes. Dividends will constitute foreign source income for foreign tax credit
limitation purposes.
Taxation of Disposition of Shares or ADSs
Subject to the passive foreign investment company rules discussed below, you will recognize
taxable gain or loss on any sale or exchange of a share or ADS in an amount equal to the difference
between the amount realized (in U.S. dollars) for the share or ADS and your tax basis (in U.S.
dollars) in the share or ADS. The gain or loss will generally be capital gain or loss and will be
long-term capital gain or loss if you are an individual who has held the share or ADS for more than
one year. The deductibility of a capital loss maybe subject to limitations. Any gain or loss that
you recognize will generally be treated as United States source gain or loss.
Passive Foreign Investment Company
Based on our current and projected income and assets, we do not believe that we should be
classified as a passive foreign investment company for United Sates federal income tax purposes and
do not expect to become a passive foreign investment company in the future. A company is considered a passive
foreign investment company for any taxable year if either:
•
at least 75% of its gross income is passive income, or
•
at least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held for
the production of passive income.
For this purpose, cash is categorized as a passive asset and the Company's unbooked
intangibles are taken into account. We will be treated as owning our proportionate share of the
assets and earning our proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25% (by value) of the stock.
In calculating the value of our goodwill and other unbooked intangibles, we have valued our
total assets based on our total market value determined using the lowest selling price of the
shares for the past year and have made a number of assumptions regarding the amount of this value
allocable to goodwill. We believe our valuation approach is reasonable. However, it is possible
that the Internal Revenue Service will challenge the valuation of our goodwill, which may also
result in us being classified as a passive foreign investment company.
The determination of whether will be classified as a passive foreign investment company is
made annually. As a result, our passive foreign investment company status may change. In
particular, as we have valued our goodwill based on the market value of our shares or ADSs, a
decrease in the price of our shares or ADSs below the lowest trading price of the shares or ADSs
for the preceding year may result in us becoming a passive foreign investment company.
If we are a passive foreign investment company for any taxable year during which you hold
shares or ADSs, you will be subject to special tax rules with respect to any "excess distribution"
that you receive and any gain you realize from a sale or other disposition (including a pledge) of
the shares or ADSs. Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three preceding taxable years
or your holding period for the shares or ADSs will be treated as an excess distribution. Under
these special tax rules:
•
the excess distribution or gain will be allocated ratably over your holding period for
the shares or ADSs,
•
the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we were a passive foreign investment company, will be treated
as ordinary income, and
•
the amount allocated to each other year will be subject to tax at the highest tax rate
in effect for that year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.
Non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends
received from us, if we are a passive foreign investment company in the taxable year in which such
dividends are paid or in the preceding taxable year.
DIVIDENDS AND PAYING AGENTS
Not applicable.
STATEMENT BY EXPERTS
Not applicable.
DOCUMENTS ON DISPLAY
You can read and copy documents referred to in this annual report that have been filed with
the SEC at the SEC's public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and
their copy charges. The SEC also maintains a website at http://www.sec.gov that contains reports
and other information that we have filed electronically with the SEC.
SUBSIDIARY INFORMATION
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 5. Operating and Financial Review and Prospects—Market Risk and Risk Management."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART
II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS.
None.
USE OF PROCEEDS
The following "Use of Proceeds" information relates to the registration statement on Form F-1
(File No. 333-132381) (the "IPO Registration Statement") for our initial public offering, including
an offering of 5,000,000 ADSs by us for an aggregate offering price of US$90 million and an
offering of 1,250,000 ADSs by our selling shareholders for an aggregate offering price of
US$22,500,000. The IPO Registration Statement was declared effective by the SEC on March 29, 2006.
Our initial public offering was terminated after all of the registered securities were sold.
Bear Stearns & Co. Inc., Piper Jaffray & Co. and WR Hambrecht + Co., LLC were the underwriters
for our initial public offering.
We received net proceeds of approximately US$83.7 million from our initial public offering,
after deducting approximately US$7.2 million for underwriting discounts and commissions, and
approximately US$2.5 million for other expenses. None of the payments were direct or indirect
payments to our directors, officers, general partners of our associates, persons owning 10% or more
of any class of our shares, or any of our affiliates.
We have used the net proceeds from our initial public offering for (1) research and
development on RF technology and our new product offerings, (2) expansion of and further
penetration by our sales and marketing distribution network, (3) construction of new research and
production facilities in Shenzhen High Technology Industrial Park, and (4) other general corporate
purposes.
ITEM 15. CONTROLS AND PROCEDURES
Evalution
of Disclosure Controls and Procedures
Our principal executive officers and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and
15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end
of the period covered by this annual report, have concluded that, as of such date, our disclosure
controls and procedures were effective to ensure that material information relating to us and our
consolidated subsidiaries was made known to them by others within our company and our consolidated
subsidiaries on a timely basis and that the information required to be disclosed by us in the
report that we file and furnish under the Exchange Act was recorded, processed, summarized and
reported, within the time periods specified in by the SEC's rules and regulations.
Changes
in Internal Controls over Financial Reporting
There
were no adverse changes in our internal controls over financial
reporting that occurred during the period covered by this annual
report on Form 20-F that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.
In addition, under the supervision and with the participation of our senior management, including our chief
executive officer and chief financial officer, we are in the process of conducting further evaluation of our internal controls over financial reporting for compliance with the requirements of
Section 404 under the Sarbanes-Oxley Act. In this regard, we have engaged an advisor to assist us in evaluating, designing, implementing and testing internal controls over financial reporting intended
to comply with the requirements of Section 404. As we are still in the evaluation process, we may identify material weaknesses or significant deficiencies in the future. Should we discover such
conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Kin Kwong Mak qualifies as an audit committee
financial expert in accordance with the terms of Item 16.A of Form 20-F. For Mr. Mak's
biographical information, see "Item 6. Directors, Senior Management and Employees—Directors and
Senior Management."
ITEM 16B CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial
Officer, and other designated members of senior management of the Company. We have filed this code
of ethics as an exhibit to this annual report.
61
Table of Contents
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our
principal accountants and all other fees billed for products and services provided by our principal
accountants other than the audit fees, audit-related fees and tax fees for such of the two years
ended December 31, 2006:
Audit
Fees
Audit-Related
Fees
Tax
Fees
Other
Fees
(in
millions of RMB)
2005
4.2
—
—
—
2006
2.5
—
—
—
Before our principal accountants were engaged by our company or our subsidiaries to render
audit or non-audit services, the engagement was approved by our audit committee as required by
applicable rules and regulations of the U.S. Securities and Exchange Commission.
ITEM
16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM
16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
None.
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS
See Index to Financial Statements for a list of all financial statements filed as part of this annual report.
ITEM 19. EXHIBITS
Exhibit
No.
Description
of Exhibit
1.1
Amended
and Restated Memorandum and Articles of Association of the
Registrant
(1)
2.1
Form
of share
certificate
(1)
2.2
Form
of deposit agreement, including form of American Depositary
Receipt
(2)
11.1
Code
of Ethics
12.1
302
CEO
Certification
12.2
CEO
Certification
12.5
302 CFO
Certification
13.1
906 Certification
by the CEO and the CFO
(1)
Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-132381)
filed with the SEC in connection with our global offering in
November 2004.
(2)
Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-132385)
filed with the SEC with respect to American Depositary Shares representing our ordinary
shares.
62
Table of Contents
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
China GrenTech Corporation Limited
/s/ Yingjie Gao
Name:
Yingjie
Gao
Title:
Chief
Executive Officer
Date: May 4, 2007
63
INDEX
TO THE FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets as of December 31, 2005 and 2006
F-2
Consolidated Statements of Income for the years ended December 31, 2004, 2005
and 2006
F-3
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2004, 2005 and 2006
F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2005 and 2006
F-6
Notes to the Consolidated Financial Statements
F-8
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
China GrenTech Corporation Limited:
We have audited the accompanying consolidated balance sheets of China GrenTech Corporation Limited
and subsidiaries as of December 31, 2005 and 2006, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the years in the three-year period ended
December 31, 2006, all expressed in Renminbi. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China GrenTech Corporation Limited and subsidiaries as
of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
The accompanying consolidated financial statements as of and for the year ended December 31, 2006,
have been translated into United States dollars solely for the convenience of the reader. We have
audited the translation and, in our opinion, such consolidated financial statements expressed in
Renminbi have been translated into United States dollars on the basis set forth in Note 2(b) to the
consolidated financial statements.
KPMG
Hong Kong, China
April 20, 2007
F-1
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Consolidated Balance Sheets
as of December 31 2005 and 2006
(RMB and US$ expressed in thousands)
Note
2005
2006
2006
RMB
RMB
US$
Assets
Current assets
Cash and cash equivalents
128,608
467,423
59,895
Pledged time deposits
3
76,250
238,618
30,576
Accounts
receivable, net of allowances for estimated settlement discounts and
doubtful debts of RMB 24,204 and RMB 21,159 respectively as of December 31, 2005 and 2006
4
537,321
747,859
95,829
Inventories
5
370,136
434,406
55,664
Prepaid expenses and other current assets
51,275
52,635
6,744
Deferred income taxes and deferred tax
charges
6
8,482
7,466
957
Total current assets
1,172,072
1,948,407
249,665
Property, plant and equipment, net
7
120,356
168,603
21,604
Lease prepayments, net
8
4,736
13,632
1,746
Investment securities
9
7,944
7,944
1,018
Goodwill
11
8,216
8,216
1,053
Intangible assets, net
10
113
75
10
Long-term accounts receivable, net
4
162,032
268,957
34,464
Total assets
1,475,469
2,415,834
309,560
Liabilities
Current liabilities
Short-term bank loans
14
160,614
336,050
43,061
Accounts payable
174,367
181,220
23,221
Bills payable
29,067
78,576
10,069
Accrued expenses and other payables
12
263,331
208,833
26,759
Amounts due to related parties
21
1,920
—
—
Income tax payable
28,344
35,760
4,582
Dividend payable
80,908
25,996
3,331
Total current liabilities
738,551
866,435
111,023
Long-term debt
15
167,053
—
—
Total liabilities
905,604
866,435
111,023
Commitments and contingencies
25
Minority interests
17,704
18,971
2,431
Mandatorily redeemable convertible preference shares
US$0.00002 par value; 33,634,500 shares authorized, issued
and outstanding as of December 31, 2005; fully converted
into ordinary shares and nil outstanding as of
of December 31, 2006
16
45,441
—
—
Shareholders' equity
Ordinary shares US$0.00002 par value; 2,500,000,000 shares
authorized, 466,365,500 and 625,000,000 issued and outstanding
as of December 31, 2005 and 2006
respectively
17
77
103
13
Contributed surplus
158,534
853,476
109,363
Statutory reserves
117,092
132,403
16,966
Retained earnings
231,017
544,446
69,764
Total shareholders' equity
506,720
1,530,428
196,106
Total liabilities and shareholders' equity
1,475,469
2,415,834
309,560
See accompanying notes to the consolidated financial statements
F-2
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Consolidated
Statements of Income
for the years ended December 31, 2004, 2005 and 2006
(RMB and US$ expressed in thousands, except per share data)
Note
2004
2005
2006
2006
RMB
RMB
RMB
US$
Revenues
18
566,504
716,270
832,795
106,712
Cost of revenues
19
(241,930
)
(328,064
)
(437,040
)
(56,001
)
Gross profit
324,574
388,206
395,755
50,711
Operating expenses:
Research and development costs
19
(16,326
)
(30,616
)
(47,671
)
(6,108
)
Sales and distribution expenses
19
(71,035
)
(91,489
)
(112,948
)
(14,473
)
General and administrative
expenses
19
(29,744
)
(41,057
)
(55,944
)
(7,169
)
Total operating expenses
(117,105
)
(163,162
)
(216,563
)
(27,750
)
Operating income
207,469
225,044
179,192
22,961
Other income/(expense)
Interest income
4,006
3,213
19,186
2,458
Interest expense
(39,392
)
(36,105
)
(28,026
)
(3,591
)
Investment income
899
159
238
30
Foreign currency exchange
gain/(loss)
—
5,584
(9,875
)
(1,265
)
Grant income
716
16,732
7,670
983
Total other expense
(33,771
)
(10,417
)
(10,807
)
(1,385
)
Income before income tax expense and
minority interests
173,698
214,627
168,385
21,576
Income tax expense
6
(16,020
)
(26,097
)
(18,277
)
(2,342
)
Income before minority interests
157,678
188,530
150,108
19,234
Minority interests, net of tax
(11,117
)
(7,086
)
(1,267
)
(162
)
Net income
146,561
181,444
148,841
19,072
Dividends, accretion to redemption value
and of foreign currency rate movements
on mandatorily redeemable convertible
preference shares
16
(3,509
)
(2,428
)
(549
)
(70
)
Net income available to ordinary
shareholders
143,052
179,016
148,292
19,002
Net income per share available to ordinary
shareholders:
– Basic
20
0.31
0.38
0.25
0.03
– Diluted
20
0.29
0.36
0.25
0.03
Weighted average number of ordinary
shares:
– Basic
20
466,365,500
466,365,500
584,580,799
584,580,799
– Diluted
20
500,000,000
500,000,000
593,150,684
593,150,684
See accompanying notes to the consolidated financial statements.
F-3
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Consolidated
Statements of Shareholder's Equity
for the years ended December 31, 2004, 2005 and 2006
(RMB and US$ expressed in thousands, except per share data)
Ordinary shares
Total
Number of
Contributed
Statutory
Retained
shareholders'
Note
shares
Amount
surplus
reserves
earnings
equity
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2004
466,365,500
77
158,534
57,249
44,289
260,149
Net income
—
—
—
—
146,561
146,561
Appropriation to statutory reserves
—
—
—
25,721
(25,721
)
—
Dividends declared on ordinary
shares
—
—
—
—
(54,411
)
(54,411
)
Dividends declared on mandatorily
redeemable convertible
preference shares
16
—
—
—
—
(2,193
)
(2,193
)
Accretion to redemption value on
mandatorily redeemable
convertible preference shares
16
—
—
—
—
(1,316
)
(1,316
)
Balance as of December 31, 2004
466,365,500
77
158,534
82,970
107,209
348,790
Net income
—
—
—
—
181,444
181,444
Interest on long-term debt paid by
shareholders
15
—
—
—
—
8,567
8,567
Appropriation to statutory reserves
—
—
—
34,122
(34,122
)
—
Dividends declared on ordinary
shares
—
—
—
—
(29,653
)
(29,653
)
Dividends declared on mandatorily
redeemable convertible
preference shares
16
—
—
—
—
(2,139
)
(2,139
)
Accretion to redemption value on
mandatorily redeemable
convertible preference shares
16
—
—
—
—
(1,385
)
(1,385
)
Effect of foreign currency rate
movement on mandatorily redeemable
convertible preference shares
—
—
—
—
1,096
1,096
Balance as of December 31, 2005
466,365,500
77
158,534
117,092
231,017
506,720
F-4
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Shareholder's Equity
for the years ended December 31, 2004, 2005 and 2006 (Continued)
(RMB and US$ expressed in thousands, except per share data)
Ordinary shares
Total
Number of
Contributed
Statutory
Retained
shareholders'
Note
shares
Amount
surplus
reserves
earnings
equity
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2006
466,365,500
77
158,534
117,092
231,017
506,720
Net income
—
—
—
—
148,841
148,841
Interest on long-term debt paid by
shareholders
15
—
—
—
—
8,345
8,345
Appropriation to statutory reserves
—
—
—
15,311
(15,311
)
—
Dividends declared on ordinary
shares
17
—
—
—
—
(7,609
)
(7,609
)
Dividends declared on mandatorily
redeemable convertible
preference shares
16
—
—
—
—
(548
)
(548
)
Accretion to redemption value on
mandatorily redeemable
convertible preference shares
16
—
—
—
—
(360
)
(360
)
Effect of foreign currency rate
movement on mandatorily redeemable
convertible preference shares
—
—
—
—
359
359
Issue of new shares, net of related
offering costs of RMB 71,534
1,17
125,000,000
20
649,002
—
—
649,022
Conversion of mandatorily redeemable
convertible preference shares
16
33,634,500
6
45,940
—
—
45,946
Extinguishment of obligations in respect
of long-term debt and related
interest payable
15
—
—
—
—
179,712
179,712
Balance as of December 31, 2006
625,000,000
103
853,476
132,403
544,446
1,530,428
Balance as of December 31,
2006 – US$
625,000,000
13
109,363
16,966
69,764
196,106
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Consolidated
Statements of Cash Flows
for the years ended December 31, 2004, 2005 and 2006
(RMB and US$ expressed in thousand)
Note
2004
2005
2006
2006
RMB
RMB
RMB
US$
Cash flow from operating activities
Net income
146,561
181,444
148,841
19,072
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Loss on disposal of property, plant and equipment
7
—
1,297
166
Depreciation of property, plant and equipment
19
11,622
16,707
22,050
2,826
Amortization of lease prepayments and intangible
assets
131
145
330
42
Interest expense on Exchangeable Bonds
13,706
14,117
3,340
428
Minority interests
11,117
7,086
1,267
162
Allowance for doubtful accounts
308
1,912
2,030
260
Deferred income taxes and deferred tax charges
(3,353
)
4,228
1,016
130
Foreign currency exchange (gain)/loss
—
(5,584
)
8,428
1,080
Changes in operating assets and liabilities, net of effects
of acquisition of a subsidiary:
Accounts receivable
70,016
(345,954
)
(319,493
)
(40,939
)
Inventories
(127,278
)
(73,732
)
(64,270
)
(8,235
)
Prepaid expenses and other current assets
(39,365
)
6,556
(1,360
)
(174
)
Accounts payable
84,463
21,722
6,853
878
Bills payable
14,996
(562
)
49,509
6,344
Accrued expenses and other payables
22,518
54,476
19,888
2,549
Income tax payable
11,561
3,868
7,416
950
Amounts due to related parties
1,234
960
(1,920
)
(246
)
Net cash provided by/(used in) operating activities
218,244
(112,611
)
(114,778
)
(14,707
)
Cash flow from investing activities
Purchase of property, plant and equipment
(46,080
)
(40,961
)
(71,639
)
(9,180
)
Purchase of land use rights
(962
)
—
(9,188
)
(1,177
)
(Increase)/decrease in pledged time deposits
(26,694
)
19,658
(162,368
)
(20,806
)
Acquisition of interests in subsidiary, net of cash acquired
(1,067
)
—
—
—
Proceeds from sale of property, plant and equipment
466
403
45
6
Net cash used in investing activities
(74,337
)
(20,900
)
(243,150
)
(31,157
)
Cash flow from financing activities
Repurchase of registered capital interests
17
(46,000
)
—
—
—
Net proceeds from issue of new shares
—
—
649,022
83,164
Principal payments of short-term bank loans
(646,330
)
(283,850
)
(342,104
)
(43,836
)
Proceeds from short-term bank loans
571,330
279,614
517,540
66,316
Proceeds from/(payment for) collection of sold accounts
receivable on behalf of financial institutions, net
98,037
(25,955
)
(54,321
)
(6,961
)
Dividends paid
—
(10,622
)
(61,623
)
(7,896
)
Net cash (used in)/provided by financing activities
(22,963
)
(40,813
)
708,514
90,787
Effect of foreign currency exchange rate change on cash
—
—
(11,771
)
(1,508
)
Net increase/(decrease) in cash and cash equivalents
120,944
(174,324
)
338,815
43,415
Cash and cash equivalents:
At beginning of year
181,988
302,932
128,608
16,480
At end of year
302,932
128,608
467,423
59,895
F-6
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2005 and 2006 (Continued)
(RMB and US$ expressed in thousand)
2004
2005
2006
2006
RMB
RMB
RMB
US$
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income tax
7,812
18,001
9,844
1,261
Interest expense
25,686
29,693
24,686
3,163
Significant Non-Cash Transactions:
Interest on long-term debt paid by shareholders
—
8,567
8,345
1,069
Extinguishment of obligations in respect of long-term
debt and related interest payable
—
—
179,712
23,028
Conversion of mandatorily redeemable convertible
preference shares into new ordinary shares
—
—
45,946
5,887
Acquisition on additional equity interest in subsidiary by
transfer and exchange of accounts
receivable
—
20,000
—
—
See accompanying notes to the consolidated financial statements.
F-7
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(1)
Principal Activities, Basis of Presentation and Organization
Principal Activities
China GrenTech Corporation Limited (the ''Company'', formerly known as Powercom Holdings
Limited) and its subsidiaries (hereinafter, collectively referred to as the "Group") are
principally engaged in the manufacture and sale of wireless coverage products and services in
the People's Republic of China (the ''PRC''). The Group derives substantially all of its
revenues from China United Telecommunications Corporation and its affiliates (the ''China
Unicom Group''), China Mobile Communications Corporation and its affiliates (the ''China
Mobile Group'') and China Telecom Corporation Limited and its affiliates (the "China Telecom
Group"). At December 31, 2006, the China Unicom Group and the China Mobile Group are the
only two licensed wireless communication operators in the PRC. See Note 24.
Basis of Presentation and Organization
The Company was incorporated in the Cayman Islands and was established on December 3, 2003,
as part of the reorganization and initial public offering ("IPO") of Shenzhen GrenTech
Company Limited ("Shenzhen GrenTech", formerly known as Shenzhen Powercom Company Limited)
and its subsidiaries (the ''Reorganization''). Shenzhen GrenTech was established in the PRC
in July 1999 as a domestic limited liability company with registered capital of RMB
10,000,000. The registered capital was subsequently increased to RMB 112,000,000 in 2000.
As of December 31, 2006, Shenzhen GrenTech's principal subsidiaries consist of i) Shenzhen
Lingxian Technology Company Limited (''Shenzhen Lingxian''), a 99% owned domestic limited
liability company; ii) Quanzhou Lake Communication Company Limited (''Lake Communication''),
an 80% owned domestic limited liability company and; iii) Quanzhou Lake Microwave Company
Limited (''Lake Microwave''), an 80% owned domestic limited liability company.
In connection with the Reorganization in December 2003, the shareholders of Shenzhen
GrenTech, through a series of related transactions, including the issuance of Exchangeable
Bonds (Note 15) to third party investors for proceeds of US$ 20,700,000, transferred their
entire equity interests in Shenzhen GrenTech to the Company in exchange for 466,365,500
ordinary shares of the Company (see Note 17). As the Reorganization was completed for the
sole purpose of establishing the legal structure of the Company in preparation for the
initial public offering of securities of GrenTech, and as the shareholders' proportionate
equity interests in the Company upon consummation of the Reorganization were identical to
their proportionate equity interests in Shenzhen GrenTech just prior to the consummation of
the Reorganization, the accompanying consolidated financial statements have been prepared as
a reorganization of businesses under common control in a manner similar to a
pooling-of-interests. Accordingly, the assets and liabilities transferred to the Company
have been stated at the historical carrying amounts of Shenzhen GrenTech.
F-8
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(1)
Principal Activities, Basis of Presentation and Organization (continued)
On April 4, 2006, the Company completed its IPO and sold 5,000,000 ADSs, representing
125,000,000 new ordinary shares, at an initial public offering price of US$ 18.00 per ADS.
The Company received net proceeds, after deduction of the related offering costs, in the
amount of RMB 649,022,000 (approximately US$ 83,164,000).
The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles ("US GAAP").
This basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company's principal subsidiaries, which are
prepared in accordance with the accounting principles and the relevant financial regulations
applicable to enterprises limited by shares as established by the Ministry of Finance of the
PRC (''PRC GAAP''), the accounting standards used in the country of their domicile. The
accompanying consolidated financial statements reflect necessary adjustments not recorded in
the books of account of the Company's subsidiaries to present them in conformity with US
GAAP.
(2)
Summary of Significant Accounting Policies and Practices
(a)
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company
and its subsidiaries. All significant intercompany balances and transactions have been
eliminated on consolidation.
(b)
Foreign Currency Transactions
The Company and its subsidiaries' functional and reporting currency is the RMB.
Transactions denominated in currencies other than Renminbi ("RMB") are translated into
RMB at the exchange rates quoted by the People's Bank of China ("PBOC") prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into RMB using the applicable exchange
rates quoted by the PBOC at the balance sheet dates. The resulting exchange
differences are recorded in the statements of income.
Commencing from July 21, 2005, the PRC government moved the RMB into a managed floating
exchange rate regime based on market supply and demand with reference to a basket of
currencies. Consequently, the PBOC's exchange rate of the U.S. dollar against the RMB
was adjusted from approximately RMB 8.28 per U.S. dollar on July 20, 2005 to RMB 8.11
per U.S. dollar on July 21, 2005, and has continued to fluctuate within a limited range
from that date, and was RMB 7.8087 per U.S. dollar on December 31, 2006.
F-9
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2)
Summary of Significant Accounting Policies and Practices (continued)
(b)
Foreign Currency Transactions (continued)
For the convenience of the readers, the 2006 RMB amounts included in the accompanying
consolidated financial statements have been translated into United States dollars at
the rate of US$ 1.00 = RMB 7.8041, being the noon buy rate for U.S. dollars in effect
on December 29, 2006 in the City of New York for cable transfer in Renminbi per U.S.
dollar as certified for custom purposes by the Federal Reserve Bank. No representation
is made that the RMB amounts could have been, or could be, converted into United States
dollars at that rate or at any other certain rate on December 31, 2006, or at any other
date.
RMB is not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the PBOC or other institutions authorized to buy and
sell foreign exchange. The exchange rate adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC, which are determined largely by supply
and demand.
As a result of the decline of the exchange rate of the U.S. dollar against RMB, the
carrying value of the mandatorily redeemable convertible preference shares, which was
denominated in U.S. dollars, was reduced by RMB 1,096,000 and RMB 359,000 (US$ 46,000)
respectively for the year ended December 31, 2005 and the period from January 1, 2006
to April 3, 2006 (being the date of conversion into ordinary shares). The effects of
the foreign currency rate movements were reflected as adjustments to shareholders'
equity in 2005 and 2006.
(c)
Use of Estimates
The preparation of the consolidated financial statements in accordance with US GAAP
requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates. On an ongoing basis, management reviews its
estimates and assumptions including those related to the recoverability of the carrying
amount of property, plant and equipment, valuation allowances for accounts receivable,
realizable values for inventories and accrued warranty costs. Changes in facts and
circumstances may result in revised estimates.
(d)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks, including certificates
of deposit and other highly liquid debt instruments with initial terms of less than
three months.
F-10
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2)
Summary of Significant Accounting Policies and Practices (continued)
(e)
Accounts Receivable
Accounts receivable are stated at the historical carrying amount, net of an allowance
for doubtful accounts. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing accounts
receivable. The Company determines the allowance based on historical write-off
experience, customer specific facts and economic conditions. Allowances for doubtful
accounts are charged to general and administrative expenses.
Outstanding account balances are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
The Company's off-balance-sheet credit exposure consists primarily of receivables sold
to financial institutions that are subject to limited recourse (Note 3).
(f)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the
weighted average cost method. Cost of work in progress and finished goods comprises
direct materials, direct production cost and an allocated proportion of production
overheads. Cost of finished goods also includes cost of installation services
performed on finished good products delivered and installed on customers' sites, and
such installation services are pending for inspection and acceptance
by customers as of
the balance sheet date.
(g)
Property, Plant and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation and
impairment.
Depreciation of property, plant and equipment is calculated based on the straight-line
method (after taking into account their respective estimated residual values) over the
estimated useful lives of the assets as follows:
Years
Buildings
20
Equipment and machinery
5-10
Motor vehicles
10
Office equipment and computer software
5
No deprecation is provided in respect of construction in progress.
F-11
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2)
Summary of Significant Accounting Policies and Practices (continued)
(h)
Lease Prepayments
Lease prepayments represent the cost of land use rights in the PRC. Land use rights
are carried at cost and amortized on a straight-line basis over the period of rights of
50 years.
(i)
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the net fair value of tangible and
identifiable intangible assets of businesses acquired. Goodwill and intangible assets
other than goodwill which are determined to have indefinite useful lives are not
amortized, but instead tested for impairment at least annually in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill
and Other Intangible Assets.
Goodwill is tested annually for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value. This determination is made at the reporting
unit level and consists of two steps. First, the Company determines the fair value of
a reporting unit and compares it to its carrying amount. Second, if the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is recognized for any
excess of the carrying amount of the reporting unit's goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, "Business Combinations". The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
As of December 31, 2005 and 2006, goodwill was attributable to the acquisition of
additional 9% equity interest in Shenzhen Lingxian in 2005 (Note 11).
Intangible assets with estimated useful lives consist of registered patents that are
amortized on a straight-line basis over the estimated useful life of 10 years.
F-12
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2)
Summary of Significant Accounting Policies and Practices (Continued)
(j)
Investment securities
Investments in equity securities of privately held companies where the Company's level
of ownership is such that it cannot exercise significant influence over the investee
(i.e. voting common stock ownership of less than 20%) are stated at cost, adjusted for
declines in fair value that are considered other than temporary. Fair value of the
investments is estimated based on market value appraisals or other valuation
techniques. In determining whether an impairment is other-than-temporary, the Company
considers whether it has the ability and intent to hold the investment until a market
price recovery and whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in this assessment
includes, but is not limited to, the reasons for the impairment, the severity and
duration of the impairment, changes in value subsequent to year end, and forecasted
performance, cash flows and the net assets of the investee. Any impairment is charged
to earnings and a new cost basis for the investment is established.
(k)
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets with finite useful lives, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by a comparison of
the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset, including identifiable intangible assets with
finite useful lives. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value is
measured by the asset's discounted cash flows or market value, if readily
determinable.
F-13
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2)
Summary of Significant Accounting Policies and Practices (Continued)
(l)
Revenue Recognition
The Company derives revenues principally from the provision and sale of wireless
coverage products and services, and to a lesser extent the sale of RF parts and
components. Revenue is recognized when the risk and rewards are transferred, delivery
has occurred or the services have been rendered, persuasive evidence of any
arrangement exists, the price to the buyer is fixed or determinable and collectibility
is reasonably assured. These criteria as they apply to the provision and sale of
wireless coverage products and services, and the sale of RF parts and components are
as follows:
Wireless coverage products and services
A wireless coverage products and services contract consists of two revenue-generating
activities, or deliverables, the sale of wireless coverage products and the provision
of installation services. Pursuant to Emerging Issues Task Force Issue No.
00-21,
"Revenue Arrangements with Multiple Deliverables"
, the equipment sale and
installation services are accounted for as separate units of accounting for the
following reasons: i) the equipment has standalone value as it can and has been sold
separately by the Company; ii) objective and reliable evidence of the fair value for
the installation services exists as evidenced by the amount charged by independent
third parties; and iii) there are no refund rights in these arrangements. As objective
and reliable evidence of fair value exists for both the equipment and installation
services, the appropriate revenue recognition convention is separately applied to each
of the two deliverables.
Revenue is allocated to each deliverable based on their relative fair values, such as
the sales price for the deliverable when it is sold on a stand-alone basis or based on
third-party pricing for a similar deliverable. Revenue attributable to the sale of the
wireless coverage products element is recognized when i) the buyer has executed and
signed a sale and purchase contract, which specifies the price, payment terms, and the
wireless coverage products and installation services to be delivered and provided; ii)
the wireless coverage products have been delivered to the buyer's premises; iii) the
risk and rewards of ownership and title of the delivered wireless coverage products
have been transferred to the buyer; iv) the buyer has issued a completion certificate,
which indicates the buyer's acceptance of the functionality, specifications, and
performance of the delivered wireless
coverage products; and v) the Company has an enforceable legal right to receive the
contractually specified amount in cash attributable to the delivered wireless coverage
products and such right is not contingent upon the Company providing the remaining
installation services or the buyer's acceptance of the installation services.
F-14
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2) Summary of Significant Accounting Policies and Practices (Continued)
(l) Revenue Recognition (continued)
A portion of the installation service deliverable is rendered concurrently with the
delivery of wireless coverage products. As the amount of the wireless coverage
products and service contract consideration is not contractually due and customer
acceptance is not deemed to occur until the issuance of the completion certificate,
revenue for the wireless coverage products deliverable is not recognized until a
significant portion of the installation service has been rendered.
Revenue attributable to the installation service element of the contract is not
recognized until i) the services have been rendered; ii) the buyer has issued a
preliminary inspection certificate, which indicates the buyer's acceptance of the
installation services provided; iii) the Company has an enforceable legal right to
receive the contractually specified amount in cash attributable to the installation
service element of the contract and such right is not contingent upon the buyer's
issuance of a final inspection certificate; and iv) the Company's remaining obligation
relating to the buyer's final acceptance of the installation services is considered
inconsequential or perfunctory.
Pursuant to the terms of the Company's contracts, the customers are generally required
to pay i) a range of 30% to 60% of the contract sum either upon signing of the sale
and purchase contract or the issuance of the completion certificate, ii) a range of
30% to 60% of the contract sum upon issuance of the preliminary inspection
certificate, iii) a range of 10% to 30% of the contract sum upon the issuance of the
final inspection certificate and iv) a range of zero to 10% of the contract sum upon
the expiration of the warranty period. The Company has allowed its customers to pay
the contract sum in installments as a standard business practice. Sales of wireless
coverage products and services are made under these payment terms and, provided that
the above criteria for revenue recognition are met, are recognized as revenue due to:
i) the Company's history of successfully collecting all amounts due under the original
payment terms without making significant concessions on payments; and ii) the
Company's enforceable legal right to receive the contractually specified amount in
cash attributable to the element of the contract that has been delivered, and the
Company's intent to enforce this right, when considered necessary.
The portion of the contract sum recognized as revenue in excess of the amounts
received under the contract payment terms is recorded in accounts receivable in the
accompanying consolidated balance sheets. The portion of the amounts received under
the contract payment terms in excess of the revenue recognized is recorded as deferred
income and included in accrued expenses and other payables in the accompanying
consolidated balance sheets. Amounts due under the contract terms beyond one year are
reclassified as long term accounts receivable and are discounted at discount rate
generally available for discounting similar instruments with commercial banks in the
PRC.
F-15
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2) Summary of Significant Accounting Policies and Practices (Continued)
(l) Revenue Recognition (continued)
Provisions for estimated settlement discounts provided to customers are recorded as a
reduction of revenue in the same period that revenue is recognized. The provision for
estimated settlement discounts, which is based on historical settlement data, is the
Company's best estimate of the amount of discounts to be provided to customers to
encourage prompt payment.
For most wireless coverage products and services contracts, the Company provides free
repairs and replacement for defective parts for a duration of 12 months to 36 months
after the issuance of final inspection certificate. The Company records an allowance
for estimated future costs to be incurred during the warranty period in the same
period that revenue is recognized. Allowances for warranties are recorded as cost of
revenues and are established on an individual basis. The estimates reflect historic
trends of warranty costs adjusted for specific conditions that may arise and the
number of contracts under warranty at each financial year-end.
Certain of the Company's wireless coverage products and service contracts contain
penalty clauses in which a penalty is levied on the party responsible for the delay in
the execution of the contract. In addition, under certain circumstances, certain
contracts may be terminated should the Company fail to provide products or
installation services within a specified timeframe. In the event of termination, the
Company would be entitled to recover a portion of the contract consideration billable
pursuant to its legally enforceable right under PRC law.
RF-based parts and components
The Company recognizes revenues from the sale of stand-alone RF parts and components
when the risk and rewards of ownership and title to the products have been transferred
to the buyer, which coincides with delivery and acceptance of the products by the
buyer.
Revenue is stated net of value added taxes ("VAT"), sales returns, trade discounts and
allowances. In the PRC, VAT of 17% on invoice amount is collected in respect of the
sales of goods on behalf of the tax authorities. The
VAT collected is not revenue of the Company; instead the amount is recorded as a
liability on the balance sheet until such VAT is paid to the tax authorities.
(m) Cost of Revenues
Cost of revenues consists primarily of material costs, payroll compensation,
installation costs, depreciation, rentals, product warranty allowances and related
expenses, which are directly attributable to the production of products and rendering
of services. Write-down of inventory to lower of cost or market is also recorded in
cost of revenues.
F-16
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2) Summary of Significant Accounting Policies and Practices (Continued)
(n) Deferred Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance is provided to reduce
the amount of deferred tax assets if it is considered more likely than not that some
portion, or all, of the deferred tax assets will not be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the
statements of income in the period that includes the enactment date.
(o) Advertising and Research and Development Costs
Advertising and research and development costs are expensed as incurred. Advertising
costs included in sales and distribution expenses amounted to RMB 2,102,000, RMB
2,036,000 and RMB 955,000 (US$ 122,000) for the years ended December 31, 2004, 2005
and 2006, respectively. Research and development costs consist primarily of the
remuneration of research and development staff, depreciation and maintenance expenses
of research and development equipment, material costs and rental expenses for premises
used for research and development.
(p) Freight Costs
The Company records freight costs related to the transporting of the raw materials to
the Company's warehouse in cost of revenues and all other outbound freight costs in
sales and distribution expenses. For the years ended December 31, 2004, 2005, and
2006, freight costs included in cost of revenues were RMB 1,948,000, RMB 2,546,000 and
RMB 2,608,000 (US$ 334,000), respectively, and freight costs included in sales and
distribution
expenses were RMB 2,289,000, RMB 2,970,000, and RMB 3,731,000 (US$ 478,000),
respectively.
(q) Bills Payable
Bills payable represent bills issued by financial institutions to the Company's
vendors. The Company's vendors receive payments from the financial institutions
directly upon maturity of the bills and the Company is obliged to repay the face value
of the bills to the financial institutions.
F-17
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2) Summary of Significant Accounting Policies and Practices (Continued)
(r) Government Grants
Receipts of government grants to encourage research and development activities which
are unconditional and non-refundable are recognized as grant income in the
accompanying consolidated statements of income upon receipt.
(s) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines
and penalties and other sources are recorded when it is probable that a liability has
been incurred and the amount of the assessment can be reasonably estimated.
(t) Income per Share
In accordance with SFAS No.128,
Computation of Earnings per Share
, basic net income
per share available to ordinary shareholders is computed by dividing net income
available to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. Diluted net income per share available to ordinary
shareholders is calculated by dividing net income available to ordinary shareholders
by the weighted average number of ordinary and dilutive potential ordinary shares
outstanding during the period. Dilutive potential ordinary shares consist of shares
issuable pursuant to mandatorily redeemable convertible preference shares, and are
determined using the as-converted method.
F-18
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(2) Summary of Significant Accounting Policies and Practices (Continued)
(u) Share-Based Payment
A share option scheme was established on August 25, 2005 (the "Scheme") which allows
the Company to grant options to its employees to acquire ordinary shares of the
Company. The Company has adopted SFAS No. 123R "Share-Based Payment", which requires
that share based payment transactions with employees, such as share options, be
measured based on the grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service period, with a
corresponding addition to paid-in capital. Under this method, compensation cost
related to employee share options or similar equity instruments is measured based on
the fair value of the award at the date of grant and is recognized over the period
during which an employee is required to provide service in exchange for the award,
which generally is the vesting period, if any. No options have been granted under the
Scheme.
(v) Segment Reporting
The Company uses the management approach in determining operating segments. The
management approach considers the internal organization and reporting used by the
Company's chief operating decision maker for making operating decisions, allocating
resources and assessing performance. Based on this assessment, the Company has
determined it has only one operating segment which is the manufacture and sale of
communication products in the PRC.
In view of the fact that the Company operates and manages its business solely in the
PRC and substantially all of its customers are located in the PRC, no geographical
segment information is presented.
(w) Recently Issued Accounting Standards
FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxes
. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in the Company's
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes
. FIN
48 prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning
after December 15, 2006. The Company is in the process of evaluating the impact of
adopting this Interpretation on its financial condition, results of operations and
cash flows
F-19
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(w) Recently Issued Accounting Standards (Continued)
Staff Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
In September 2006, the Securities and Exchange Commission issued SAB 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements
. SAB 108 provides guidance on how prior year misstatements should
be taken into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year's financial statements
are materially misstated. SAB 108 requires registrants to apply the new quantification
guidance to errors in existence at the beginning of the fiscal year ending after
November 15, 2006 by correcting errors determined to be material under this new
quantification method through a one-time cumulative effect adjustment to
beginning-of-year retained earnings. The Company has adopted SAB 108 as of October 31,
2006. No significant adjustment was recorded by the Company upon adoption of SAB 108.
SFAS
No. 156, Accounting for Servicing of Financial Assets - an amendment of SFAS No.
140
In March 2006, the FASB issued SFAS No. 156
, Accounting for Servicing of Financial
Assets — an amendment of SFAS No. 140.
This Statement amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement requires an entity to, among other things,
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract under
certain specific situation(s). This Statement is effective for the Company in fiscal
years beginning after September 15, 2006. The Company is in the process of evaluating
the impact of adopting this Statement on its financial condition, results of
operations and cash flows.
SFAS No. 157, Fair value measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This
Statement defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require fair value measurements and does not require
any new fair value measurements. This Statement will be effective for the Company in
fiscal years beginning after November 15, 2007. The Company is in the process of
evaluating the impact of adopting this Statement on its financial condition, results
of operations and cash flows.
F-20
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(w) Recently Issued Accounting Standards (Continued)
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of SFAS No. 115
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of SFAS No. 115
. This
Statement permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is effective for the Company in
fiscal years beginning after November 15, 2007. The Company is in the process of
evaluating the impact of adopting this Statement on its financial condition, results
of operations and cash flows.
EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same
Counterparty
In September 2005, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No.
04-13,
Accounting for Purchases and Sales of Inventory with the Same Counterparty
.
EITF 04-13 provides guidance as to when purchases and sales of inventory with the same
counterparty should be accounted for as a single exchange transaction. EITF 04-13
also provides guidance as to when a nonmonetary exchange of inventory should be
accounted for at fair value. EITF 04-13 will be applied to new arrangements entered
into, and modification or renewals of existing arrangements occurring after January 1,
2007. The adoption of EITF 04-13 is not expected to have a material effect on the
Company's consolidated financial statements.
(3) Pledged Time Deposits
Pledged time deposits at December 31, 2005 and 2006 consist of the following:
2005
2006
2006
RMB'000
RMB'000
US$'000
Pledged deposits with financial institutions for security on:
- accounts receivable sold (Note (a))
57,198
32,349
4,145
- bills payable (Note (b))
19,052
50,187
6,431
- short-term bank loans (Note (b))
—
156,082
20,000
76,250
238,618
30,576
F-21
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(3)
Pledged Time Deposits (Continued)
a)
In its ordinary course of business, the Company entered into certain one-year agreements with
independent financial institutions to sell, on an ongoing basis, accounts receivable up to a
specified amount (which totalled RMB 400 million as of December 31, 2005 and 2006). Accounts
receivable are sold at a discount, which is adjusted based upon the timing of collection by
the financial institutions. Under the terms of certain of these agreements, a portion of the
sold receivables are subject to certain limited recourse provisions pursuant to which the
Company is required to deposit twenty percent of the sale proceeds into a restricted bank
account as security in the event of default of payment by the paying accounts receivable
customer. The cash in the restricted bank account is released to the Company upon full
payment by the customer and is released on a proportionate basis to the extent that the
collections fall short of the amount of accounts receivable sold. The Company did not
experience any significant losses under these recourse provisions during the three-year period
ended December 31, 2006. The Company surrendered control over the accounts receivable
transferred to the financial institutions. Accordingly, pursuant to the provisions of SFAS No.
140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
accounts receivable of RMB 375,200,000 RMB 180,117,000 and RMB 117,664,000 (US$
15,077,000) were derecognized from the balance sheet on their respective dates of the transfer
during 2004, 2005 and 2006, respectively. The Company received proceeds from the sale of the
accounts receivable of RMB 360,234,000, RMB 169,041,000 and RMB
108,998,000 (US$ 13,967,000)
respectively for the years ended December 31, 2004, 2005 and 2006, and recorded a discount on
the sale of accounts receivable of RMB 14,966,000, RMB 11,076,000 and
RMB 8,666,000 (US$
1,110,000) respectively, which was included in interest expense for the years ended December 31,
2004, 2005 and 2006. Discount on the sale of accounts receivable is calculated based on the
time when the agreement was entered into but is subject to adjustments for the actual
collections of the accounts receivable. These adjustments are recorded as interest expenses in
the period during which it occurs.
As of December 31, 2005 and 2006, accounts receivable sold to financial institutions yet to
be settled by the Company's customers amounted to RMB 182,857,000 and RMB 143,986,000
respectively.
Pursuant to the sale agreements with the financial institutions, the Company is responsible
for servicing the accounts receivable sold until the expiration of the sale agreements. The
service obligations primarily comprise of serving notice to customers and collecting the cash
on behalf of the financial institutions and remitting the cash to the
financial institutions by a specified period of time. No servicing obligation was recorded
at the date of sale as the amount was considered to be immaterial. As of December 31, 2005
and 2006, an amount of RMB 72,082,000 and RMB 17,761,000 (US$ 2,276,000) respectively had
been collected by the Company pending transfer to the financial institutions, and are
included in accrued expenses and other payables in the accompanying consolidated balance
sheets.
F-22
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(3) Pledged Time deposits (continued)
b)
The Company entered into several financing facilities for bills and short-term loans with
banks during the years presented. Under the terms of the arrangements, cash deposits ranging
from 30% to 100% of the respective financing facilities amount were pledged to the banks. The
pledged deposits will be released upon the termination or expiry of these facilities.
(4) Accounts Receivable, net
Accounts receivable at December 31, 2005 and 2006 consist of the following:
2005
2006
2006
RMB'000
RMB'000
US$'000
Accounts receivable
721,680
1,020,005
130,701
Less:
Allowance for estimated settlement discounts
(20,057
)
(14,982
)
(1,920
)
701,623
1,005,023
128,781
Less: Allowance for doubtful accounts
(4,147
)
(6,177
)
(791
)
697,476
998,846
127,990
Amounts due after one year, net
(162,032
)
(268,957
)
(34,464
)
535,444
729,889
93,526
Bills receivable
1,877
17,970
2,303
537,321
747,859
95,829
Amounts due after one year, net were stated after the deduction of unearned interest of
RMB 8,083,000 and RMB 15,307,000 (US$ 1,961,000) respectively as of December 31, 2005 and
2006.
Pursuant to the terms of the Company's contracts to provide wireless coverage products and
services (Note 2 (l)), amounts due beyond one-year are reclassified as long-term accounts
receivable in the accompanying consolidated balance sheets, being discounted at the
applicable discount rate at the time of recognition of the receivables. For the years ended
December 31, 2005 and 2006, the weighted average discount rates were 4.42% and 5.58% per
annum respectively.
F-23
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(4) Accounts Receivable, net (continued)
An analysis of the allowance for doubtful accounts for 2004, 2005 and 2006 is as follows:
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Balance at beginning of year
1,927
2,235
4,147
532
Charged to statements of income
308
1,912
2,030
260
Balance at end of year
2,235
4,147
6,177
792
Allowance for estimated settlement discounts provided to customers is recorded as a reduction
from the corresponding accounts receivables in the balance sheet. An
analysis of the allowance for estimated settlement discounts for 2004, 2005 and 2006 is as follows:
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
USS'000
Balance at beginning of year
25,512
26,884
20,057
2,570
Amount charged to
statements of income
1,372
—
—
—
Amount written back
—
(6,827
)
(5,075
)
(650
)
Balance at end of year
26,884
20,057
14,982
1,920
As of December 31, 2005, the Company pledged certain of its accounts receivable with a
carrying value of RMB 106,615,000 to banks as collateral for short-term bank loans of RMB
50,760,000. Such bank loans were fully repaid in 2006 and the asset pledge was released
accordingly (See also Note 14).
(5) Inventories
Inventories at December 31, 2005 and 2006 consist of the following:
2005
2006
2006
RMB'000
RMB'000
US$'000
Raw materials
55,572
65,395
8,380
Work-in-progress
4,057
5,135
658
Finished goods
310,507
363,876
46,626
370,136
434,406
55,664
Included in finished goods are wireless coverage products delivered to customers' sites
which have not been accepted by the customers through the issuance of the completion
certificates. Also included in finished goods are deferred installation costs related to
wireless coverage products delivered and installed for which the related completion and/or
inspection certificates have not been issued at the respective year end dates. The deferred
installation costs are charged to cost of revenue in the same period that the revenue
attributable to the installation service is recognized. As of December 31, 2005 and 2006,
deferred installation costs amounted to RMB 50,626,000 and RMB 47,210,000 (US$ 6,049,000)
respectively.
F-24
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(6) Income Tax Expense
Cayman Islands Tax
Under the current Cayman Islands laws, the Company is not subject to tax on income or capital
gains.
PRC Tax
Subsidiaries established in the Shenzhen Special Economic Zone of the PRC, namely Shenzhen
GrenTech and Shenzhen Lingxian, are subject to income tax at a rate of 15%. Lake Microwave
is a foreign investment enterprise ("FIE") established in a coastal open economic area and is
subject to income tax at a rate of 27%. Lake Communication is subject to income tax at a
rate of 33%.
Pursuant to the applicable Income Tax Law of the PRC, Shenzhen GrenTech is eligible for an
exemption from income tax for two years starting from the first profitable year of operations
and thereafter, a 50 percent relief from income tax for the following three years (the "tax
holiday"). The local tax bureau initially determined the year 2000 was the first
profit-making year of Shenzhen GrenTech and therefore, Shenzhen GrenTech was exempted from
income tax in 2000 and 2001, and income tax for 2002 was provided for at a reduced rate of
7.5%. Subsequent to the initial determination, the PRC tax authorities reversed the initial
determination in 2004 and concluded that the first profit-making year of Shenzhen GrenTech
should have been 2001. Consequently, Shenzhen GrenTech became fully exempted for PRC income
for 2001 and 2002 and subject to PRC income PRC income tax at the rate of 7.5% for 2003, 2004
and 2005. In addition, the income tax previously paid in 2002 of RMB 12,781,000 was refunded
in 2004, which was recorded as a reduction to income tax expense in 2004.
Shenzhen GrenTech applied for and was granted on December 13, 2005, an extension of its 50
percent relief from income tax for an additional three-year period commencing from January 1,
2006. Shenzhen GrenTech will be subject to PRC income tax at 15% from January 1, 2009
onwards.
Shenzhen
Lingxian was entitled to full exemption from income tax for two years starting from
the first profit-making year and a 50% reduction in the next three years as approved by the
tax authorities. As the first profit-making year of Shenzhen Lingxian was 2002, Shenzhen
Lingxian was fully exempted for PRC income tax for 2002 and 2003 and subject to PRC income at
the rate of 7.5% for 2004, 2005 and 2006. Commencing from January 1, 2007, Shenzhen Lingxian
is subject to PRC income tax at the rate of 15%.
F-25
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(6) Income Tax Expense (continued)
On March 16, 2007, the National People's Congress of the PRC passed the new Enterprise Income
Tax Law (the "New Tax Law"), which law will take effect as of January 1, 2008. In accordance
with the New Tax Law, a unified enterprise income tax rate of 25%, a unified deduction
measure and standard and unified tax preferential treatment will be applied to both foreign
invested and domestic enterprises and an income tax rate of 15% will be available to advanced
technology enterprises recognized by the government authorities. The New Tax Law also
provides for transitional measures for enterprises established prior to the promulgation of
the New Tax Law and eligible for lower tax rate preferential treatment in accordance with the
then prevailing tax laws and administrative regulations. These enterprises will gradually
become subject to the new, unified tax rate over a five-year period; enterprises eligible for
regular tax reductions or exemptions may continue to enjoy tax preferential treatments after
the implementation of the New Tax Law and until their preferential treatment expire. Given
that the New Tax Law has been promulgated only recently, its implementation has yet to be
further clarified in practice. The implementation of the New Tax Law could adversely affect
the Company's financial condition and results of operations.
Substantially, all the income and income tax expense derived by the Company is domestic in
nature.
Income tax expense consists of:
PRC Income tax
Current
Deferred
Total
RMB'000
RMB'000
RMB'000
Year ended December 31, 2004
19,373
(3,353
)
16,020
Year ended December 31, 2005
21,869
4,228
26,097
Year ended December 31, 2006
17,261
1,016
18,277
Year ended December 31, 2006 (US$)
2,212
130
2,342
Income tax expense reported in the consolidated statements of income differs from the
amount computed by applying the PRC income tax rate of 15% (the statutory tax rate of the
Company's principal subsidiaries) for the years ended December 31, 2004, 2005 and 2006 for
the following reasons:
F-26
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(6) Income Tax Expense (continued)
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Income before income tax expense
173,698
214,627
168,385
21,576
Computed "expected" tax expense
26,055
32,194
25,258
3,237
Non-deductible entertainment expenses
4,515
4,072
4,756
609
Other non-deductible expenses
2,313
284
705
90
Non-taxable income
(562
)
(1,317
)
(36
)
(5
)
Tax rate differential of other subsidiaries
7,122
7,241
331
43
Tax holiday
(10,642
)
(16,377
)
(13,602
)
(1,743
)
Deferred tax valuation allowance
—
—
865
111
Income tax refunded
(12,781
)
—
—
—
Actual income tax expense
16,020
26,097
18,277
2,342
If the Company's subsidiaries were not in the tax holiday periods, the income tax
expense would be increased by Rmb 10,642,000, RMB 16,377,000 and RMB 13,602,000 (US$
1,743,000) for the years ended December 31, 2004, 2005 and 2006 respectively and the net
income per share available to ordinary shareholders for such periods would be decreased as
follows:
2004
2005
2006
2006
RMB
RMB
RMB
US$
Decrease in net income per share available
to ordinary shareholders:
- Basic
0.02
0.04
0.02
0.003
- Diluted
0.02
0.03
0.02
0.003
The tax effects of temporary differences that give rise to significant portions of the
deferred tax asset as of December 31, 2005 and 2006 are presented below:
2005
2006
2006
RMB'000
RMB'000
US$'000
Accounts receivable
4,637
1,762
226
Accrued expenses
884
923
118
Unrealized profit on intercompany revenues
2,961
4,781
613
Tax losses
—
865
111
8,482
8,331
1,068
Less: valuation allowance
—
(865
)
(111
)
Net deferred tax assets
8,482
7,466
957
F-27
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(6) Income Tax Expense (continued)
As of December 31, 2006, a subsidiary of the Company had net operating losses for PRC income
tax purpose totalling Rmb 2,621,000 (US$ 336,000). Such tax losses are available for carry
forward to set-off against future taxable profits for a maximum period of five years. As of
December 31, 2006, a valuation allowance of Rmb 865,000 (US$ 111,000) was established to
substantially provide for deferred tax assets in respect of such tax losses. The Company
believes it is more likely than not, that such amounts will not be recoverable, having
considered the expected future taxable profits of the subsidiary and restrictions on carrying
forward tax losses under PRC tax laws.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible or utilized.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon an assessment of the
level of historical taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible or can be utilized, management believes that the
deferred tax asset as of December 31, 2005 and 2006 is more likely than not to be realized. The
amount of the deferred tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced.
F-28
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(7)
Property, Plant and Equipment, net
Property, plant and equipment consist of the following:
2005
2006
2006
RMB'000
RMB'000
US$'000
Buildings
9,686
9,686
1,241
Equipment and machinery
129,973
185,284
23,742
Motor vehicles
18,216
20,522
2,630
Office equipment and computer software
5,751
9,763
1,251
163,626
225,255
28,864
Accumulated depreciation
(43,270
)
(63,752
)
(8,169
)
120,356
161,503
20,695
Construction in progress
—
7,100
909
120,356
168,603
21,604
(8)
Lease Prepayments, net
2005
2006
2006
RMB'000
RMB'000
US$'000
Prepaid land use rights
5,421
14,609
1,871
Accumulated amortization
(685
)
(977
)
(125
)
4,736
13,632
1,746
Amortization expense for the years ended December 31, 2004, 2005 and 2006 were RMB
94,000, RMB 108,000 and RMB 292,000 (US$ 37,000) respectively.
(9)
Investment Securities
Investment securities at December 31, 2005 and 2006 represented a 4.67% equity interest in
Quanzhou Bank, a privately held bank in the PRC. Such investment was not marketable, and
therefore accounted for using the cost method.
F-29
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(10)
Intangible Assets, net
2005
2006
2006
RMB'000
RMB'000
US$'000
Patent
375
375
48
Accumulated amortization
(262
)
(300
)
(38
)
113
75
10
Amortization expense for the years ended December 31, 2004, 2005 and 2006 were RMB
37,000, RMB 37,000 and RMB 38,000 (US$ 5,000) respectively.
The estimated amortization expense of intangible assets for the next five years is as
follows:
RMB'000
US$'000
2007
38
5
2008
37
5
2009
—
—
2010
—
—
2011
—
—
75
10
F-30
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(11)
Goodwill
On March 28, 2005, the Company entered into a sale and purchase agreement with Ms Zhang Xiu
Jun, the then 10% minority shareholder of Shenzhen Lingxian, whereby Ms Zhang sold her 9%
equity interest in Shenzhen Lingxian to Shenzhen GrenTech for RMB 20,000,000. The purchase
price was determined taking into consideration the estimated fair value of 9% equity interest
of Shenzhen Lingxian as of March 28, 2005, and was paid by the transfer of the Company's
accounts receivable with carrying value of RMB 20,000,000 as at that date. Consequently, the
Company recorded a goodwill of RMB 8,216,000 from the acquisition.
The above acquisition was not considered significant to the Company's financial position or
results of operations for the periods presented.
(12)
Accrued Expenses and Other Payables
Accrued expenses and other payables at December 31, 2005 and 2006 consist of the following:
2005
2006
2006
RMB'000
RMB'000
US$'000
Amounts collected on sold accounts receivable
on behalf of financial institutions (Note 3)
72,082
17,761
2,276
Allowance for product warranties (Note 13)
11,794
12,308
1,577
Accruals for salaries and welfare
8,394
9,872
1,265
Deferred income
85,145
47,803
6,125
VAT payable
45,985
91,747
11,756
Bsuiness and other taxes payable
6,090
9,820
1,258
Accrued interest on Exchangeable Bonds (Note 15)
19,129
—
—
Reimbursement payment to staff
2,833
2,680
344
Others
11,879
16,842
2,158
263,331
208,833
26,759
F-31
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(13)
Allowance for Product Warranties
An analysis of the allowance for product warranties for 2004, 2005 and 2006 is as
follows:
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Balance at beginning of year
9,623
11,981
11,794
1,511
Amount charged to expense
8,011
9,281
8,240
1,056
Amount utilized
(5,653
)
(9,468
)
(7,726
)
(990
)
Balance at end of year
11,981
11,794
12,308
1,577
(14)
Short-Term Bank Loans
Short-term bank loans outstanding, which are all denominated in Renminbi, are as follows:
2005
2006
2006
RMB'000
RMB'000
US$'000
- Unsecured
109,854
176,050
22,559
- Secured
50,760
160,000
20,502
160,614
336,050
43,061
During the years ended December 31, 2004, 2005 and 2006, the Company entered into
various loan agreements with commercial banks with terms ranging from three months to one
year to finance its working capital. None of the loan agreements requires the Company to
comply with any financial covenants. The weighted average interest rate of short-term bank
loans outstanding as of December 31, 2005 and 2006 were 4.42% and 5.58% per annum,
respectively.
The Company had available undrawn committed bank loan facilities and bills financing
facilities amounting to RMB 52,756,000 (US$ 6,760,000) and RMB 40,130,000 (US$ 5,142,000)
respectively as of December 31, 2006. In addition, the Company had available committed
receivable selling facilities of RMB 258,250,000 (US$ 33,092,000) as of December 31, 2006.
Of the unutilized bills financing facilities and receivable selling facilities, the Company
will be required to pledge with the banks a time deposit equal to 30% and 20% respectively as
security for the amount to be utilized.
F-32
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(15)
Long-Term Debt
On December 17, 2003, the shareholders of the Company entered into an Exchangeable Bonds
Subscription Agreement (the "Agreement") with three investors — Actis China Investment
Holdings No.1 Limited ("Actis China"), Standard Chartered Private Equity Limited ("SCPEL")
and JAFCO Asia Technology Fund ("JATF"). Pursuant to the Agreement, the shareholders of the
Company issued exchangeable bonds ("Exchangeable Bonds") at par value bearing interest at a
rate of 5% per annum, to Actis China, SCPEL and JATF for a total consideration of US$ 20.7
million. The bond holders were entitled to a premium payment when the total dividend as
declared and paid to ordinary shareholders exceeded a specified amount. The Exchangeable
Bonds would be automatically converted into approximately 131,365,500 existing ordinary shares held by the shareholders of the Company at a conversion price of US$ 0.16 per share
immediately prior and upon an initial public offering. Accordingly, no new ordinary shares
would be issued by the Company. The conversion price was determined based on the estimated
fair value of the Company's ordinary shares at the date of the Agreement. Proceeds received
by the shareholders from the issuance of the Exchangeable Bonds were entirely used by the
shareholders to subscribe 461,365,500 newly issued ordinary shares of the Company. The
Company used the proceeds from the sale of 461,365,500 newly issued ordinary shares to
complete the Reorganization through the acquisition of Shenzhen GrenTech by its wholly owned
subsidiary, GrenTech (BVI) Limited. The effect of these transactions was to distribute the
proceeds from the issuance of the Exchangeable Bonds to the Company's existing shareholders.
The ultimate shareholders and their respective proportionate ordinary share ownership
interest in the underlying net assets of the Company were identical to their respective
equity interests held in Shenzhen GrenTech as a result of these transactions (Note 1).
In connection with issuance of the Exchangeable Bonds, the Company provided a guarantee to
the bondholders effective from the date of the Agreement until all liabilities of the
shareholders under the Exchangeable Bonds and the Agreement are discharged in full when the
Exchangeable Bonds are converted to ordinary shares or redeemed. Under the Agreement and the
relevant guarantee and the share pledge agreements, the Company was subject to various
covenants and restrictions, including a minimum after-tax profit requirement. In addition,
whether the anticipated initial public offering is successful or not, the holders of
Exchangeable Bonds are entitled to redeem the Exchangeable Bonds at any time after three
years from the date of issuance of the preference shares (see Note 16) or in the event of the
occurrence of triggering events such as the Company receiving third party demand letters for
immediate repayment of aggregate indebtedness over RMB 50,000,000. The Exchangeable Bonds
were redeemable at an amount equal to the principal amount of the Exchangeable Bonds plus 8%
interest.
F-33
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(15)
Long-Term Debt (continued)
Because the Exchangeable Bonds were guaranteed by the Company, the debt obligation and
related interest costs were pushed down to the Company, and were reflected in the
consolidated financial statements as though the Company was the primary obligor. The push
down of Exchangeable Bonds was reflected as long-term debt in the consolidated balance sheet,
with a corresponding decrease in retained earnings in 2003. In association with the pushed
down debt and pursuant to the guarantee given by the Company, interest expense of RMB
13,706,000 and RMB 14,117,000 and RMB 3,340,000 (US$ 428,000), calculated based on interest
of 8% per annum, was pushed down and recognized with a corresponding increase to interest
payable for the year ended December 31, 2004, 2005 and 2006 respectively. The amount of
interest payable by the Company would depend on the satisfaction of the obligation by the
shareholders pursuant to the guarantee arrangement specified above. Upon satisfaction of the
obligation by the shareholders or release of the guarantee, the amount of interest payable
would be recorded as an adjustment to retained earnings. Any unpaid portion would be credited
to the retained earnings upon the conversion of the Exchangeable Bonds.
In January 2005 and 2006, shareholders of the Company satisfied their obligation and paid
interest on the Exchangeable Bonds in the amount of RMB 8,567,000 and RMB 8,345,000 (US$
1,069,000), respectively. Accordingly, the Company reduced its accrued interest on
Exchangeable Bonds and increased retained earnings by the same amounts in the years ended
December 31, 2005 and 2006 respectively.
In connection with the IPO and pursuant to a board resolution of the Company dated April 3,
2006, the Exchangeable Bonds were converted fully into 131,365,500 existing ordinary shares
held by the shareholders of the Company in April 2006. Consequently, the Company's
obligations in respect of the Exchangeable Bonds and unpaid portion of interest payable,
totalling RMB 179,712,000 (US$ 23,028,000), were extinguished and such amount was credited to
the retained earnings.
F-34
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(16)
Mandatorily Redeemable Convertible Preference Shares
On December 30, 2003, the Company received RMB 43,565,000 (US$ 5,300,000) from three
investors – Actis China, SCPEL and JATF, in exchange for 33,634,500 mandatorily redeemable
convertible preference shares. The holders of the preference shares were entitled to a fixed
cumulative preference dividend of 5% per annum based on the face value of the preference shares and a special dividend as when the total dividend declared and payable to the ordinary
shareholders exceeds a certain amount. In addition, upon redemption, the Company was
required to pay the subscription price plus an 8% per annum compounded return less any
preference dividends accrued, declared or paid up to the date of redemption. Cumulative
preference dividends and accretion to redemption value were reflected as a reduction to net
income to arrive at net income available to ordinary shareholders in the accompanying
consolidated statements of income. In December 2004 and 2005 and April 2006, the directors
declared a preference share dividend of RMB 0.065, RMB 0.064 and RMB 0.016 (US$ 0.002) per share, respectively, totalling RMB 2,193,000 and RMB 2,139,000 and RMB 548,000 (US$ 70,000)
to the holders of preference shares, respectively. In addition, accretion to redemption
value of RMB 1,316,000, RMB 1,385,000 and RMB 360,000 (US$ 46,000), being the difference
between the 8% yield on the mandatorily redeemable convertible preference shares upon
redemption and the actual dividend declared of 5%, was accrued and charged to consolidated
statements of income for the years ended December 31, 2004, 2005 and 2006 respectively.
In connection with the IPO and pursuant to a board resolution of the Company dated April 3,
2006, the mandatorily redeemable convertible preference shares were converted fully into
33,634,500 new ordinary shares of the Company in April 2006.
The mandatorily redeemable convertible preference shares contained the following terms:
Liquidation Preference
On a distribution of assets of the Company on a winding up or other return of capital, the
holders of the preference shares are entitled, in proportion to the number of preference shares held by them and in priority to any holder of any other class of shares, to receive an
amount equal to the sum of the subscription price of the preference shares and any and all
accrued and unpaid dividends.
Conversion
In accordance with the articles of association of the Company, the holders of the preference shares have the right to convert their preference shares into ordinary shares only upon the
occurrence of an initial public offering of the Company's ordinary shares. The rate at which
the preference shares shall be converted into ordinary shares shall be one ordinary share for
every one preference share, subject to certain anti-dilutive adjustments.
F-35
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(16)
Mandatorily Redeemable Convertible Preference Shares (continued)
Redemption
In accordance with the articles of association of the Company, the holders of preference shares are entitled to redeem the preference shares upon serving written demand to the
Company. Such demand may be made by a holder of preference share at any time after three
years from the date of issuance of the preference shares or in the event of the occurrence of
a triggering event as specified in the articles of association, such as receiving third party
demand letters for immediate repayment of aggregate indebtedness over RMB 50,000,000.
Voting Rights
Each mandatorily redeemable preference share carries the same number of votes as an ordinary
share.
(17)
Shareholders' equity
Registered capital
Prior to the Reorganization, the registered capital of Shenzhen GrenTech was RMB 112,000,000.
Capital contribution in excess of the registered capital was credited to contributed surplus.
In October 2003, Shenzhen GrenTech repurchased a total of 28.672% equity interests from two
shareholders, for total consideration of RMB 66,308,000 of which RMB 20,308,000 and RMB
46,000,000 was paid in 2003 and 2004 respectively. Shenzhen GrenTech, through Shenzhen
Lingxian, simultaneously sold 28.672% equity interests to the three existing shareholders of
Shenzhen GrenTech for a total consideration of RMB 66,308,000 which was fully received as of
December 31, 2003. In connection with the said share transfers, the Company had unrestricted
use of the excess cash proceeds from the reissuance of shares over the amounts paid through
the final settlement in 2004. Since all of the risks and rewards ownership of the said shares of Shenzhen GrenTech were transferred to the three existing shareholders
simultaneously with the purchase of the equity interests by Shenzhen GrenTech, the share
transfers are deemed to occur at the same time for accounting purposes.
Ordinary shares
In connection with the Reorganization described in Note 1, the Company issued 932,731
ordinary shares (as adjusted for the five-hundred-for-one share split as described below) to
the shareholders of Shenzhen GrenTech in exchange for the transfer of their equity interests
in Shenzhen GrenTech. Accordingly, the registered capital of Shenzhen GrenTech was eliminated
through a corresponding increase in the par value of ordinary shares of RMB 77,000 and
contributed surplus of RMB 111,923,000.
F-36
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(17)
Shareholders' equity (continued)
On August 25, 2005, the Company declared a five-hundred-for-one share split of the Company's shares. The share split was effected in the form of subdividing each of the
Company's issued and unissued ordinary shares and mandatorily redeemable convertible
preference shares into 500 ordinary shares and 500 redeemable convertible preference shares,
respectively. The par value of the ordinary shares was adjusted from US$ 0.01 per share to
US$ 0.00002 per share. All references in the accompanying consolidated financial statements
and notes to the number of shares, per share amounts and par value data of the Company's
ordinary and mandatorily redeemable convertible preference shares have been restated to
reflect the effect of the share split for all periods presented.
On April 3, 2006, the directors declared dividends totalling RMB 7,609,000 to the holders of
the Company's ordinary shares in issue as of that date.
In connection with the IPO, 125,000,000 new ordinary shares of the Company were issued to
public shareholders in April 2006 (Note 1).
(18)
Revenues
The Company derives revenues from the provision of wireless coverage products and services,
which consist of the sale of wireless coverage equipment and the rendering of related
installation services, as well as sale of RF parts and components. The components of revenues
are as follows:
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Sale of wireless coverage products
503,904
614,503
679,606
87,083
Installation services of wireless
coverage products
30,115
69,338
108,867
13,950
Sale of other products
33,857
25,602
39,247
5,029
567,876
709,443
827,720
106,062
Less: (Provision for)/write back
of settlement
discounts
(1,372
)
6,827
5,075
650
566,504
716,270
832,795
106,712
F-37
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(19)
Depreciation
Depreciation of property, plant and equipment is included in the following:
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Cost of revenues
6,917
10,824
14,366
1,841
Research and development costs
1,065
1,931
2,504
320
Sales and distribution expenses
1,468
1,760
2,104
270
General and administrative expenses
2,172
2,192
3,076
394
11,622
16,707
22,050
2,825
F-38
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(20)
Net income available to Ordinary Shareholders
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Net income available to ordinary shareholders
143,052
179,016
148,292
19,002
Denominator for basic net income available to
ordinary shareholders:
Weighted average number of ordinary
shares outstanding
466,365,500
466,365,500
584,580,799
584,580,799
Basic net income per share available to
ordinary shareholders
0.31
0.38
0.25
0.03
Net income available to ordinary shareholders
143,052
179,016
148,292
19,002
Dividend, accretion to redemption value
and foreign exchange currency rate movements
on mandatorily redeemable convertible
preference shares
3,509
2,428
549
70
Diluted net income available to ordinary
shareholders
146,561
181,444
148,841
19,072
Denominator for diluted net income available to
ordinary shareholders:
Weighted average number of ordinary shares
outstanding
466,365,500
466,365,500
584,580,799
584,580,799
Weighted average number of mandatorily
redeemable convertible preference shares
33,634,500
33,634,500
8,569,885
8,569,885
500,000,000
500,000,000
593,150,684
593,150,684
Diluted net income per share available to
ordinary shareholders
0.29
0.36
0.25
0.03
Basic and diluted net income per share available to ordinary shareholders for the years
ended December 31, 2004 and 2005 have been calculated as if 466,365,500 ordinary shares had
been issued and outstanding throughout for such periods.
F-39
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(21)   Related Party Transactions
The
principal related party transactions during the years ended December 31, 2004, 2005 and
2006 are as follows:
2004
2005
2006
2006
RMB'000
RMB'000
RMB'000
US$'000
Payment for rental (Note (a))
960
960
960
123
Amount due to related party as of December 31, 2005 and 2006 was as follows:
2005
2006
2006
RMB'000
RMB'000
US$'000
Due to related company
Shenzhen Fang Sheng AutoBig World Management
Co., Ltd ("Shenzhen Fang Sheng") (Note(a))
1,920
—
—
Notes:
(a)
Shenzhen GrenTech has leased and occupied certain premises in an office building
of floor area of approximately 1,433.35 square metres owned by Shenzhen Fang Sheng.
Certain directors of the Company are also directors of Shenzhen Fang Sheng. The lease
which expired on December 31, 2005, was subsequently renewed until December 31, 2006
under the same contract terms. A rental of RMB 960,000 which was determined with
reference to the market rental, was charged to expenses for 2004, 2005 and 2006.
As of December 31, 2005, the Company had a balance due to Shenzhen Fang Sheng of RMB
1,920,000 in respect of the rental, which was fully settled during 2006.
(b)
As of December 31, 2005 and 2006, the 20% minority equity interest in Lake
Communication is owned by the son of a director of the Company.
(22)
Pension and Other Postretirement Benefits
Pursuant to the relevant PRC regulations, the Company is required to make contributions at a
rate 8% to 9% of employees' salaries and wages to a defined contribution retirement scheme
organized by the local social security bureau in respect of the retirement benefits for the
Company's employees in the PRC. The total amount of contributions of RMB 3,964,000, RMB
7,889,000 and RMB 10,970,000 (US$ 1,406,000) for the years ended December 31, 2004, 2005 and
2006 respectively, was charged to expense in the accompanying consolidated statements of
income. The Company has no other obligation to make payments in respect of retirement
benefits of the employees.
F-40
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(23)
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amount of financial
assets, such as cash and cash equivalents, short-term accounts receivable, bills receivable,
amounts due from related parties, accounts and bills payable, accruals and other payables,
amounts due to related parties and other payables, approximates their fair values because of
the short maturity of these instruments. The carrying amount of short-term borrowings
approximate fair value determined based on the borrowing rates currently available for debt
securities with similar terms and maturities. The investment securities represented unquoted
equity securities of an entity established in the PRC. There is no quoted market price for
such equity securities and accordingly, it is impracticable to have a reasonable estimate of
the fair value.
Long term accounts receivables as of December 31, 2005 and 2006 were recorded in the
accompanying consolidated balance sheet at their net present value based on a discount rate
of 4.42% and 5.58% per annum respectively, which approximated the discount rate generally
available for discounting similar instruments with commercial banks in the PRC. The carrying
amount of long term accounts receivable approximate their fair value.
The carrying amount of long-term debt approximated their fair value based on the borrowing
rates currently available for debt securities with similar terms and average maturities.
F-41
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(24)
Business and Credit Concentrations
Substantially all of the Company's customers are located in the PRC. The following are
customers that individually comprise 10% or more of gross revenue for the years ended
December 31, 2004, 2005 and 2006:
2004
2005
2006
2006
RMB'000
%
RMB'000
%
RMB'000
%
US$'000
China Unicom Group
345,847
61
322,896
45
298,693
36
38,274
China Mobile Group
157,327
28
241,575
34
277,098
33
35,507
China Telecom Group
19,299
3
69,490
10
89,169
11
11,426
At December 31, 2005 and 2006, approximately 87% and 80% of gross accounts receivable,
respectively, were due from these customers. As a result, a termination in relationship in or
a reduction in orders from any one of these customers would have a material impact on the
Company's results of operations and financial condition. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no collateral from
its customers.
The gross accounts receivable due from major customers, China Unicom Group, China Mobile
Group and China Telecom Group at December 31, 2005 and 2006, were as follows:
2005
2006
2006
RMB'000
RMB'000
US$'000
China Unicom Group
— Current portion
288,052
305,813
39,186
— Long-term portion
79,032
100,162
12,835
367,084
405,975
52,021
China Mobile Group
— Current portion
147,779
223,374
28,623
— Long-term portion
43,772
80,010
10,252
191,551
303,384
38,875
China Telecom Group
— Current portion
35,002
70,158
8,990
— Long-term portion
17,164
28,853
3,697
52,166
99,011
12,687
610,801
808,370
103,583
F-42
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(25)
Commitments and Contingencies
(i)
Operating lease commitments
Future minimum lease payments under non-cancelable operating leases as of December 31,
2006 are as follows:
RMB'000
US$'000
2007
6,912
886
2008
1,945
249
2009
1,156
148
2010
—
—
2011
—
—
10,013
1,283
For the years ended December 31, 2004, 2005 and 2006, total rental expenses for
non-cancellable and cancellable operating leases were RMB 8,480,000, RMB 13,361,000 and
RMB 16,385,000 (US$ 2,100,000), respectively.
(ii)
Capital commitments
Capital commitments for future purchase of property, plant and equipment as of December
31, 2006 was RMB 219,612,000 (US$ 28,141,000).
(iii)
Contingencies
In the ordinary course of its business, the Company provides customers with one to three
years of warranty protection, under which the Company agrees to repair or replace
defective installed wireless coverage products at no additional cost to the customers.
The contracts generally do not contain disclaimers or limitations on product liabilities
for special, consequential and incidental damages, nor does the Company typically cap
the amounts the customers may recover for damages. In addition, the Company does not
currently maintain any insurance for product liability or warranty claims. A failure of
the Company's products to operate properly and the potential damage from malfunction of
the Company's products could give rise to substantial liabilities under the warranties
and otherwise.
F-43
Table of Contents
China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
(expressed in RMB and US$)
(26)
China GrenTech Corporation Limited (Parent Company)
In accordance with the relevant PRC regulations, the Company's subsidiaries may pay
dividends only out of their accumulated profits, if any, determined in accordance with
PRC GAAP. In addition, the Company's subsidiaries are required to set aside at least
10% of their respective accumulated profits each year, if any, to fund the statutory
general reserve until the balance of the reserve reaches 50% of their respective
registered capital. The statutory general reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year losses,
if any, and may be converted into share capital by the issue of new shares to
shareholders in proportion to their existing shareholdings, or by increasing the par
value of the shares currently held by them, provided that the reserve balance after such
issue is not less than 25% of the registered capital. As of December 31, 2006, the
statutory general reserve already reached 50% of the registered capital of certain
subsidiaries of the Company and no additional transfer is required.
Furthermore, certain subsidiaries were previously required to allocate 5% to 10% of the
profit after tax, determined in accordance with PRC GAAP, to the statutory public welfare
fund, which was restricted to be used for capital expenditures for staff welfare facilities
owned by the Company. In accordance with the new regulations which became effective January
1, 2006, appropriation to the statutory public welfare fund is longer required and the
balance of the statutory public welfare fund of RMB 40,986,000 had been transferred to the
statutory general reserve on January 1, 2006.
As of December 31, 2005 and 2006, an aggregate amount of RMB 117,092,000 and RMB 132,403,000
(US$ 16,966,000) were appropriated from retained earnings and set aside for statutory general
reserves and public welfare fund respectively by the Company's subsidiaries.
As of December 31, 2005 and 2006, the amount of restricted net assets of the Company's
subsidiaries, which may not be transferred to the Company in the forms of loans, advances or
cash dividends by the subsidiaries without the consent of a third party, was approximately
23% and 9% respectively of the Company's consolidated net assets as discussed above. In
addition, the current foreign exchange control policies applicable in the PRC also restrict
the transfer of assets or dividends outside the PRC.
F-44