-3x Short China Regulatory News (CHNS)

China Shoto plc

("China Shoto", the "Company" or "the Group")

Final Results & Notice of AGM

China Shoto plc (AIM: CHNS), a leading Chinese producer of industrial batteries and power supply systems, announces its final results for the year ended 31 December 2010.

Highlights

Notice of AGM

Notice is hereby given that the Annual General Meeting of China Shoto plc will be held at the 8th Floor, 131 Finsbury Pavement, London EC2A 1NT at 11.00 a.m. on 26 April 2011.

A full version of the Annual Report and Accounts, including Notice of Annual General Meeting, is set out below and is also available for download from the Company's website at www.chinashoto.com.

China Shoto plc A Green Energy Solution Provider

Company Number: 05448599

2010 Annual Report and Accounts 

Contents 

Directors, Secretary and Advisers

Highlights

Company Overview

Chairman's Statement

Finance Director's Report

Board of Directors

Directors' Report

Corporate Governance

Directors' Responsibility Statement

Remuneration Report

Independent Auditor's Report

Consolidated Income Statement

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statements

Notes to the Financial Statements

Directors, Secretary and Advisers

Directors

Yang Shanji (Executive Director)

Zhou Ping (Executive Director)

Qian Shangao (Executive Director)

Zhou Yuezhang (Executive Director)

Zhou Weigang (Executive Director)

Bernard Harry Asher (Non-Executive Director)

Peter Maurice Crystal (Non-Executive Director)

Li Shuang (Non-Executive Director)

Company Secretary

Peter Maurice Crystal

Registered Office 

The Broadgate Tower

20 Primrose Street

London EC2A 2RS

Registered Number

05448599

Auditor

BDO LLP

Emerald HouseEast StreetEpsomSurrey KT17 1HS

Nominated Adviser and Broker

Seymour Pierce Limited

20 Old BaileyLondon EC4M 7EN

Registrars 

Capita Registrars

The Registry

34 Beckenham Road

Beckenham

Kent BR3 4TU

Solicitors

Reed Smith LLP

The Broadgate Tower

20 Primrose Street

London EC2A 2RS

Highlights

Company Overview

Business introduction

China Shoto plc (the "Company") and its subsidiaries (together the "Group") are mainly engaged in the production of back-up batteries and power type batteries. The back-up batteries are used primarily by telecommunications operators, but also by customers in the power, railway and other sectors. The power type batteries are mainly used by the electric bicycle manufacturer and retail sectors. During the year ended 31 December 2010, the Group maintained its market share as a leading back-up battery supplier to China's three major telecom operators, China Mobile, China Unicom and China Telecom and was awarded Huawei Technology Core Supplier Status.

Total revenue decreased by 7.3% to £196.95 million in 2010 (2009: £212.57 million). Revenue from the back-up battery business decreased by 15.8% to £165.57 million (2009: £196.53 million) and the gross profit margin decreased from 13.2% in 2009 to 11.5% in 2010. At the same time, revenue from the power type battery business increased 95.5% to £31.36 million (2009: £16.04 million) helping to narrow the negative profit margin from -4.17% in 2009 to -0.55% in 2010. 

Acquisition and disposal of subsidiaries

In January 2010, the Group acquired a controlling equity interest in Rugao Tianpeng Metallurgy Co., Ltd (Rugao Tianpeng) for a total consideration of £1.82 million. Rugao Tianpeng is mainly engaged in battery recycling and is located in Rugao City, Jiangsu Province, China, within easy reach of the Group's existing production facilities in Jiangyan.

The Company disposed of its shareholding in Yangzhou Zhenghe Power Supply Co., Ltd in December 2010 for a cash consideration of RMB 4 million, yielding a profit on disposal of RMB 820,000 against the original purchase price in 2006.

Strategic Objective

The Company has become the largest back-up battery producer in China. As a China environment friendly enterprise, the Company intends to become a green energy storage products provider through enhancing its R&D effort and in particular, to progress the development of green energy storage products.

Products

Manufacturing

The Group's factories are conveniently located in Jiangyan, Jiangsu Province, two hours from Shanghai, with easy access to well-developed transportation networks.

The Group now has eight back-up battery and two power type battery production lines including two new lines built in 2010 for 12V back up battery to satisfy increased market demand. Key manufacturing equipment includes a TBS casting machine from the UK, and a concasting system from USA, both designed for the production of Front Terminal batteries and Spiral Wound batteries. The designed annual capacity for Front Terminal batteries is 1 million KVAH (830,000 pcs), and 108,000 KVAH (180,000 pcs) for spiral wound batteries.

Products are manufactured according to international and domestic industrial standards and comply with the network license requirements of major countries in Europe, America and South Asia. The Group has also met the international authentication standards of other countries such as Indonesia, Russia and Nigeria and of the International Electrotechnical Commission. 

Research and development

The Company established the Nanjing Shuangdeng Science & Technology Academy and Post Doctoral Research Workstation, a key laboratory for research into new power type batteries in Jiangsu Province. It is also cooperating with more than 10 large domestic universities, including Nanjing Normal University and the China Academy of Science, in product development, technical innovation and talent training. In addition, the Group has equipped itself with high-tech instruments from the UK, Germany and the USA so as to maximise the quality of its R&D and production.

The Company's R&D centre is mainly responsible for developing new types of GEL, AGM and Spiral Wound batteries, as well as the technological development of all existing products.

Sales and Market

Market sectors served include telecommunications, electrical power, railways and electric bicycle sectors. 

Key Customers

Back-up battery business

Domestic market: China's three major telecom operators remain our key customers, with sales of £109.7 million (2009: £159.68 million), accounting for 66.3% (2009: 81.2%) of the total back-up battery business during the year. Other major customers include ZTE Telecom and Huawei Technology, who awarded the Company "Huawei Technology Core Supplier Status" during the year. Sales to these two customers increased to £35.79 million (2009: £15.26 million), accounting for 21.6% (2009: 7.8%) of total back-up battery revenue during the year.

Foreign markets: Back up battery sales to FAAM and Indus Tower Ltd totalled £2.03 million (2009: £4.54 million), accounting for 26.9% (2009: 47.1%) of total foreign sales.

Power type battery

Changsha Zhongxiang Electric Bicycle Co., Ltd, Jiangsu Xinri Electric Bicycle Co., Ltd, and Tianjin Taifeng Xiaoniao Electric Bicycle Co., Ltd were the top three customers for power type batteries, generating sales of £10.64 million (2009: £4.48million), and accounting for 33.9% (2009: 14.3%) of total power type battery business.

Sales and Service Network

The Group now has 89 domestic sales offices and five overseas offices in Dusseldorf, Dubai, Moscow, Singapore and South Africa which opened in 2010.

Chairman's Statement 

Against the backdrop of continuing complications both in China's domestic markets and internationally, marked in particular by a huge decrease in infrastructure construction spending by China's three telecom operators, 2010 proved to be a challenging year for China Shoto. In spite of these difficulties, the Company implemented developments that we believe position us strongly to expand the business as we continue working to create value for our shareholders. During the year, the Company successfully completed the acquisition of Rugao Tianpeng, providing us with a battery recycling operation that enables the Group to meet environmental criteria imposed by key customers. We also continued working to maximise our existing technology advantages and customer relationships and focused our sales strategy to maintain market share and remain the largest back-up battery supplier to China's huge telecoms sector. Further, our strong R&D capabilities resulted in the successful development of new battery types, providing opportunities into other domestic markets, such as the electric power, railway and bicycle sectors. Considerable progress in our exploration of key customer potential has been made in overseas markets. We have also continued working hard to control costs and evaluate more efficient production methods whilst maintaining overall production levels. At the end of the year, the Company disposed of its entire shareholding in Yangzhou Zhenghe for a cash consideration of RMB 4 million, yielding a profit on disposal of RMB 820,000.

Results and Dividend

Significant decreases in the central purchasing budgets of China's three telecom operators, higher lead prices, and wider global competition resulted in a significant decrease in Group sales compared with 2009. Revenue decreased 7.3% to £196.95 million (2009: £212.57 million), whilst net profit attributable to equity holders of the parent decreased by 33.9% to £15.40 million (2009: £23.30 million).

The Board is not recommending any increase in the full year dividend which will be maintained at 5 pence per share for the year ended 31 December 2010. If approved by shareholders at the Annual General Meeting on 26 April 2011 the dividend will be paid on 4 May 2011 to shareholders on the register at the close of business on 8 April 2011, with the shares going ex-dividend on 6 April 2011.

Operating Overview

Market Overview

Business segments

Back-up batteries

Sales revenue from the back-up battery business in 2010 decreased 15.8% to £165.57 million (2009: £196.53 million).

Power type batteries

Sales from the power type battery business in 2010 increased 95.5% to £31.36 million (2009: £16.04 million).

Geographical segments

Domestic sales

Although the Company successfully increased its sales to ZTE and Huawei by 134.5% to £35.79 million (2009: £15.26 million), domestic sales still decreased 6.6% to £189.43 million (2009: £202.93 million). Sales to the Group's three key customers, China's telecom operators decreased 31.3% to £109.7 million.

Foreign sales

Foreign sales decreased 22.1% to £7.52million (2009: £9.64 million) mainly due to lower sales to our biggest overseas market, India, which cut imports from China following an increase in domestic Indian suppliers. Sales to India alone decreased 78% to £1.25 million (2009: £5.70 million). However, the Group is working to broaden its international presence, and successfully captured new sales in Korea, Russia, Malaysia and Brazil during 2010.

Key customers

Back-up batteries

Sales to China's three largest telecom operators decreased 31.3% to £109.7 million (2009: £159.68 million), although the Group remains the largest single back-up battery supplier to China's three telecom operators. Mitigating the affect of the revenue drop, sales to ZTE and Huawei Technology increased 134.5% to £35.79 million (2009: £15.26 million).

During the year, the Group's back-up batteries were used successfully in the China Mobile Pavilion, the Pacific Pavilion, and the Joint Pavilion of International Organizations at the Shanghai EXPO 2010. This endorsement has improved the recognition of our brand in the key markets in which the Group operates.

Power type batteries 

Following the Company's market development activities over the past three years, sales of power type batteries improved significantly during 2010. Sales to the primary market (where customers include e-bike manufacturers) increased 114.8% to £13.22 million (2009: £6.15 million), whilst sales to the secondary market (where the customers are e-bike accessory distributors, repair shops and retailers) increased 103.4% to £18.14 million (2009: £8.87 million).

The Group continues to strengthen its communications with customers through improvements to its technical support and after-sale services.

In 2010, the Group also strengthened its presence at key international telecom fairs, such as the Singapore Telecom Fair, the Brazil International Telecommunications Exhibition, the Russia Telecom Exhibition, the South Africa Telecom Exhibition, the China International Telecom Fair and the International Engineer Machine Exhibition, as well as increased media advertising and other marketing strategies.

Lead Acid Battery Recycling Project

In January 2010, the Company acquired Rugao Tianpeng, which now enables the Group to meet internally, the battery recycling requirements of its key customers. Rugao Tianpeng mainly produces lead alloy as required by the Group. The Group is now undertaking research on the selection of smelting equipment and technical demonstrations.

Research and Development

The R&D centre is responsible for developing new types of GEL, AGM and Spiral Wound batteries, and for the technical development of existing types of these batteries and of super capacitors. New products developed in 2010 include a full series 12V front terminal 100AH with concasting technology, a 2V flat plate gel battery, a 12V front-terminal gel battery, and a 12V 100AH AGM specially designed for UPS. 

Patents Granted

During 2010, the Group was granted 71 new patents, bringing the total number of patents awarded by the China Intellectual Property Bureau to 197, including 15 invention patents.

Directorate Changes 

There were no changes to the Board of Directors in the year ended 31 December 2010 or up to the date of signing the annual report.

Social Responsibility

As a China environmentally friendly enterprise, we remain committed to commercial development in parallel with the Group's wider social responsibility. Balancing the requirements of our shareholders, staff, customers, suppliers, and social and environmental demands, we are committed to pursuing value for the benefit of the whole community.

The Group has attained ISO14001 environment management system certification and GB/T18001 vocation health and safety management certification. Further, the Group's products have passed CE Verification, UL Verification and EU RoHS tests.

Outlook

As foreseen in the 2009 Annual Report, the Group's management faced severe commercial pressures and challenges in 2010. The year ahead will undoubtedly bring further uncertainties, in particular in relation to the:

All are expected to affect the Group's business and impact profit margins. In the face of these challenges, the Group will continue to explore new opportunities in both the international and domestic markets. The newly built production lines for front terminal and spiral wound batteries will contribute towards growing the business going forward. The Group will also continue to focus on cost savings, ensuring tighter risk controls and maintaining environmental compliance in line with its objective of becoming a key green energy solution provider.

Following a challenging year for the Group, the Directors have conducted a detailed review of the Group's strategic options. This review has included evaluating the benefits and disadvantages of the admission of the Company's shares to trading on AIM. The Directors have concluded that it is in the best interests of the Company and shareholders as a whole for the admission of the Company's ordinary shares to trading on AIM be cancelled. The Company has issued a circular to shareholders on 30 March 2011 which provides further details of the proposed cancellation of admission of the Company's ordinary shares to trading on AIM, a tender offer by Seymour Pierce Limited to purchase certain of the Company's Ordinary Shares as well as a Notice of Annual General Meeting. 

Following the cancellation of the Company's admission to trading on AIM, the Directors will consider various strategic options which may include a listing on the Hong Kong Stock Exchange, the Shanghai Stock Exchange or any other Stock Exchange. It should be noted that there can be no certainty of another listing on any Stock Exchange.

Yang Shanji

Chairman

30 March 2011

Finance Director's Report

Results

The Board regards the following measures as key performance indicators:

Income Tax

China Shoto plc

China Shoto plc is a non-resident company registered in England and Wales and only subject to UK corporation tax for activities undertaken in the UK.

According to the latest taxation laws of the Peoples' Republic of China, which came into effect on 1 January 2008, the Group and its significant subsidiary undertakings are subject to income tax at the following tax rates:

Jiangsu Shuangdeng Group Co., Ltd ("JSG Co")

As a foreign enterprise, JSG Co enjoys a preferential policy of a five-year transition period between the new and old enterprise income tax laws. A half-relief tax rate of 12.5% will be applied from 2010 to 2012; the full applicable income tax rate will be 25% from 2013.

Jiangsu Fuste Power Supply Co., Ltd

The full income tax rate of 25% is applied according to the latest taxation laws of the Peoples' Republic of China.

Nanjing Shuangdeng Science and Technology Development Academy Co., Ltd

A half relief tax rate of 12.5% is applied from 2010 to 2012. From 2013, the applicable income tax rate will be 25%. 

Jiangsu Best Power Supply Co., Ltd

The applicable income tax rate is 12.5% according to the latest taxation laws of the Peoples' Republic of China. Since 2011, the applicable income tax rate has been 25%.

Rugao Tianpeng Mettallurgy Co., Ltd

The applicable income tax rate is 25% according to the latest taxation laws of the Peoples' Republic of China.

Earnings and Dividends

Diluted earnings per share decreased 34.6% to 64.27p (2009: 98.34p).

The Board is not recommending any increase in the full year dividend, which will be maintained at 5 pence per share for the year ended 31 December 2010.

Shareholders' Equity

The proportion of equity of the Company attributable to shareholders of the parent increased by 26.9% to £91.64 million in 2010 (2009: £72.22 million). Retained earnings of the Group increased by 31.6% to £43.47 million (2009: £33.03 million).

Cash Flow

The net cash inflows from operating activities is £5.98million (2009: £14.36 million).

Borrowing

In 2010 the Group entered into credit facility with the Jiangyan branch of China Construction Bank, the Jiangyan branch of Agricultural Bank of China, the Jiangyan branch of Industrial and Commercial Bank of China and the Jiangyan branch of Bank of China. On 31 December 2010, the Group's short term bank borrowing stood at £35.40 million compared with £40.99million as at 31 December 2009.

Cost management

The Group reduced manufacturing waste through product technological innovation, enhanced cost estimates and control, and more precise cost audits and management.

Liquidity Risk

Liquidity risk arises from the Group's management of working capital. The Group has financed its operations primarily through a mix of short-term and long-term borrowings. Liquidity risk was significantly reduced by increasing the banking facilities available to the Group.

Foreign Exchange Risk

Foreign sales in 2010 were £7.52 million (2009: £9.64 million), accounting for 3.8% of total revenue (2009: 4.5%).

The Group effectively reduced and controlled risks regarding export payment through the application of export credit insurance, letters of credit and advance payments, among other measures, alongside the application of forward settlement method to reduce foreign exchange risks.

Interest Rate Risk

With the adjustment of Chinese currency policy, anticipated interest rate increases in 2011 may affect purchasing costs and thus profitability. The main interest rate risk is the rate of return on short term cash deposit and bank borrowings.

Zhou Weigang

Finance Director 

30 March 2011

Board of Directors

Yang Shanji, Executive Chairman

Yang Shanji has a Master's Degree in Administration and the title of Senior Economist. He is the main founder and the largest shareholder of the Company. He is Chairman of the Board and CEO of the Company. Mr. Yang is one of the pioneers of China's battery industry and is the Vice Director of both the China Battery Industry Association and China Industrial Association of Power Sources. He has more than 30 years of senior enterprise management experience and has a strong reputation in the battery industry. Mr. Yang is regularly recognised for his work in the industry, receiving titles such as National Model Worker, an honour that the Chinese Government grants to individuals who have provided significant contributions to the Chinese economy.

Zhou Ping, Executive Director

Zhou Ping holds a Master's Degree, the title of Senior Economist and is the Chief Marketing Officer of the Company. He is an economist with 17 years' experience in the battery and industrial power supply sector, spent entirely with the Group. For the past 12 years he has been responsible for Group marketing and sales.

Qian Shangao, Executive Director

Mr. Qian Shangao has a Master's Degree. He is a senior engineer, and holds the title of Senior Economist. He is one of the founders of JSG Co. He worked as a plant supervisor in Jiangsu Taixian Electric Cooking Utensils Factory from February 1975 to 1990. Between 1990 and 1995, Mr. Qian was the Deputy Director of the Jiangyan Sealed Storage Battery Factory (Jiangyan Factory). He joined JS Power as Deputy General Manager when it was set up in 1995 and has been Vice President of JSG Co since 2003.

Zhou Yuezhang, Executive Director

Zhou Yuezhang holds a Master's Degree and is one of the founders of JSG Co. From 1990 to 1995, he was the Deputy Director of the Jiangyan Factory. He joined JS Power as Deputy General Manager when it was set up in 1995 and has been the Vice President of JSG Co. since 2003. Mr. Zhou has extensive experience in several management fields in the power supply industry.

Zhou Weigang, Executive Director

Zhou Weigang, holds a Master's Degree, the title of Senior Economist and is an accountant. He is the Chief Finance Officer of the Group. He has been awarded the title "Provincial Advance Chief Financial Officer" by the Finance Office of Jiangsu Province, China. Mr. Zhou has 30 years' management experience in senior financial positions with Chinese industrial companies. He has served the Group for 13 years, most recently as the Group's Financial Controller, with responsibility for risk control. He was part of the team involved in the listing of the Company on the AIM market in December 2005.

Bernard Harry Asher, Non-Executive Director

Mr. Asher, who lives in London, was an Executive Director of HSBC Holdings from 1986 to 1998 and Chairman of HSBC Investments. In 1997 Mr. Asher became Non-Executive Vice Chairman of the Legal & General Group and Vice Chairman of the London School of Economics. He has been a Non-Executive Director of Morgan Sindall, Seymour Pierce, Chairman of Liontrust. Currently, Bernard Asher is a Director of Hansard Global, China Shoto and BMC Bank International.

Li Shuang, Non-Executive Director

Li Shuang is a Professor in the Central University of Finance and Economics. Professor Li acted as the Deputy Secretary-General of the Chinese Institute of Certified Public Accountants (CICPA) from 1999 to 2002, following which he acted as an advisor to the organisation from 2002 to 2004. In 2010, he was selected as the "Senior Certified Public Accountant". He is currently a member of the Accounting Society of China (ASC), a Director and member of CICPA and China Audit Society, and a member of Academic Committee of Audit Society. He is also a Non-Executive Director of two companies listed in China, and an External Supervisor of a listed company.

Peter Maurice Crystal, Non-Executive Director

Mr. Crystal is a Solicitor and has over 30 years' experience advising Directors and companies whose shares are listed on the London Stock Exchange and AIM. Founder of law firm Memery Crystal, he specialises in matters relating to listed companies and advising on flotations, takeovers, mergers and other corporate finance activities. He is a graduate of Oxford and McGill Universities, a former Law Society Examiner, Director of several companies and a known speaker on corporate finance and corporate governance.

Directors' Report

The Directors are pleased to submit the annual report and financial statements for the year ended 31 December 2010.

Principal Activities

The principal activity of China Shoto plc is that of a holding company. Its subsidiaries mainly devote themselves to the design, development, manufacture and sale of back-up or power type batteries. 

Business Review

The Group has performed satisfactorily during the year and the trading performance achieved the budget established at the beginning of the year.

The Income Statement of the Group shows revenue of £196.95 million and profit attributable to equity holders of the parent of £15.40 million for the year ended 31 December 2010.

Total Group revenue decreased by 7.3% compared with 2009. Back-up battery revenue decreased by 15.8% to £165.57 million in 2010 (2009: £196.53 million). Further details of revenue by product type are set out in note 26 to the accounts.

The Group signed a share transfer agreement in January 2010 for total consideration of £1.82 million for the entire share capital of Rugao Tianpeng. The company mainly produces lead alloy as required by other companies of the Group.

In December 2010, the Group disposed its total shareholding of 51% in Yangzhou Zhenghe Power Co., Ltd for a cash consideration of RMB 4 million which represented a profit on disposal of RMB 820,000.

Further details of the Group's operations, performance and key performance indicators are set out in the Chairman's Statement and the Finance Director's Report.

Principal Risks and Uncertainties

The acquisition of Rugao Tianpeng in 2010 could expose the Group to potential risks, including risks associated with the management of new operations, technologies and personnel. The Company will recruit a related expert management team and technician to control the risk.

The Company's exports markets are exposed to fluctuating foreign exchange rates, and any appreciation of RMB may influence the Company's foreign sales and profitability overseas. Other forms of financial risk are discussed further in note 23 to the financial statements. The Company will consider the use of financial instruments to manage any material exposure to foreign currency.

With the adjustment of Chinese currency policy, anticipated interest rate increases during 2011 may affect financing costs and thus profitability. The Company will pay close attention to the trend of Chinese currency policy, enhance management on trade receivables, increase the trade receivable velocity and improve the capital utilization efficiency to control finance cost.

The Chinese Government's increased requirements on environmental protection measures expose the Company to greater pressure on energy conservation and emission controls, associated vocational health and increase of labour costs. The Company will increase input in environmental facility, R&D and commercialization progress of green environmental product, promote the industry to control this pressure caused by such cost increase.

Dividend

The Board is not recommending any increase in the full year dividend, which will be maintained at 5 pence per share for the year ended 31 December 2010. If approved by shareholders at the Annual General Meeting on 26 April 2011 the dividend will be paid on 4 May2011 to shareholders on the register at the close of business on 8 April 2011, with the shares going ex-dividend on 6 April 2011.

Substantial Shareholders

The Company has not been notified of any beneficial interests, other than those of the Directors of 3% or more of the issued share capital of the Company.

Directorate Changes

There were no changes to the Board of Directors in the year ended 31 December 2010 and up to the date of signing of the annual report.

Employee Policy

As a China environment friendly enterprise, we seek to identify and minimise all health and safety risks in daily operations and in the production process. We also provide regular physical examinations and occupational health and safety training for all employees. The Group also pays for endowment, medical, and unemployment insurance, as well as providing a housing fund for all employees in accordance with relevant national regulations.

The Group is committed to equal opportunities for its employees regardless of gender, age and religion and rejects other forms of discrimination. Personnel are selected on the basis of merit and capability.

Environmental Policy

The Group passed the certification of ISO14001 and GB/T18001 vocation health and safety management, and its products passed the CE Verification, UL Verification and EU RoHS test. Its subsidiary, JS Power., successfully signed a strategic cooperation agreement, the "Green Action Program", with China Mobile. As a China environment friendly enterprise, environment protection is always integrated into the Group's strategies which are demonstrated in our purchasing policies for equipment and raw materials, recycling of waste residue and purification of waste water. 

Creditor Payment Policy

The Group pays for the main raw material (lead ingot) by cash on delivery. The payment for other raw materials is by bank acceptance with six months' maturity. The number of average days purchases of the Group represented by trade creditors at 31 December was 62 days (2009: 45 days).

Financing

The Group currently uses bank borrowings of one year's maturity to provide finance for working capital requirements. Given the trading performance, the Directors expect the Group to continue to operate as a going concern for the foreseeable future.

Financial Instruments

The Group has its own cash resource and foreign exchange account which is managed to reduce exchange rate risk from transactions not denominated in RMB. The Group has not undertaken any transactions in financial derivatives. For further information on financial instruments please see note 23 to the financial statements.

Communication with Shareholders and the Market

The annual report and financial statements and interim statements are the primary vehicles for communication with shareholders. Meetings with significant shareholders are arranged through our Nominated Advisor and Broker, Seymour Pierce Limited, and take place after the Final and Interim Financial Statements are published. Such meetings may also take place after other significant announcements, if any, are made to the market.

Research reports published by the Group's broker are another means of communication with shareholders and the market. General information about the business is also available on the Company's website: www.chinashoto.com.

Annual General Meeting

The Annual General Meeting of the Company ("AGM") will be held on 26 April 2011 in London. Full details of the AGM and the resolutions to be put to the AGM will be distributed in a separate circular to shareholders accompanying this Annual Report.

Auditors

All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the auditors for the purposes of their audit and to establish that the auditors are aware of the information. The directors are not aware of any relevant audit information of which the auditors are unaware.

By order of the board

Peter Maurice Crystal

Company Secretary

Corporate Governance

Introduction

The Board of Directors is accountable to the Company's shareholders for good corporate governance. Although the Company's shares are traded on AIM, the Directors plan to comply with the Combined Code where practicable and appropriate.

Below is a brief description of the role of the Board and its committees, followed by a statement regarding the Group's system of internal financial control.

The Board and its Committees

The Board

The Board comprises eight Directors, five of whom are Executive Directors and three of whom are Non-Executive Directors. The Board believes this balance to be appropriate. The Board is responsible to shareholders for the proper management of the Group and it meets not less than four times a year, sometimes by telephone, in order to review trading performance, ensure adequate funding, set and monitor strategy, examine acquisition opportunities and capital expenditure projects, report to shareholders and to consider any other major issues that arise. 

Audit Committee

The Audit Committee, which is chaired by Li Shuang, comprises the three Non-Executive Directors only. It meets at least once a year.

The Audit Committee receives and reviews reports from management and the Group's auditors relating to the Interim and Annual Financial Statements and the accounting and internal control systems in use throughout the Group. The Audit Committee has unrestricted access to the Group's auditors. 

The Audit Committee advises the Board on the appointment of external auditors and their remuneration and discusses the nature and scope of the audit with the external auditors.

A formal statement of independence is received from the external auditors each year.

Remuneration Committee

The Remuneration Committee is chaired by Peter Maurice Crystal and includes Bernard Asher and Qian Shangao. It meets at least once a year.

It is responsible for reviewing the scale and structure of the Executive Directors' and senior employees' remuneration and the terms of their service or employment contracts including share option schemes and bonus arrangement. The remuneration and terms and conditions of the employment contracts of the Non-Executive Directors are set by the entire Board. 

Internal Control and Risk Management

The Board is responsible for establishing and maintaining the Group's system of internal control. The key procedures, which the Directors have established with a view to providing effective internal controls, are as follows: 

l Management structure

The Board has overall responsibility for the Company. Executive Directors together with key senior executives at the Company's level meet monthly to discuss sales and day to day operational matters. The subsidiary undertakings of the Group also hold monthly management meetings to summarise operating activities, as well as additional meetings on matters such as quality analysis and control, and financial cost analysis. 

l Identification of business risks

The Board is responsible for identifying the major business risks faced by the Group and for determining the appropriate course of action to manage those risks. 

The Board has established a sound risk evaluation and control system and ensures that directed measures be taken to manage such risks after identifying and evaluating them. In addition, the Directors take responsibility for monitoring changes in economic activity and the external environment, and communicate with members of the Company internal and external auditors.

The Board and the Audit Committee have reviewed the effectiveness of the internal control system. 

l Budgetary process

Each year the Board approves the annual budget, and key risk areas are identified. Performance is monitored and relevant action is taken throughout the year through the quarterly reporting to the Board of variances from the budget, updated forecasts for the year and information on the key risk areas.

Directors' responsibilities statement

The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the group and company financial statements in accordance with International Financial Reporting Standards ("IFRS"s) as adopted by the European Union. Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group for that period. The directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market.

In preparing these financial statements, the Directors are required to:

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 

Website publication

The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Remuneration Report

Remuneration Policy

The aim of the Company's remuneration policy is to reward the performance of the employees and thereby enhance shareholder value. Remuneration of the Executive of the Company is designed to provide rewards that will attract and retain high quality executives capable of achieving the Group's performance targets on both an annual and a long term basis.

At the time of the listing of the Company, it was decided that the remuneration policy then in operation would remain in place, and that adjustments to that policy would be made at the appropriate time. 

The Remuneration Committee

The principal functions of the Remuneration Committee are to review the remuneration packages of Directors and senior employees of the Group and its subsidiaries. The Remuneration Committee can modify and draft the remuneration terms or, if appropriate, suggest changes and reports to the Board for approval.

The Committee also reviews all service contracts for senior staff.

The Board (excluding the Non-Executive Directors) determines the remuneration of Non-Executive Directors.

Directors' Remuneration

Executive Directors 

The main components of Executive Directors' remuneration are:

Salary

The basic salary of each Director is determined by taking into account the Director's experience, responsibility and value to the Company.

Bonus awards

In addition to the salary, all Executive Directors were eligible for a performance-related bonus. The bonus was based on the annual budget and linked to achieving specified executive tasks during the year ended 31 December 2010. Detailed information can refer to Note 5. The targets were designed to ensure that the total remuneration varies in line with company performance.

Benefits

Benefits for the Executive Directors include medical insurance, and contribution by the Company to State Pension Scheme (which is subject to stipulations of the State).

Non-Executive Directors

The fees of the Non-Executive Directors reflect the time that they are required to commit to their duties.

Remuneration

The remuneration of the Directors for the year ended 31 December 2010 is set out in note 5 to the Financial Statements.

Share Options

The following Directors had interests in options to subscribe for ordinary shares of the Company as set out below:

Contracts of Service

The service agreements with each of the Executive Directors are terminable on 12 months' notice by either party. 

The Non-Executive directors all have letters of appointment with an initial fixed term of 12 months. The appointment may be terminated at any time thereafter by six months' written notice.

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF CHINA SHOTO PLC 

We have audited the financial statements of China Shoto plc for the year ended 31 December 2010 which comprise the consolidated income statement, the consolidated and company balance sheet, the consolidated and company statements of changes in equity and the consolidated and company cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. 

Respective responsibilities of directors and auditors

As explained more fully in the statement of directors' responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on financial statements

In our opinion:

Opinion on other matters prescribed by the Companies Act 2006 

In our opinion the information given in the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: 

Kevin Cook (senior statutory auditor)

For and on behalf of BDO LLP, statutory auditor

Epsom

United Kingdom

30 March 2011

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Consolidated Income Statement

For the year ended 31 December 2010

Consolidated Balance Sheet

As at 31 December 2010

Company Number: 05448599

Consolidated Balance Sheet (Cont'd)

As at 31 December 2010

Company Number: 05448599

The financial statements were approved and authorised for issue by the Board of Directors on 30 March 2011 and signed on its behalf by:

Shanji Yang

Chief Executive

The accompanying notes 1 to 30 forman integral part of the consolidated financial statements

Consolidated statement of changes in equity

For the year ended 31 December 2010

The accompanying notes 1 to 30 form an integral part of the consolidated financial statements.

Statement of changes in equity

For the year ended 31 December 2010

The accompanying notes 1 to 30 form an integral part of the consolidated financial statements.

Consolidated cash flow statements

For the year ended 31 December 2010

Consolidated cash flow statements (Cont'd)

For the year ended 31 December 2010

The accompanying notes 1 to 30 form an integral part of the consolidated financial statements.

Company cash flow statement

For the year ended 31 December 2010

The accompanying notes 1 to 30 form an integral part of the consolidated financial statement.

Notes to the Financial Statements

For the year ended 31 December 2010

1. General information

China Shoto plc is a company incorporated in the United Kingdom on 10 May 2005. The address of the registered office is given above, and the principal place of business is Shuangdeng Science and Industrial Zone, Liangxu Town, Jiangyan City, Jiangsu Province, China. Details of the Group's reporting and functional currencies are disclosed in note 2 below.

The Group financial statements consolidate those of the company and its subsidiaries (together referred to as the Group). The parent company financial statements present information about the company as a separate entity and not about its group. The nature of the Group's operations and its principal activities are set out in the directors' report. 

2. Accounting policies

The consolidated financial statements of China Shoto plc and its subsidiary undertakings (the 'Group') and the individual financial statements of China Shoto plc (the 'Company') have been prepared in accordance with those International Financial Reporting Standards and Interpretations in force ('IFRS'), as adopted by the European Union, and those parts of the Companies Act 2006 applicable to companies preparing financial statements under IFRS.

The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its income statement in these financial statements. The Company loss for the year is £265,000 (2009 profit £2,068,000), which is dealt with in the financial statements of the Company.

Standards effective but not yet adopted

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the group's accounting periods beginning on or after 1 January 2011 or later periods and which the group has decided not to adopt early and are not expected to have a material impact on the group's accounts. These are:

Estimates and assumptions

The Group makes certain estimates and assumptions regarding the future. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimate and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

a) Useful lives and depreciation of intangible assets and property, plant and equipment

Intangible assets and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the consolidated income statement in specific periods. Details of the estimated useful lives are shown in the policy note for depreciation. While the estimated useful life of an asset is determined on acquisition, using best estimates, both residual values and estimated useful lives are monitored on an annual basis. More details including carrying values are included in Notes 10 and 12.

b) Inventory

The Company reviews the net realisable value of, and demand for, its inventory on a quarterly basis to provide assurance that recorded inventory is stated at the lower of cost and net realisable value. Factors that could impact estimated demand and selling prices include the timing and success of future technological innovations, competitor actions, supplier prices and economic trends. Changes of the expected net realisable value of inventory could potentially result in an increase or reduction in the profit for the year.

c) Allowance for doubtful trade receivables

The Group makes sales on credit. A proportion of the outstanding credit sales may prove uncollectable in due course. An estimate is made of the uncollectible portion of accounts receivables using a percentage based on the ageing profile of the amounts outstanding, and also individually confirmed according to the customers' accrual credit conditions. Historically the Group has not born losses exceeding 1% of gross book value of trade and other receivables but has increased its allowance for doubtful trade receivables during this period to reflect tightening monetary policy in China, in particular.

There is a degree of uncertainty as to actions the Group is able to undertake to enforce collection of doubtful debts, which may impact the eventual recoverable amounts. Accordingly, the Directors have assessed their best estimate of the recoverability of such debts as nil. More details of the allowance for doubtful trade and other receivables are provided in Note 14.

d) Income taxes

The Group is subject to income tax in several jurisdictions within the People's Republic of China and significant judgment is required in determining the provision for income taxes. The carrying amount of the group's income tax payable at 31 December 2010 was £1,094,000 (2009: £60,000). The company believes that its provision for tax liabilities are adequate for all of its years of operations based on the assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.

During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. As a result, the company recognises tax liabilities based on best estimates of whether additional taxes and interest may be due.

Subsidiaries

A subsidiary is an entity over which the Group has the power to govern the financial and operating policies so as to obtain benefits from its activities. The Group generally has such power when it directly or indirectly, holds more than 50% of the issued share capital, or controls more than half of the voting power, or controls the composition of the board of directors. 

In the Company's separate financial statements, investments in subsidiaries are accounted for at cost less any impairment losses.

Principles of consolidation

The consolidated financial statements comprise the financial statements of the China Shoto plc and its subsidiaries as at the balance sheet date. The financial statements of the subsidiaries are prepared for the same reporting date as the parent company. Consistent accounting policies are applied for like transactions and events in similar circumstances.

All inter-group balances, transactions, income, expenses, profits and losses resulting from inter-group transactions that are recognised are eliminated in full.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date such control ceases.

Acquisitions of subsidiaries are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. For acquisitions prior to 1 January 2010, cost directly related to the acquisition were included as part of the cost of an acquisition, thereafter cost directly attributable have been expensed. Identified assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date.

Any excess of the cost of the business combination over the Group's interest in the net fair value of the identified assets, liabilities and contingent liabilities represents goodwill. The goodwill is accounted for in accordance with the accounting policy for goodwill stated below.

Non-controlling interests represent the portion of net assets in subsidiaries not held by the Group. These are presented in the consolidated balance sheet within equity, separately from the parent shareholder's equity, and the share of profit or loss is separately disclosed in the consolidated income statement.

The acquisition of Leadstar Enterprises Limited by China Shoto plc on 30 November 2005 has been accounted for using the principles of reverse acquisition accounting, in accordance with IFRS 3 'Business Combinations', on the basis that the management, who are the former majority shareholders of Leadstar Enterprises Limited, retained effective control of the Group. The fair value of the assets of China Shoto plc at the date of the business combination were equivalent to the fair value of the notional number of equity instruments which would have been issued by Leadstar Enterprises Limited to acquire China Shoto plc, and therefore no goodwill arose in respect of this transaction.

Foreign currencies

As sales and purchases are denominated primarily in RMB and receipts from operations are usually retained in RMB, the functional currency of the subsidiary undertakings is Renminbi ("RMB"). Monetary assets and liabilities maintained in currencies other than RMB are translated into the RMB at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than RMB are translated at rates ruling on the transaction dates. All resulting exchange differences are dealt with in the income statements.

The consolidated results are presented in Sterling reflecting the Company's UK quotation and investor base. Assets and liabilities of subsidiaries are translated into Sterling at the closing rate, and all income and expenses are translated at the average rate during the financial period, being an approximation for the actual rates at the date of the transactions. All resulting exchange differences are taken to the foreign currency translation reserve within equity.

Revenue recognition

Revenue from the sale of goods is recognised upon significant risks and rewards of ownership of the goods being transferred to the customer, which coincides with acceptance of the goods sold and the quality inspection by clients, being a contractual requirement of the Group's customers.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When a grant relates to an expense item, it is recognised in the consolidated income statement over the period necessary to match it on a systematic basis to the costs that it is intended to compensate. Where a grant relates to an asset, it is included in deferred income and amortized to the consolidated income statement in equal annual installments over the expected useful life of the relevant asset.

Employee benefits

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statements as incurred.

Bonuses for staff are accrued when the Group has an obligation to settle the liability for staff's past performance at the financial year end. The bonus accrual is stated at the present value of the discounted cash flows based upon the expected timing of bonus payments.

Borrowings costs

The Group does not incur any interest costs that qualify for capitalization under IAS 23 'Borrowing costs', and are therefore expensed as incurred.

Share-based payments

Where equity settled share options are awarded to employees for services provided in respect of the flotation, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The fair value of the award is recognised over the vesting period as an increase in the cost of investment in the subsidiary in the company balance sheet. The cumulative expense is not adjusted for failure to achieve a market vesting condition.

Where equity instruments are granted to persons other than employees, the consolidated income statement is charged with the fair value of goods and services received.

Income tax

Income tax for the financial year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case such tax is recognised in equity.

Current tax is the expected tax payable on the taxable income for the financial year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous financial years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences as at the balance sheet date between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except for differences arising on the initial recognition of goodwill and goodwill for which amortisation is not tax deductible.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Dividends

Equity dividends are recognised when they become legally payable. In respect of interim dividends to equity shareholders, this is when they are paid. In respect of final dividends to equity shareholders, this is when they are approved at the annual shareholders' meeting. The Company will recognise investment income when the subsidiaries' dividend is approved by their shareholders' meetings.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Depreciation is calculated using the straight-line method so as to write off the cost of property, plant and equipment reduced by the estimated residual value of the assets over their estimated useful lives. The estimated residual value and annual depreciation rates used for this purpose are as follows:

Fully depreciated plant and equipment are retained in the financial statements until such time that they are no longer in use. Construction in progress represents property, plant and equipment under construction and is stated at cost. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for use.

Intangible assets

a) Land use rights

Land use rights arise when the Bureau of the Land and Resources of People's Republic of China grants the group rights to develop, use and operate land during a limited period of time. Land use rights are measured initially at cost and subsequently amortised on a straight-line basis over the life of the asset. The life of the land use right is taken to be the length of time for which the right has been granted (42 to 50 years). The carrying values of land use rights are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

b) Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary or associated undertaking at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement, through administrative expenses, and is not subsequently reversed.

c) Other intangible assets

The cost of intangible assets acquired in a business combination is their value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

Intangible assets are amortised through administrative expenses on a straight-line basis over their estimated useful economic lives and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortisation period and amortisation method for intangible assets are reviewed at least at each financial year-end.

The estimated useful economic lives for the Group's intangible assets are as follows:

Trademark & Patents 10 years

Investment in subsidiary undertakings

Investments in subsidiaries are stated at cost less provision for impairment.

Impairment of assets

The carrying amounts of non-current assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of the asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised through administrative expenses in the income statement.

The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. Fair value is the amount obtainable from the sale of an asset in an arm's length transaction less costs to sell. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash generating unit.

An impairment loss for an asset other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. Reversals of impairment losses are recognised in the income statement.

Inventories

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

Financial assets

The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity. Unless otherwise stated, book value of financial assets is not materially different from their fair values.

a) Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provision is recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being made based on past experience after analysis of the ageing of the receivables.

For trade receivables such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the income statement. On confirmation that trade receivables will not be collectable, the gross carrying value of the assets is written off against the associated provision.

The Group's loans and receivables comprise trade and other receivables, amounts due from related parties, short-term investment and cash and cash equivalents in the balance sheet.

The short-term investments are bank deposits with original maturities of more than three months but within a financial year. The short-term investments are security for export sales or notes payables with an initial maturity of more than three months. The short-term investments are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash and cash equivalents comprise cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Financial liabilities and equity

The Group classifies its financial liabilities into one of the categories discussed below:

Financial liabilities of the Group include trade and other payables, amounts due to related parties and bank borrowings.

Trade and other payables are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.  

Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and repayable on redemption, as well as any interest or coupon payable while the liability is outstanding.

Equity instruments are recorded net of direct issue costs.

Research and development expenditure

Research costs are expensed as incurred. Development expenditure on an individual project is recognised as an asset when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention and availability of resource to complete the asset, the ability to measure reliably the expenditure during development, and whether the asset will generate future economic benefits.

If development expenditure cannot be distinguished from the research phase of an internal project to create an intangible asset, the research and development expenditure of internal projects is recognised in the income statement as incurred.

Following initial recognition, the asset is carried at cost less any accumulated amortization and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. During the period of development, the asset is tested for impairment annually.

No costs in the current or prior period meet the criteria required for capitalisation.

3. Revenue

Government grant income is a direct subsidy which is received by the Group from the Finance Bureau and other government departments.

4. Profit from operations

5. Information regarding directors and employees

Directors' remuneration was as follows:

There wereno payments for post-employment benefits, other long-term benefits or termination benefits in respect of directors.

6. Finance costs

7. Income tax

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax applied to profits for the year are as follows: