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[energyi] 11/9/2006 09:47

22
Review of Operations
China market maintained its robust momentum in line with the country's thriving
economy, generating an overall increase in capital expenditure by our customers to
improve the quality of their networks in order to meet increasing demand. In
particular, China's plans to develop the Northeastern and Northwestern provinces
and cities have a positive impact on the demand for capital investment in telecoms
infrastructure within the mainland. The success of China's aerospace projects has
also accelerated investment in the telecoms and related sectors. For the six-month
period, China sales accounted for HK$1,081 million of the Group's turnover (2004:
HK$883 million).

The Group also reported stable business in Europe, where healthcare and fire
services continued to be core sectors for the Group's wireless messaging solutions.

During the Period, several new installations were implemented which were
accompanied by enhanced applications to deliver clinical efficiency and improve
emergency response times. Turnover attributable to the operations in Europe was
HK$252 million (2004: HK$187 million).

Meanwhile, the Group's strategic investment in In-Car Telematics solutions and antiradiation
products to counteract radio emission from mobile phones continued to
report steady progress. In February 2006, the Group entered into a Letter of Intent to
acquire a licensed PRC systems provider in digital image capturing to pursue
identity card and IT security opportunities in China. Initial due diligence is under
way.

Kantone Holdings Limited (Kantone)
Kantone's performance continued to improve. It recorded a turnover of HK$658
million, an increase of 24 percent over the Previous Period. Profit attributable to
equity holders was HK$158 million, representing an improvement of 24 percent
compared with HK$127 million of Previous Period. Its gross margin has improved to
46 percent of turnover from 41 percent of the Previous Period, due to continued
investment and introduction of high value-add products. Kantone's operating margin
also rose to 28 percent (excluding HK$25.9 million change in fair value of
convertible bonds) from 25 percent as a result of efficient outsourcing and cost
control measures.
Sales in China was in line with the country's economic growth. With China's
continued economic prosperity, Kantone's customised solutions and products have
grown from strength to strength. A combination of factors such as natural economic
growth, improved standards of living, and upcoming international events are growth
drivers to sustain spending on telecoms and IT solutions.
Interim Report 2005/2006

In October 2005, Kantone completed its acquisition of a controlling stake in a
pioneer systems developer and service provider in paperless betting systems in
China, providing technological support to PRC governmental welfare lottery
administrative authorities in return for recurring revenue sharing of betting turnover.
Telephone betting systems in Shanghai and Shenzhen, including the launch of SMS
assisted services, have proved popular, and the new e-lottery business is making a
positive, albeit modest, contribution to Kantone's earnings. A third project to install
the paperless betting operating system for the entire Anhui province is progressing
smoothly, and is expected to be launched shortly. If paperless betting were to follow
the trend of the high adoption rate of other technologies such as mobile phones and
Internet usage, e-lottery will have a significant impact on China's overall lottery
market.

Within Europe, UK sales registered steady growth. The award of key supplier status by
the National Health Service (NHS) as part of the latter's Purchase and Supply Agency
(PASA) has won Kantone a number of new contracts in the personal security arena.
In the US, Kantone continued to benefit from the Government's spectrum migration
programme for public sector networks.
Meanwhile, Kantone continues to invest in research and development, and has a
number of exciting new products in the development pipeline.

DIGITALHONGKONG.COM (Digital HK)
The profit contribution of Digital HK was HK$543,000, compared with HK$426,000
for the Previous Period. Digital HK has adapted well in the highly competitive
marketplace and amidst the rapid technological changes in the IT industry. It
continued to maintain momentum in its pursuit of business in relation to e-commerce
solutions, and had benefited from a steadily growing customer base resulting from
increased awareness of its products and services.

- -

The Group's financial position remained strong with a low gearing and a net cash
position. As at 31 December 2005, the Group had HK$999 million made up of
deposits, bank balances and cash. Current assets were approximately HK$1,827
million (30 June 2005: HK$1,637 million) and current liabilities amounted to
approximately HK$310 million (30 June 2005: HK$329 million). With net current
assets of HK$1,516 million, the Group had maintained a high level of financial
liquidity. The gearing ratio at the period-end, which calculation was based on the
Group's total borrowings of HK$219 million (30 June 2005: HK$193 million) and
equity attributable to equity holders of the parent of HK$5.0 billion (30 June 2005:
HK$4.7 billion), was 0.04 (30 June 2005: 0.04).
Total borrowings comprise bank borrowings of HK$145 million (30 June 2005:
HK$59 million); other borrowings, which represent block discounting loans, of
HK$6 million (30 June 2005: HK$9 million); and convertible bonds of HK$68
million, after taking into account of the fair value changes with the adoption of new
accounting standards (see Note 3 for details) (30 June 2005: HK$125 million).
Finance costs for the Period amounted to HK$4.4 million (Previous Period: HK$4.2
million).

[energyi] 11/9/2006 09:24

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