Auditor’s ReportFIYTA Precision Technology Co., Ltd.

RSMSZ[2026]NO.350Z0003

RSM CHINA CPA LLP

CHINA·BEIJING

If there is any conflict of meaning between the Chinese and English versions, the Chinese

version will prevail

(English Translation for Reference Only)

Auditor’s Report

RSMSZ[2026]NO.350Z0003To the Shareholders of FIYTA Precision Technology Co., Ltd.，OpinionWe have audited the financial statements of FIYTA Precision Technology Co., Ltd.(hereafter referred to as “the Company”), which comprises the consolidated and theparent company’s statement of financial position as at 31 December 2025, theconsolidated and the parent company’s statement of profit or loss and othercomprehensive income, the consolidated and the parent company’s statement of cashflows, the consolidated and the parent company’s statement of changes in equity for theyear then ended, and the notes to the financial statements.In our opinion, the accompanying the Company’s financial statements present fairly, inall material respects, the consolidated and the company’s financial position as at 31December 2025, and of their financial performance and cash flows for the year thenended in accordance with Accounting Standards for Business Enterprises.

Basis for OpinionWe conducted our audit in accordance with Chinese Standards on Auditing (CSAs). Ourresponsibilities under those standards are further described in the Auditor’sResponsibilities for the Audit of the Financial Statements section of our report. Inaccordance with the Code of Ethics for Professional Accountants and the Code ofIndependence for Professional Accountants of the Chinese Institute of Certified PublicAccountants, we are independent of the Company, have complied with the provisions ofthe independence standards applicable to audits of financial statements of public interestentities, and have fulfilled our other ethical responsibilities. We believe that the auditevidence we obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit MattersKey audit matters are those matters that, in our professional judgment, were of the most

容诚会计师事务所（特殊普通合伙）总所：北京市西城区阜成门外大街22号1幢10层1001-1 至 1001-26 (100037)

TEL:010-6600 1391 FAX:010-6600 1392

E-mail:bj@rsmchina.com.cnhttps://www.rsm.global/china/

significance in our audit of the financial statements of the current period. These matterswere addressed in the context of our audit of the financial statements as a whole, and informing our opinion thereon, and we do not provide a separate opinion on these matters.(I) Existence and Net Realizable Value of Inventory

1. Descriptions of the matter

For the details, please refer to Note 3.13 and Note 5.6 of the financial statements.As stated in Note 5.6, as of 31 December 2025, the carrying amount of the Company'sinventory was RMB 1,830.9665 million, with an inventory write-down provision ofRMB 102.9841 million, resulting in a net inventory value of RMB 1,727.9824 million,accounting for 46.28% of total assets. The Company's main business involves sellingFIYTA brand watches and other agency-branded watches, with year-end inventoryprimarily consisting of finished watches and watch components. Given the small sizeand high unit value of branded watches and the widely dispersed inventory acrosscentral warehouses, regional warehouses, and retail stores, there is a heightened riskrelated to inventory existence and impairment.

As of the balance sheet date, the Company's management is required to determine thenet realizable value (NRV) of inventory, and any excess of cost over NRV should bewritten down accordingly. The determination of NRV involves significant managementestimates regarding selling prices, costs to completion, selling expenses, and relevanttaxes. Due to the materiality of the inventory balance and the significant accountingestimates and judgments involved in the impairment provision, we have identified theexistence of inventory and the determination of its NRV as a key audit matter.

2. How the matter was addressed in our audit

The audit procedures we performed in relation to existence and net realizable value ofinventory:

(1) Understanding, evaluating, and testing the design and operating effectiveness ofinternal controls related to procurement and payment, production and warehousing, andinventory write-down provisions;

(2) Utilizing expert work to conduct IT audits on the information system to evaluate the

authenticity and accuracy of business data related to financial reporting;

(3) Performing inventory counts at selected warehouses and retail stores to verify theexistence and condition of year-end inventory;

(4) Selecting samples of significant purchases during the reporting period and tracingthem to purchase contracts, invoices, purchase requisitions, and warehouse receipts;

(5) Sending confirmation requests to selected suppliers to verify transaction amountsand balances to confirm procurement details;

(6) Reviewing the Company’s inventory impairment policy and methodology to assessits reasonableness, obtaining management’s inventory impairment calculation, andevaluating key assumptions such as estimated selling prices, costs to completion, sellingexpenses, and related taxes, along with performing recalculations;

(II) Revenue Recognition

1. Descriptions of the matter

For the details, please refer to Note 3.27 and Note 5.33 of the financial statements.As stated in Note 5.33 to the financial statements, the main operating revenue of theCompany for the current year was RMB 3490.3203 million, representing a 11.16%decrease compared to the previous year. The Company's main operating revenue isprimarily derived from the sales of self-owned and agency-brand watches.Since revenue is one of the Company's key performance indicators, there is an inherentrisk that revenue may be recognized in the incorrect period or manipulated to meetspecific targets or expectations. Therefore, we have identified the revenue recognition ofthe Company as a key audit matter.

2. How the matter was addressed in our audit

The audit procedures we performed in relation to revenue recognition:

(1) Understanding, evaluating, and testing the design and operating effectiveness ofinternal controls related to revenue recognition;

(2) Utilizing expert work to conduct IT audits on the information system, evaluating theauthenticity and accuracy of business data related to financial reporting;

(3) Obtaining and reviewing accounting policies related to revenue recognition, andassessing whether the timing of control transfer, transaction price measurement, andspecial transaction accounting treatment comply with the requirements of accountingstandards;

(4) Selecting samples to examine supporting documents related to revenue recognition,including sales contracts, sales invoices, mall reconciliation statements, customerreceipt records, and logistics documents;

(5) Performing audit procedures on accounts receivable by selecting samples forconfirmation of transaction amounts and balances with customers, as well as verifyingsubsequent collections;

(6) Selecting samples of sales revenue recognized before and after the balance sheetdate to review sales contracts, sales invoices, mall reconciliation statements, customerreceipt records, and logistics documents to evaluate whether revenue is recognized inthe appropriate accounting period.

Other informationManagement of the Company is responsible for the other information. The otherinformation comprises the information included in the Annual Report of the Companyfor the year of 2025, but does not include the financial statements and our auditor’sreport thereon.

Our opinion on the financial statements does not cover the other information and we donot express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read theother information and, in doing so, consider whether the other information is materiallyinconsistent with the financial statements or our knowledge obtained in the audit orotherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a materialmisstatement of this other information, we are required to report that fact. We havenothing to report in this regard.Responsibilities of Management and Those Charged with Governance for theFinancial Statements

Management of the Company is responsible for the preparation and fair presentation ofthe financial statements in accordance with Accounting Standards of BusinessEnterprises, and for the design, implementation and maintenance of such internalcontrol as management determines is necessary to enable the preparation of financialstatements that are free from material misstatement, whether due to fraud or error.In preparing the financial statements, management is responsible for assessing theCompany’s ability to continue as a going concern, disclosing, as applicable, mattersrelated to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Company or to cease operations, or have norealistic alternative but to do so.Those charged with governance are responsible for overseeing the Company’s financialreporting process.

Auditor’s Responsibilities for the Audit of the Financial StatementsOur Objectives are to obtain reasonable assurance about whether the financialstatements as a whole are free from material misstatement, whether due to fraud or error,and to issue an auditor’s report that includes our opinion. Reasonable assurance is ahigh level of assurance, but is not a guarantee that an audit conducted in accordancewith CSAs will always detect a material misstatement when it exists. Misstatements canarise from fraud or error and are considered material if, individually or in the aggregate,they could reasonably be expected to influence the economic decisions of users taken onthe basis of these financial statements.

As part of an audit in accordance with CSAs, we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:

i) Identify and assess the risks of material misstatement of the financial statements,whether due to fraud or error, design and perform audit procedures responsive tothose risks, and obtain audit evidence that is sufficient and appropriate to provide abasis for our opinion. The risk of not detecting a material misstatement resultingfrom fraud is higher than for one resulting from error, as fraud may involvecollusion, forgery, intentional omissions, misrepresentations, or the override ofinternal control.

ii) Obtain an understanding of internal control relevant to the audit in order to designaudit procedures that are appropriate in the circumstances.

iii) Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management.

iv) Conclude on the appropriateness of management’s use of the going concern basis of

accounting and, based on the audit evidence obtained, whether a materialuncertainty exists related to events or conditions that may cast significant doubt onthe Company’s ability to continue as a going concern. If we conclude that a materialuncertainty exists, we are required to draw attention in our auditor’s report to therelated disclosures in the financial statements or, if such disclosures are inadequate,to modify our opinion. Our conclusions are based on the audit evidence obtained upto the date of our auditor’s report. However, future events or conditions may causethe Company to cease to continue as a going concern.

v) Evaluate the overall presentation, structure and content of the financial statements,and whether the financial statements represent the underlying transactions andevents in a manner that achieves fair presentation.vi) Obtain sufficient appropriate audit evidence regarding the financial information ofthe entities or business activities within the Company to express an opinion on thefinancial statements. We are responsible for the direction, supervision andperformance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters,the planned scope and timing of the audit and significant audit findings, including anysignificant deficiencies in internal control that we identify during our audit.We also provide those charged with governance with a statement that we have compliedwith relevant ethical requirements regarding independence, and to communicate withthem all relationships and other matters that may reasonably be thought to bear on ourindependence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determinethose matters that were of most significance in the audit of the financial statements ofthe current period and are therefore the key audit matters. We describe these matters in

our auditor’s report unless law or regulation precludes public disclosure about thematter or when, in extremely rare circumstances, we determine that a matter should notbe communicated in our report because the adverse consequences of doing so wouldreasonably be expected to outweigh the public interest benefits of such communication.

(This is seal page for Auditor’s Report of RSMSZ[2026]No.350Z0003 for FIYTAPrecision Technology Co., Ltd.)

RSM China CPA LLPCai RuxiaoChina Certified Public Accountant(Engagement Partner)China·Beijing

Ge HuaChina Certified Public Accountant

12 March 2026

FIYTA Precision Technology Co., Ltd.Notes to the Financial StatementsFor the year ended 31 December 2025（All amounts are expressed in Renminbi Yuan(“RMB”)unless otherwise stated）

1. BASIC INFORMATION ABOUT THE COMPANY

FIYTA Precision Technology Co., Ltd. (hereinafter referred to as “the Company”) wasestablished, under the approval of Shen Fu Ban Fu (1992) 1259 issued by the General Office ofShenzhen Municipal Government, through the restructuring of former Shenzhen FIYTA TimeIndustrial Company by the promoter of China National Aero-Technology Import and ExportShenzhen Industry & Trade Center (name changed to “China National Aero-TechnologyShenzhen Co., Ltd” lately) on 25 December 1992. On 3 June 1993, both the Company waslisted on Shenzhen Stock Exchange. The Company holds business license with the UnifiedSocial Credit Code of 91440300192189783K.As at 31 December 2025, the outstanding shares issued by the Company was 405.764007million shares and the registered capital was 405.764007 million after a series of sharedividends, rights offering, capitalization of reserves, and issuing of new shares. The Company’sregistered address is FIYTA Hi-Tech Building, Gao Xin Nan Yi Dao, Nanshan District,Shenzhen, Guangdong Province, where the Company’s headquarters locates. The parentcompany of the Company is CATIC Shenzhen Holdings Limited (CATIC Shenzhen) and theultimate controlling party of the Company is Aviation Industry Corporation of China, Ltd.(AVIC) .The business nature and main operating activities of the Company and its subsidiaries mainlyinclude: Watch and Clock Sales; Watch and Timing Instrument Manufacturing; Watch andTiming Instrument Sales; Jewelry Wholesale; Jewelry Retail; Wearable Intelligent DevicesManufacturing; Wearable Intelligent Devices Sales; Non-residential Real Estate Leasing;Professional Design Services; Sales of Household Electrical Appliances; Sales of SatelliteMobile Communication Terminals. (Except for projects that require approval by law, businessactivities may be conducted independently based on the business license in accordance with thelaw.)The Company included a total of 12 subsidiaries in the consolidation scope for the currentperiod. For details, refer to Note 7, Interests in Other Entities. There were no changes in theentities included in the consolidated financial statements compared to the previous period.The financial statements were approved and authorized for issue, upon the resolution of theCompany’s Board of Directors meeting on 12 March 2026.

2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

2.1 Basis of Preparation

Based on going concern, according to actually occurred transactions and events, the Companyprepares its financial statements in accordance with the Accounting Standards for BusinessEnterprises – Basic standards and concrete accounting standards, Accounting Standards forBusiness Enterprises – Application Guidelines, Accounting Standards for Business Enterprises– Interpretations and other relevant provisions (collectively known as “Accounting Standardsfor Business Enterprises, issued by Ministry of Finance of PRC”). In addition, the Companydiscloses the relevant financial information in accordance with "Rules No.15 for the InformationDisclosure and Reporting of Companies Offering Securities to the Public - GeneralRequirements for Financial Reporting (2023 Revision)" issued by CSRC.

2.2 Going Concern

The Company has assessed its ability to continually operate for the next twelve months fromthe end of the reporting period, and no any matters that may result in doubt on its ability as agoing concern were noted. Therefore, it is reasonable for the Company to prepare financialstatements on the going concern basis.

3. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATESThe following significant accounting policies and accounting estimates of the Company areformulated in accordance with the Accounting Standards for Business Enterprises. Businessesnot mentioned are complied with relevant accounting policies of the Accounting Standards forBusiness Enterprises.

3.1 Statement of Compliance with the Accounting Standards for Business EnterprisesThe Company prepares its financial statements in accordance with the requirements of theAccounting Standards for Business Enterprises, truly and completely reflecting the Company’sfinancial position as at 31 December 2025, and its operating results, changes in shareholders'equity, cash flows and other related information for the year then ended.

3.2 Accounting Period

The accounting year of the Company is from 1 January to 31 December in calendar year.

3.3 Operating Cycle

The normal operating cycle of the Company is twelve months.

3.4 Functional Currency

The Company and its domestic subsidiaries use RMB as the functional currency. TheCompany’s overseas subsidiary, FIYTA (Hong Kong) Limited (“FIYTA Hong Kong”) , hasdetermined HKD as its functional currency based on the primary economic environment inwhich it operates. Montres Chouriet SA, a subsidiary of FIYTA Hong Kong, has determinedCHF as its functional currency based on its operating environment. When preparing financialstatements, their amounts are translated into RMB. The Company prepares its financialstatements in RMB.

3.5 Determining Factor and Basis of Selection of Materiality

3.6 Accounting Treatment of Business Combinations under and not under CommonControl(a) Business combinations under common controlThe assets and liabilities that the Company obtains in a business combination under commoncontrol shall be measured at their carrying amount of the acquired entity at the combinationdate. If the accounting policy and accounting period adopted by the acquired entity is differentfrom that adopted by the acquiring entity, the acquiring entity shall, according to accountingpolicy and accounting period it adopts, adjust the relevant items in the financial statements ofthe acquired party based on the principal of materiality. As for the difference between thecarrying amount of the net assets obtained by the acquiring entity and the carrying amount ofthe consideration paid by it, the capital reserve (capital premium or share premium) shall beadjusted. If the capital reserve (capital premium or share premium) is not sufficient to absorbthe difference, any excess shall be adjusted against retained earnings.(b) Business combinations not under common controlThe assets and liabilities that the Company obtains in a business combination not undercommon control shall be measured at their fair value at the acquisition date. If the accountingpolicy and accounting period adopted by the acquired entity is different from that adopted bythe acquiring entity, the acquiring entity shall, according to accounting policy and accountingperiod it adopts, adjust the relevant items in the financial statements of the acquired entity basedon the principal of materiality. The acquiring entity shall recognise the positive balance betweenthe combination costs and the fair value of the identifiable net assets it obtains from the acquiredentity as goodwill. The acquiring entity shall, pursuant to the following provisions, treat thenegative balance between the combination costs and the fair value of the identifiable net assetsit obtains from the acquired entity:

(i) It shall review the measurement of the fair values of the identifiable assets, liabilities andcontingent liabilities it obtains from the acquired entity as well as the combination costs;(ii) If, after the review, the combination costs are still less than the fair value of the identifiablenet assets it obtains from the acquired entity, the balance shall be recognised in profit or loss ofthe reporting period.(c) Treatment of business combination related costs

The intermediary costs such as audit, legal services and valuation consulting and other relatedmanagement costs that are directly attributable to the business combination shall be charged inprofit or loss in the period in which they are incurred. The costs to issue equity or debt securitiesfor the consideration of business combination shall be recorded as a part of the value of therespect equity or debt securities upon initial recognition.

3.7 Judgment of Control and Method of Preparing the Consolidated FinancialStatements(a) Judgment of control and consolidation decisionControl exists when the Company has power over the investee, exposure, or rights, to variablereturns from its involvement with the investee and the ability to use its power over the investeeto affect the amount of the returns. The definition of control contains there elements: - powerover the investee; exposure, or rights to variable returns from the Company’s involvement withthe investee; and the ability to use its power over the investee to affect the amount of theinvestor’s returns. The Company controls an investee if and only if the Company has all theabove three elements.The scope of consolidated financial statements shall be determined on the basis of control. Itnot only includes subsidiaries determined based on voting rights (or similar) or together withother arrangement, but also structured entities under one or more contractual arrangements.Subsidiaries are the entities that controlled by the Company (including enterprise, a divisiblepart of the investee, and structured entity controlled by the enterprise). A structured entity(sometimes called a Special Purpose Entity) is an entity that has been designed so that votingor similar rights are not the dominant factor in deciding who controls the entity.(b) Method of preparing the consolidated financial statementsThe consolidated financial statements shall be prepared by the Company based on the financialstatements of the Company and its subsidiaries, and using other related information.When preparing consolidated financial statements, the Company shall consider the entire groupas an accounting entity, adopt uniform accounting policies and apply the requirements ofAccounting Standard for Business Enterprises related to recognition, measurement andpresentation. The consolidated financial statements shall reflect the overall financial position,operating results and cash flows of the group.(i) Like items of assets, liabilities, equity, income, expenses and cash flows of the parent arecombined with those of the subsidiaries.(ii) The carrying amount of the parent’s investment in each subsidiary is eliminated (off-set)against the parent’s portion of equity of each subsidiary.(iii) Eliminate the impact of intragroup transactions between the Company and the subsidiariesor between subsidiaries, and when intragroup transactions indicate an impairment of relatedassets, the losses shall be recognised in full.

(iv) Make adjustments to special transactions from the perspective of the group.(c) Special consideration in consolidation elimination(i) Long-term equity investment held by the subsidiaries to the Company shall be recognised astreasury stock of the Company, which is offset with the owner’s equity, represented as “treasurystock” under “owner’s equity” in the consolidated statement of financial position.Long-term equity investment held by subsidiaries between each other is accounted for takinglong-term equity investment held by the Company to its subsidiaries as reference. That is, thelong-term equity investment is eliminated (off-set) against the portion of the correspondingsubsidiary’s equity.(ii) Due to not belonging to paid-in capital (or share capital) and capital reserve, and beingdifferent from retained earnings and undistributed profit, “Specific reserves” and “General riskprovision” shall be recovered based on the proportion attributable to owners of the parentcompany after long-term equity investment to the subsidiaries is eliminated with thesubsidiaries’ equity.(iii) If temporary timing difference between the book value of the assets and liabilities in theconsolidated statement of financial position and their tax basis is generated as a result ofelimination of unrealized inter-company transaction profit or loss, deferred tax assets ofdeferred tax liabilities shall be recognised, and income tax expense in the consolidatedstatement of profit or loss shall be adjusted simultaneously, excluding deferred taxes related totransactions or events directly recognised in owner’s equity or business combination.(iv) Unrealised inter-company transactions profit or loss generated from the Company sellingassets to its subsidiaries shall be eliminated against “net profit attributed to the owners of theparent company” in full. Unrealized inter-company transactions profit or loss generated fromthe subsidiaries selling assets to the Company shall be eliminated between “net profit attributedto the owners of the parent company” and “non-controlling interests” pursuant to the proportionof the Company in the related subsidiaries. Unrealized inter-company transactions profit or lossgenerated from the assets sales between the subsidiaries shall be eliminated between “net profitattributed to the owners of the parent company” and “non-controlling interests” pursuant to theproportion of the Company in the selling subsidiaries.(v) If loss attributed to the minority shareholders of a subsidiary in current period is more thanthe proportion of non-controlling interest in this subsidiary at the beginning of the period, non-controlling interest is still to be written down.

3.8 Classification of Joint Arrangements and Accounting for Joint OperationA joint arrangement is an arrangement of which two or more parties have joint control. Jointarrangement of the Company is classified as either a joint operation or a joint venture.(a) Joint operationA joint operation is a joint arrangement whereby the parties that have joint control of the

arrangement have rights to the assets, and obligations for the liabilities, relating to thearrangement.The Company shall recognise the following items in relation to shared interest in a jointoperation, and account for them in accordance with relevant accounting standards of theAccounting Standards for Business Enterprises:

(i) its assets, including its share of any assets held jointly;(ii) its liabilities, including its share of any liabilities incurred jointly;(iii) its revenue from the sale of its share of the output arising from the joint operation;(iv) its share of the revenue from the sale of the output by the joint operation; and(v) its expenses, including its share of any expenses incurred jointly.(b) Joint ventureA joint venture is a joint arrangement whereby the parties that have joint control of thearrangement have rights to the net assets of the arrangement.The Company accounts for its investment in the joint venture by applying the equity method oflong-term equity investment.

3.9 Cash and Cash Equivalents

Cash comprises cash on hand and deposits that can be readily withdrawn on demand. Cashequivalents include short-term (generally within three months of maturity at acquisition), highlyliquid investments that are readily convertible into known amounts of cash and which aresubject to an insignificant risk of changes in value.

3.10 Foreign Currency Transactions and Translation of Foreign Currency FinancialStatements(a) Determination of the exchange rate for foreign currency transactionsAt the time of initial recognition of a foreign currency transaction, the amount in the foreigncurrency shall be translated into the amount in the functional currency at the spot exchange rateof the transaction date, or at an exchange rate which is determined through a systematic andreasonable method and is approximate to the spot exchange rate of the transaction date(hereinafter referred to as the approximate exchange rate).(b) Translation of monetary items denominated in foreign currency on the balance sheetdateThe foreign currency monetary items shall be translated at the spot exchange rate on the balancesheet date. The balance of exchange arising from the difference between the spot exchange rateon the balance sheet date and the spot exchange rate at the time of initial recognition or prior tothe balance sheet date shall be recorded into the profits and losses at the current period. Theforeign currency non-monetary items measured at the historical cost shall still be translated atthe spot exchange rate on the transaction date; for the foreign currency non-monetary items

restated to a fair value measurement, shall be translated into the at the spot exchange rate at thedate when the fair value was determined, for the Fair Value Through Profit or Loss,thedifference between the restated functional currency amount and the original functional currencyamount shall be recorded into the profits and losses at the current period.(c) Translation of foreign currency financial statementsBefore translating the financial statements of foreign operations, the accounting period andaccounting policy shall be adjusted so as to conform to the Company. The adjusted foreignoperation financial statements denominated in foreign currency (other than functional currency)shall be translated in accordance with the following method:

(i) The asset and liability items in the statement of financial position shall be translated at thespot exchange rates at the date of that statement of financial position. The owners’ equity itemsexcept undistributed profit shall be translated at the spot exchange rates when they are incurred.(ii) The income and expense items in the statement of profit and other comprehensive incomeshall be translated at the spot exchange rates or approximate exchange rate at the date oftransaction.(iii) Foreign currency cash flows and cash flows of foreign subsidiaries shall be translated atthe spot exchange rate or approximate exchange rate when the cash flows are incurred. Theeffect of exchange rate changes on cash is presented separately in the statement of cash flowsas an adjustment item.(iv) The differences arising from the translation of foreign currency financial statements shallbe presented separately as “other comprehensive income” under the owners’ equity items of theconsolidated statement of financial position.When disposing a foreign operation involving loss of control, the cumulative amount of theexchange differences relating to that foreign operation recognised under other comprehensiveincome in the statement of financial position, shall be reclassified into current profit or lossaccording to the proportion disposed.

3.11 Financial Instruments

Financial instrument is any contract which gives rise to both a financial asset of one entity anda financial liability or equity instrument of another entity.(a) Recognition and derecognition of financial instrumentA financial asset or a financial liability should be recognised in the statement of financialposition when, and only when, an entity becomes party to the contractual provisions of theinstrument.A financial asset can only be derecognised when meets one of the following conditions:

(i) The rights to the contractual cash flows from a financial asset expire(ii) The financial asset has been transferred and meets one of the following derecognition

conditions:

Financial liabilities (or part thereof) are derecognised only when the liability is extinguished—i.e., when the obligation specified in the contract is discharged or cancelled or expires. Anexchange of the Company (borrower) and lender of debt instruments that carry significantlydifferent terms or a substantial modification of the terms of an existing liability are bothaccounted for as an extinguishment of the original financial liability and the recognition of anew financial liability.Purchase or sale of financial assets in a regular-way shall be recognised and derecognised usingtrade date accounting. A regular-way purchase or sale of financial assets is a transaction undera contract whose terms require delivery of the asset within the time frame established generallyby regulations or convention in the market place concerned. Trade date is the date at which theentity commits itself to purchase or sell an asset.(b) Classification and measurement of financial assetsAt initial recognition, the Company classified its financial asset based on both the businessmodel for managing the financial asset and the contractual cash flow characteristics of thefinancial asset: financial asset at amortised cost, financial asset at fair value through profit orloss (FVTPL) and financial asset at fair value through other comprehensive income (FVTOCI).Reclassification of financial assets is permitted if, and only if, the objective of the entity’sbusiness model for managing those financial assets changes. In this circumstance, all affectedfinancial assets shall be reclassified on the first day of the first reporting period after the changesin business model; otherwise the financial assets cannot be reclassified after initial recognition.Financial assets shall be measured at initial recognition at fair value. For financial assetsmeasured at FVTPL, transaction costs are recognised in current profit or loss. For financialassets not measured at FVTPL, transaction costs should be included in the initial measurement.Notes receivable or accounts receivable that arise from sales of goods or rendering of servicesare initially measured at the transaction price defined in the accounting standard of revenuewhere the transaction does not include a significant financing component.Subsequent measurement of financial assets will be based on their categories:

(i)Financial asset at amortised costThe financial asset at amortised cost category of classification applies when both the followingconditions are met: the financial asset is held within the business model whose objective is tohold financial assets in order to collect contractual cash flows, and the contractual term of thefinancial asset gives rise on specified dates to cash flows that are solely payment of principaland interest on the principal amount outstanding. These financial assets are subsequentlymeasured at amortised cost by adopting the effective interest rate method. Any gain or lossarising from derecognition according to the amortization under effective interest rate methodor impairment are recognised in current profit or loss.(ii)Financial asset at fair value through other comprehensive income (FVTOCI)

The financial asset at FVTOCI category of classification applies when both the followingconditions are met: the financial asset is held within the business model whose objective isachieved by both collecting contractual cash flows and selling financial assets, and thecontractual term of the financial asset gives rise on specified dates to cash flows that are solelypayment of principle and interest on the principal amount outstanding. All changes in fair valueare recognised in other comprehensive income except for gain or loss arising from impairmentor exchange differences, which should be recognised in current profit or loss. At derecognition,cumulative gain or loss previously recognised under OCI is reclassified to current profit or loss.However, interest income calculated based on the effective interest rate is included in currentprofit or loss.The Company make an irrevocable decision to designate part of non-trading equity instrumentinvestments as measured through FVTOCI. All changes in fair value are recognised in othercomprehensive income except for dividend income recognised in current profit or loss. Atderecognition, cumulative gain or loss are reclassified to retained earnings.(iii)Financial asset at fair value through profit or loss (FVTPL)Financial asset except for above mentioned financial asset at amortised cost or financial assetat fair value through other comprehensive income (FVTOCI), should be classified as financialasset at fair value through profit or loss (FVTPL). These financial assets should be subsequentlymeasured at fair value. All the changes in fair value are included in current profit or loss.(c) Classification and measurement of financial liabilitiesThe Company classified the financial liabilities as financial liabilities at fair value through profitor loss (FVTPL), loan commitments at a below-market interest rate and financial guaranteecontracts and financial asset at amortised cost.Subsequent measurement of financial assets will be based on the classification:

(i)Financial liabilities at fair value through profit or loss (FVTPL)Held-for-trading financial liabilities (including derivatives that are financial liabilities) andfinancial liabilities designated at FVTPL are classified as financial liabilities at FVTP. Afterinitial recognition, any gain or loss (including interest expense) are recognised in current profitor loss except for those hedge accounting is applied. For financial liability that is designated asat FVTPL, changes in the fair value of the financial liability that is attributable to changes inthe own credit risk of the issuer shall be presented in other comprehensive income. Atderecognition, cumulative gain or loss previously recognised under OCI is reclassified toretained earnings.(ii)Loan commitments and financial guarantee contractsLoan commitment is a commitment by the Company to provide a loan to customer underspecified contract terms. The provision of impairment losses of loan commitments shall berecognised based on expected credit losses model.Financial guarantee contract is a contract that requires the Company to make specified

payments to reimburse the holder for a loss it incurs because a specified debtor fails to makepayment when due in accordance with the original or modified terms of a debt instrument.Financial guarantee contracts liability shall be subsequently measured at the higher of: Theamount of the loss allowance recognised according to the impairment principles of financialinstruments; and the amount initially recognised less the cumulative amount of incomerecognised in accordance with the revenue principles.(iii) Financial liabilities at amortised costAfter initial recognition, the Company measured other financial liabilities at amortised costusing the effective interest method.Except for special situation, financial liabilities and equity instrument should be classified inaccordance with the following principles:

(i) If the Company has no unconditional right to avoid delivering cash or another financialinstrument to fulfill a contractual obligation, this contractual obligation meet the definition offinancial liabilities. Some financial instruments do not comprise terms and conditions relatedto obligations of delivering cash or another financial instrument explicitly, they may includecontractual obligation indirectly through other terms and conditions.(ii) If a financial instrument must or may be settled in the Company's own equity instruments,it should be considered that the Company’s own equity instruments are alternatives of cash oranother financial instrument, or to entitle the holder of the equity instruments to sharing theremaining rights over the net assets of the issuer. If the former is the case, the instrument is aliability of the issuer; otherwise, it is an equity instrument of the issuer. Under somecircumstances, it is regulated in the contract that the financial instrument must or may be settledin the Company's own equity instruments, where, amount of contractual rights and obligationsare calculated by multiplying the number of the equity instruments to be available or deliveredby its fair value upon settlement. Such contracts shall be classified as financial liabilities,regardless that the amount of contractual rights and liabilities is fixed, or fluctuate totally orpartially with variables other than market price of the entity’s own equity instruments (such asinterest rate, price of some kind of goods or some kind of financial instrument).(d) Derivatives and embedded derivativesAt initial recognition, derivatives shall be measured at fair value at the date of derivativecontracts are signed and subsequently measured at fair value. The derivative with a positive fairvalue shall be recognized as an asset, and with a negative fair value shall be recognised as aliability.Gains or losses arising from the changes in fair value of derivatives shall be recognised directlyinto current profit or loss except for the effective portion of cash flow hedges which shall berecognised in other comprehensive income and reclassified into current profit or loss when thehedged items affect profit or loss.An embedded derivative is a component of a hybrid contract with a financial asset as a host,

the Company shall apply the requirements of financial asset classification to the entire hybridcontract. If a host that is not a financial asset and the hybrid contract is not measured at fairvalue with changes in fair value recognised in profit or loss, and the economic characteristicsand risks of the embedded derivative are not closely related to the economic characteristics andrisks of the host, and a separate instrument with the same terms as the embedded derivativewould meet the definition of a derivative, the embedded derivative shall be separated from thehybrid instrument and accounted for as a separate derivative instrument. If the Company isunable to measure the fair value of the embedded derivative at the acquisition date orsubsequently at the balance sheet date, the entire hybrid contract is designated as financial assetsor financial liabilities at fair value through profit or loss.(e) Impairment of financial instrumentThe Company shall recognise a loss allowance based on expected credit losses on a financialasset that is measured at amortised cost, a debt investment at fair value through othercomprehensive income, a contract asset, a lease receivable, a loan commitment and a financialguarantee contract.(i) Measurement of expected credit lossesExpected credit losses are the weighted average of credit losses of the financial instrumentswith the respective risks of a default occurring as the weights. Credit loss is the differencebetween all contractual cash flows that are due to the Company in accordance with the contractand all the cash flows that the Company expects to receive (ie all cash shortfalls), discounted atthe original effective interest rate or credit- adjusted effective interest rate for purchased ororiginated credit-impaired financial assets.Lifetime expected credit losses are the expected credit losses that result from all possible defaultevents over the expected life of a financial instrument.12-month expected credit losses are the portion of lifetime expected credit losses that representthe expected credit losses that result from default events on a financial instrument that arepossible within the 12 months after the reporting date (or the expected lifetime, if the expectedlife of a financial instrument is less than 12 months).At each reporting date, the Company classifies financial instruments into three stages and makesprovisions for expected credit losses accordingly. A financial instrument of which the creditrisk has not significantly increased since initial recognition is at stage 1. The Company shallmeasure the loss allowance for that financial instrument at an amount equal to 12-monthexpected credit losses. A financial instrument with a significant increase in credit risk sinceinitial recognition but is not considered to be credit-impaired is at stage 2. The Company shallmeasure the loss allowance for that financial instrument at an amount equal to the lifetimeexpected credit losses. A financial instrument is considered to be credit-impaired as at the endof the reporting period is at stage 3. The Company shall measure the loss allowance for thatfinancial instrument at an amount equal to the lifetime expected credit losses.The Company may assume that the credit risk on a financial instrument has not increased

significantly since initial recognition if the financial instrument is determined to have low creditrisk at the reporting date and measure the loss allowance for that financial instrument at anamount equal to 12-month expected credit losses.For financial instrument at stage 1, stage 2 and those have low credit risk, the interest revenueshall be calculated by applying the effective interest rate to the gross carrying amount of afinancial asset (ie, impairment loss not been deducted). For financial instrument at stage 3,interest revenue shall be calculated by applying the effective interest rate to the amortised costafter deducting of impairment loss.For notes receivable, accounts receivable and accounts receivable financing, no matter itcontains a significant financing component or not, the Company shall measure the lossallowance at an amount equal to the lifetime expected credit losses.ReceivablesFor the notes receivable, accounts receivable, other receivables, accounts receivable financingand long-term receivables which are demonstrated to be impaired by any objective evidence,or applicable for individual assessment, the Company shall individually assess for impairmentand recognise the loss allowance for expected credit losses. If the Company determines that noobjective evidence of impairment exists for notes receivable, accounts receivable, otherreceivables, accounts receivable financing and long-term receivables, or the expected creditloss of a single financial asset cannot be assessed at reasonable cost, such notes receivable,accounts receivable, other receivables, accounts receivable financing and long-term receivablesshall be divided into several groups with similar credit risk characteristics and collectivelycalculated the expected credit loss. The determination basis of groups is as following:

Determination basis of notes receivable is as following:

Group 1: Commercial acceptance billsGroup 2: Bank acceptance billsFor each group, the Company calculates expected credit losses through default exposure andthe lifetime expected credit losses rate, taking reference to historical experience for credit lossesand considering current condition and expectation for the future economic situation.Determination basis of accounts receivable is as following:

Group 1: Accounts receivables due from customersFor each group, the Company calculates expected credit losses through preparing an aginganalysis schedule with the lifetime expected credit losses rate, taking reference to historicalexperience for credit losses and considering current condition and expectation for the futureeconomic situation.Determination basis of other receivables is as following:

Group 1: Deposit and guarantee receivable

Group 2: Employee advance paymentsGroup 3: OthersFor each group, the Company calculates expected credit losses through default exposure andthe 12-months or lifetime expected credit losses rate, taking reference to historical experiencefor credit losses and considering current condition and expectation for the future economicsituation.The Company calculates the aging of receivables (notes receivable, accounts receivable, andother receivables) based on the period from the transaction date to the balance sheet date todetermine credit risk characteristic groups.Debt investment and other debt investmentFor debt investment and other debt investment, the Company shall calculate the expected creditloss through the default exposure and the 12-month or lifetime expected credit loss rate basedon the nature of the investment, counterparty and the type of risk exposure.(ii) Low credit riskIf the financial instrument has a low risk of default, the borrower has a strong capacity to meetits contractual cash flow obligations in the near term and adverse changes in economic andbusiness conditions in the longer term may, but will not necessarily, reduce the ability of theborrower to fulfill its contractual cash flow obligations.(iii) Significant increase in credit riskThe Company shall assess whether the credit risk on a financial instrument has increasedsignificantly since initial recognition, using the change in the risk of a default occurring overthe expected life of the financial instrument, through the comparison of the risk of a defaultoccurring on the financial instrument as at the reporting date with the risk of a default occurringon the financial instrument as at the date of initial recognition.To make that assessment, the Company shall consider reasonable and supportable information,that is available without undue cost or effort, and that is indicative of significant increases incredit risk since initial recognition, including forward-looking information. The informationconsidered by the Company are as following:

? Significant changes in internal price indicators of credit risk as a result of a change in creditrisk since inception? Existing or forecast adverse change in the business, financial or economic conditions of theborrower that results in a significant change in the borrower’s ability to meet its debt obligations；? An actual or expected significant change in the operating results of the borrower; An actualor expected significant adverse change in the regulatory, economic, or technologicalenvironment of the borrower；? Significant changes in the value of the collateral supporting the obligation or in the quality

of third-party guarantees or credit enhancements, which are expected to reduce the borrower’seconomic incentive to make scheduled contractual payments or to otherwise influence theprobability of a default occurring;? Significant change that are expected to reduce the borrower’s economic incentive to makescheduled contractual payments;? Expected changes in the loan documentation including an expected breach of contract thatmay lead to covenant waivers or amendments, interest payment holidays, interest rate step-ups,requiring additional collateral or guarantees, or other changes to the contractual framework ofthe instrument；? Significant changes in the expected performance and behavior of the borrower；? Contractual payments are more than 30 days past due.Depending on the nature of the financial instruments, the Company shall assess whether thecredit risk has increased significantly since initial recognition on an individual financialinstrument or a group of financial instruments. When assessed based on a group of financialinstruments, the Company can group financial instruments on the basis of shared credit riskcharacteristics, for example, past due information and credit risk rating.Generally, the Company shall determine the credit risk on a financial asset has increasedsignificantly since initial recognition when contractual payments are more than 30 days pastdue. The Company can only rebut this presumption if the Company has reasonable andsupportable information that is available without undue cost or effort, that demonstrates that thecredit risk has not increased significantly since initial recognition even though the contractualpayments are more than 30 days past due.(iv) Credit-impaired financial assetThe Company shall assess at each reporting date whether the credit impairment has occurredfor financial asset at amortised cost and debt investment at fair value through othercomprehensive income. A financial asset is credit-impaired when one or more events that havea detrimental impact on the estimated future cash flows of that financial asset have occurred.Evidences that a financial asset is credit-impaired include observable data about the followingevents:

Significant financial difficulty of the issuer or the borrower；a breach of contract, such as adefault or past due event; the lender(s) of the borrower, for economic or contractual reasonsrelating to the borrower’s financial difficulty, having granted to the borrower a concession(s)that the lender(s) would not otherwise consider；it is becoming probable that the borrower willenter bankruptcy or other financial reorganisation;the disappearance of an active market for thatfinancial asset because of financial difficulties；the purchase or origination of a financial assetat a deep discount that reflects the incurred credit losses.(v) Presentation of impairment of expected credit loss

In order to reflect the changes of credit risk of financial instrument since initial recognition, theCompany shall at each reporting date remeasure the expected credit loss and recognise in profitor loss, as an impairment gain or loss, the amount of expected credit losses addition (or reversal).For financial asset at amortised cost, the loss allowance shall reduce the carrying amount of thefinancial asset in the statement of financial position; for debt investment at fair value throughother comprehensive income, the loss allowance shall be recognised in other comprehensiveincome and shall not reduce the carrying amount of the financial asset in the statement offinancial position.(vi) Write-offThe Company shall directly reduce the gross carrying amount of a financial asset when theCompany has no reasonable expectations of recovering the contractual cash flow of a financialasset in its entirety or a portion thereof. Such write-off constitutes a derecognition of thefinancial asset. This circumstance usually occurs when the Company determines that the debtorhas no assets or sources of income that could generate sufficient cash flow to repay the write-off amount.Recovery of financial asset written off shall be recognised in profit or loss as reversal ofimpairment loss.(f) Transfer of financial assetsTransfer of financial assets refers to following two situations:

? Transfers the contractual rights to receive the cash flows of the financial asset;? Transfers the entire or a part of a financial asset and retains the contractual rights to receivethe cash flows of the financial asset, but assumes a contractual obligation to pay the cash flowsto one or more recipients.(i) Derecognition of transferred assetsIf the Company transfers substantially all the risks and rewards of ownership of the financialasset, or neither transfers nor retains substantially all the risks and rewards of ownership of thefinancial asset but has not retained control of the financial asset, the financial asset shall bederecognised.Whether the Company has retained control of the transferred asset depends on the transferee’sability to sell the asset. If the transferee has the practical ability to sell the asset in its entiretyto an unrelated third party and is able to exercise that ability unilaterally and without needingto impose additional restrictions on the transfer, the Company has not retained control.The Company judges whether the transfer of financial asset qualifies for derecognition basedon the substance of the transfer.If the transfer of financial asset qualifies for derecognition in its entirety, the difference betweenthe following shall be recognised in profit or loss:

? The carrying amount of transferred financial asset;

? The sum of consideration received and the part derecognised of the cumulative changes infair value previously recognised in other comprehensive income (The financial assets involvedin the transfer are classified as financial assets at fair value through other comprehensive incomein accordance with Article 18 of the Accounting Standards for Business Enterprises -Recognition and Measurement of Financial Instruments).If the transferred asset is a part of a larger financial asset and the part transferred qualifies forderecognition, the previous carrying amount of the larger financial asset shall be allocatedbetween the part that continues to be recognised (For this purpose, a retained servicing assetshall be treated as a part that continues to be recognised) and the part that is derecognised, basedon the relative fair values of those parts on the date of the transfer. The difference betweenfollowing two amounts shall be recognised in profit or loss:

? The carrying amount (measured at the date of derecognition) allocated to the partderecognised；? The sum of the consideration received for the part derecognised and part derecognised ofthe cumulative changes in fair value previously recognised in other comprehensive income (Thefinancial assets involved in the transfer are classified as financial assets at fair value throughother comprehensive income in accordance with Article 18 of the Accounting Standards forBusiness Enterprises - Recognition and Measurement of Financial Instruments).(ii) Continuing involvement in transferred assetsIf the Company neither transfers nor retains substantially all the risks and rewards of ownershipof a transferred asset, and retains control of the transferred asset, the Company shall continueto recognise the transferred asset to the extent of its continuing involvement and also recognisean associated liability.The extent of the Company’s continuing involvement in the transferred asset is the extent towhich it is exposed to changes in the value of the transferred asset(iii) Continue to recognise the transferred assetsIf the Company retains substantially all the risks and rewards of ownership of the transferredfinancial asset, the Company shall continue to recognise the transferred asset in its entirety andthe consideration received shall be recognised as a financial liability.The financial asset and the associated financial liability shall not be offset. In subsequentaccounting period, the Company shall continuously recognise any income (gain) arising fromthe transferred asset and any expense (loss) incurred on the associated liability.(g) Offsetting financial assets and financial liabilitiesFinancial assets and financial liabilities shall be presented separately in the statement offinancial position and shall not be offset. When meets the following conditions, financial assetsand financial liabilities shall be offset and the net amount presented in the statement of financialposition:

The Company currently has a legally enforceable right to set off the recognised amounts; TheCompany intends either to settle on a net basis, or to realise the asset and settle the liabilitysimultaneously.In accounting for a transfer of a financial asset that does not qualify for derecognition, theCompany shall not offset the transferred asset and the associated liability.(h) Determination of fair value of financial instrumentsDetermination of fair value of financial assets and financial liabilities please refer to Note 3.12

3.12 Fair Value Measurement

Fair value refers to the price that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date.The Company determines fair value of the related assets and liabilities based on market valuein the principal market, or in the absence of a principal market, in the most advantageous marketprice for the related asset or liability. The fair value of an asset or a liability is measured usingthe assumptions that market participants would use when pricing the asset or liability, assumingthat market participants act in their economic best interest.The principal market is the market in which transactions for an asset or liability take place withthe greatest volume and frequency. The most advantageous market is the market whichmaximizes the value that could be received from selling the asset and minimizes the valuewhich is needed to be paid in order to transfer a liability, considering the effect of transportcosts and transaction costs both.If the active market of the financial asset or financial liability exists, the Company shall measurethe fair value using the quoted price in the active market. If the active market of the financialinstrument is not available, the Company shall measure the fair value using valuation techniques.A fair value measurement of a non-financial asset takes into account a market participant’sability to generate economic benefits by using the asset in its highest and best use or by sellingit to another market participant that would use the asset in its highest and best use.? Valuation techniquesThe Company uses valuation techniques that are appropriate in the circumstances and for whichsufficient data are available to measure fair value, including the market approach, the incomeapproach and the cost approach. The Company shall use valuation techniques consistent withone or more of those approaches to measure fair value. If multiple valuation techniques are usedto measure fair value, the results shall be evaluated considering the reasonableness of the rangeof values indicated by those results. A fair value measurement is the point within that range thatis most representative of fair value in the circumstances.When using the valuation technique, the Company shall give the priority to relevant observableinputs. The unobservable inputs can only be used when relevant observable inputs is notavailable or practically would not be obtained. Observable inputs refer to the information which

is available from market and reflects the assumptions that market participants would use whenpricing the asset or liability. Unobservable Inputs refer to the information which is not availablefrom market and it has to be developed using the best information available in the circumstancesfrom the assumptions that market participants would use when pricing the asset or liability.? Fair value hierarchyTo Company establishes a fair value hierarchy that categorises into three levels the inputs tovaluation techniques used to measure fair value. The fair value hierarchy gives the highestpriority to Level 1 inputs and second to the Level 2 inputs and the lowest priority to Level 3inputs. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets orliabilities that the entity can access at the measurement date. Level 2 inputs are inputs otherthan quoted prices included within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

3.13 Inventories

(a) Classification of inventoriesInventories are finished goods or products held for sale in the ordinary course of business, inthe process of production for such sale, or in the form of materials or supplies to be consumedin the production process or in the rendering of services, including raw materials, work inprogress, and goods in stock, etc.(b) Measurement method of cost of inventories sold or usedThe cost of raw materials and goods in stock (except the branded luxury watch inventory) usedor sold is determined on the weighted average basis, while the cost of the branded luxury watchinventory used or sold is determined on individual valuation method basis.(c) Inventory systemThe perpetual inventory system is adopted. The inventories should be counted at least once ayear, and surplus or losses of inventory stocktaking shall be included in current profit and loss.(d) Recognition Criteria and Provision for impairment of inventoryInventories are stated at the lower of cost and net realizable value. The excess of cost over netrealizable value of the inventories is recognised as provision for impairment of inventory, andrecognised in current profit or loss.Net realizable value of the inventory should be determined on the basis of reliable evidenceobtained, and factors such as purpose of holding the inventory and impact of post balance sheetevent shall be considered.(i) In normal operation process, finished goods, products and materials for direct sale, their netrealizable values are determined at estimated selling prices less estimated selling expenses andrelevant taxes and surcharges; for inventories held to execute sales contract or service contract,their net realizable values are calculated on the basis of contract price. If the quantities ofinventories specified in sales contracts are less than the quantities held by the Company, the net

realizable value of the excess portion of inventories shall be based on general selling prices.Net realizable value of materials held for sale shall be measured based on market price.(ii) For materials in stock need to be processed, in the ordinary course of production andbusiness, net realisable value is determined at the estimated selling price less the estimated costsof completion, the estimated selling expenses and relevant taxes. If the net realisable value ofthe finished products produced by such materials is higher than the cost, the materials shall bemeasured at cost; if a decline in the price of materials indicates that the cost of the finishedproducts exceeds its net realisable value, the materials are measured at net realisable value anddifferences shall be recognised at the provision for impairment.(iii) Provisions for inventory impairment are generally determined on an individual basis. Forinventories with large quantity and low unit price, the provisions for inventory impairment aredetermined on group basis.(iv) If any factor rendering write-downs of the inventories has been eliminated at the reportingdate, the amounts written down are recovered and reversed to the extent of the inventoryimpairment, which has been provided for. The reversal shall be included in profit or loss.

3.14 Contract Assets and Contract Liabilities

The Company shall present contract assets or contract liabilities in the statement of financialposition, depending on the relationship between the Company’s satisfying a performanceobligation and the customer’s payment. A contract asset shall be presented if the Company hasthe right to consideration in exchange for goods or services that the Company has transferredto a customer when that right is conditioned on something other than the passage of time. Acontract liability shall be presented if the Company has the obligation to transfer goods orservices to a customer for which the Company has received consideration (or the amount is due)from the customer.Method of determination and accounting for expected credit loss for contract assets please referto Note 3.11.Contract assets and contract liabilities shall be presented separately in the statement of financialposition. The contract asset and contract liability for the same contract shall be presented on anet basis. A net balance shall be listed in the item of "Contract assets" or "Other non-currentassets" according to its liquidity; a credit balance shall be listed in the item of "Contractliabilities" or "Other non-current liabilities" according to its liquidity. Contract assets andcontract liabilities for different contracts cannot be offset.

3.15 Contract costs

Contract costs include costs to fulfill a contract and the costs to obtain a contract.The Company shall recognise an asset from the costs incurred to fulfill a contract only if thosecosts meet all of the following criteria:

(i) the costs relate directly to a contract or to an anticipated contract, including: direct labour,

direct materials, manufacturing costs (or similar costs), costs that are explicitly chargeable tothe customer under the contract and other costs that are incurred only because an entity enteredinto the contract;(ii) the costs enhance resources of the Company that will be used in satisfying performanceobligations in the future; and(iii) the costs are expected to be recovered.The incremental costs of obtaining a contract shall be recognised as an asset if the Companyexpects to recover them.An asset related to contract costs shall be amortised on a systematic basis that is consistent withthe revenue recognition of the goods or services to which the asset relates. The Companyrecognises the contract acquisition costs as an expense when incurred if the amortisation periodof the asset that the Company otherwise would have recognised is one year or less.The Company shall accrue the provision for impairment, recognise an impairment loss in profitor loss to the extent that the carrying amount of an asset related to the contract cost exceeds thedifference of below two items, and further consider whether the estimated liability related tothe onerous contract needs to be accrued:

(i) the remaining amount of consideration that the Company expects to receive in exchangefor the goods or services to which the asset relates; less(ii) the costs that relate directly to providing those goods or services and that have not beenrecognised as expenses.The Company shall recognise in profit or loss a reversal of some or all of an impairment losspreviously recognised when the impairment conditions no longer exist or have improved. Theincreased carrying amount of the asset shall not exceed the amount that would have beendetermined (net of amortisation) if no impairment loss had been recognised previously.Providing that the costs to fulfil a contract satisfy the requirement to be recognised as an asset,the Company shall present them in the account “Inventory” if the contract has an originalexpected duration of one year (or a normal operating cycle) or less, or in the account “Othernon-current assets” if the contract has an original expected duration of more than one year (ora normal operating cycle).Providing that the costs to obtain a contract satisfy the requirement to be recgonised as an asset,the Company shall present them in the account “Other current asset” if the contract has anoriginal expected duration of one year (or a normal operating cycle) or less, or in the account“Other non-current assets” if the contract has an original expected duration of more than oneyear (or a normal operating cycle).

3.16 Long-term Equity Investments

Long-term equity investments refer to equity investments where an investor has control of, orsignificant influence over, an investee, as well as equity investments in joint ventures.

Associates of the Company are those entities over which the Company has significant influence.(a) Determination basis of joint control or significant influence over the investeeJoint control is the relevant agreed sharing of control over an arrangement, and the arrangedrelevant activity must be decided under unanimous consent of the parties sharing control. Inassessing whether the Company has joint control of an arrangement, the Company shall assessfirst whether all the parties, or a group of the parties, control the arrangement. When all theparties, or a group of the parties, considered collectively, are able to direct the activities of thearrangement, the parties control the arrangement collectively. Then the Company shall assesswhether decisions about the relevant activities require the unanimous consent of the parties thatcollectively control the arrangement. If two or more groups of the parties could control thearrangement collectively, it shall not be assessed as have joint control of the arrangement. Whenassessing the joint control, the protective rights are not considered.Significant influence is the power to participate in the financial and operating policy decisionsof the investee but is not control or joint control of those policies. In determination of significantinfluence over an investee, the Company should consider not only the existing voting rightsdirectly or indirectly held but also the effect of potential voting rights held by the Company andother entities that could be currently exercised or converted, including the effect of sharewarrants, share options and convertible corporate bonds that issued by the investee and couldbe converted in current period.If the Company holds, directly or indirectly 20% or more but less than 50% of the voting powerof the investee, it is presumed that the Company has significant influence of the investee, unlessit can be clearly demonstrated that in such circumstance, the Company cannot participate in thedecision-making in the production and operating of the investee.(b) Determination of initial investment cost(i) Long-term equity investments generated in business combinationsFor a business combination involving enterprises under common control, if the Company makespayment in cash, transfers non-cash assets or bears liabilities as the consideration for thebusiness combination, the share of carrying amount of the owners’ equity of the acquiree in theconsolidated financial statements of the ultimate controlling party is recognised as the initialcost of the long-term equity investment on the combination date. The difference between theinitial investment cost and the carrying amount of cash paid, non-cash assets transferred andliabilities assumed shall be adjusted against the capital reserve; if capital reserve is not enoughto be offset, undistributed profit shall be offset in turn.For a business combination involving enterprises under common control, if the Company issuesequity securities as the consideration for the business combination, the share of carrying amountof the owners’ equity of the acquiree in the consolidated financial statements of the ultimatecontrolling party is recognised as the initial cost of the long-term equity investment on thecombination date. The total par value of the shares issued is recognised as the share capital. Thedifference between the initial investment cost and the carrying amount of the total par value of

the shares issued shall be adjusted against the capital reserve; if capital reserve is not enough tobe offset, undistributed profit shall be offset in turn.For business combination not under common control, the assets paid, liabilities incurred orassumed and the fair value of equity securities issued to obtain the control of the acquiree at theacquisition date shall be determined as the cost of the business combination and recognised asthe initial cost of the long-term equity investment. The audit, legal, valuation and advisory fees,other intermediary fees, and other relevant general administrative costs incurred for the businesscombination, shall be recognised in profit or loss as incurred.(ii) Long-term equity investments acquired not through the business combination, theinvestment cost shall be determined based on the following requirements:

For long-term equity investments acquired by payments in cash, the initial cost is the actuallypaid purchase cost, including the expenses, taxes and other necessary expenditures directlyrelated to the acquisition of long-term equity investments.For long-term equity investments acquired through issuance of equity securities, the initial costis the fair value of the issued equity securities.For the long-term equity investments obtained through exchange of non-monetary assets, if theexchange has commercial substance, and the fair values of assets traded out and traded in canbe measured reliably, the initial cost of long-term equity investment traded in with non-monetary assets are determined based on the fair values of the assets traded out together withrelevant taxes. Difference between fair value and book value of the assets traded out is recordedin current profit or loss. If the exchange of non-monetary assets does not meet the abovecriterion, the book value of the assets traded out and relevant taxes are recognised as the initialinvestment cost.For long-term equity investment acquired through debt restructuring, the initial cost isdetermined based on the fair value of the equity obtained and the difference between initialinvestment cost and carrying amount of debts shall be recorded in current profit or loss.(c) Subsequent measurement and recognition of profit or lossLong-term equity investment to an entity over which the Company has ability of control shallbe accounted for at cost method. Long-term equity investment to a joint venture or an associateshall be accounted for at equity method.(i) Cost methodFor Long-term equity investment at cost method, cost of the long-term equity investment shallbe adjusted when additional amount is invested or a part of it is withdrawn. The Companyrecognises its share of cash dividends or profits which have been declared to distribute by theinvestee as current investment income.(ii) Equity methodIf the initial cost of the investment is in excess of the share of the fair value of the net identifiable

assets in the investee at the date of investment, the difference shall not be adjusted to the initialcost of long-term equity investment; if the initial cost of the investment is in short of the shareof the fair value of the net identifiable assets in the investee at the date investment, the differenceshall be included in the current profit or loss and the initial cost of the long-term equityinvestment shall be adjusted accordingly.The Company recognises the share of the investee’s net profits or losses, as well as its share ofthe investee’s other comprehensive income, as investment income or losses and othercomprehensive income respectively, and adjusts the carrying amount of the investmentaccordingly. The carrying amount of the investment shall be reduced by the share of any profitor cash dividends declared to distribute by the investee. The investor’s share of the investee’sowners’ equity changes, other than those arising from the investee’s net profit or loss, othercomprehensive income or profit distribution, shall be recognised in the investor’s equity, andthe carrying amount of the long-term equity investment shall be adjusted accordingly. TheCompany recognises its share of the investee’s net profits or losses after making appropriateadjustments of investee’s net profit based on the fair values of the investee’s identifiable netassets at the investment date. If the accounting policy and accounting period adopted by theinvestee is not in consistency with the Company, the financial statements of the investee shallbe adjusted according to the Company’s accounting policies and accounting period, based onwhich, investment income or loss and other comprehensive income, etc., shall be adjusted. Theunrealized profits or losses resulting from inter-company transactions between the companyand its associate or joint venture are eliminated in proportion to the company’s equity interestin the investee, based on which investment income or losses shall be recognised. Any lossesresulting from inter-company transactions between the investor and the investee, which belongto asset impairment, shall be recognised in full.Where the Company obtains the power of joint control or significant influence, but not control,over the investee, due to additional investment or other reason, the relevant long-term equityinvestment shall be accounted for by using the equity method, initial cost of which shall be thefair value of the original investment plus the additional investment. Where the originalinvestment is classified as other equity investment, difference between its fair value and thecarrying value, in addition to the cumulative changes in fair value previously recorded in othercomprehensive income, shall be recogised into retained earnings of the period of using equitymethod.If the Company loses the joint control or significant influence of the investee for some reasonssuch as disposal of equity investment, the retained interest shall be measured at fair value andthe difference between the carrying amount and the fair value at the date of loss the joint controlor significant influence shall be recognised in profit or loss. When the Company discontinuesthe use of the equity method, the Company shall account for all amounts previously recognisedin other comprehensive income under equity method in relation to that investment on the samebasis as would have been required if the investee had directly disposed of the related assets orliabilities.

(d) Impairment testing and provision for impairment lossFor investment in subsidiaries, associates or a joint ventures, provision for impairment lossplease refer to Note 3.22.

3.17 Investment Properties

(a) Classification of investment propertiesInvestment properties are properties to earn rentals or for capital appreciation or both, including:

(i)Land use right leased out(ii)Land held for transfer upon appreciation(iii)Buildings leased out(b) The measurement model of investment propertyThe Company adopts the cost model for subsequent measurement of investment properties. Forprovision for impairment please refer to Note 3.22.The Company calculates the depreciation or amortization based on the net amount ofinvestment property cost less the accumulated impairment and the net residual value usingstraight-line method. The estimated useful life and annual depreciation rates which aredetermined according to the categories, estimated economic useful lives and estimated netresidual rates are listed as followings:

3.18 Fixed Assets

Fixed assets refer to the tangible assets with higher unit price held for the purpose of producingcommodities, rendering services, renting or business management with useful lives exceedingone year.(a) Recognition criteria of fixed assetsFixed assets will only be recognised at the actual cost paid when obtaining as all the followingcriteria are satisfied:

(i) It is probable that the economic benefits relating to the fixed assets will flow into theCompany;(ii) The costs of the fixed assets can be measured reliably.Subsequent expenditure for fixed assets shall be recorded in cost of fixed assets, if recognitioncriteria of fixed assets are satisfied, otherwise the expenditure shall be recorded in current profitor loss when incurred.

(b) Depreciation methods of fixed assetsThe Company begins to depreciate the fixed asset from the next month after it is available forintended use using the straight-line-method. The estimated useful life and annual depreciationrates which are determined according to the categories, estimated economic useful lives andestimated net residual rates of fixed assets are listed as followings:

For the fixed assets with impairment provided, the impairment provision should be excludedfrom the cost when calculating depreciation.At the end of reporting period, the Company shall review the useful life, estimated net residualvalue and depreciation method of the fixed assets. Estimated useful life of the fixed assets shallbe adjusted if it is changed compared to the original estimation.

3.19 Construction in Progress

(a) Classification of construction in progressConstruction in progress is measured on an individual project basis.(b) Recognition criteria and timing of transfer from construction in progress to fixedassetsThe initial book values of the fixed assets are stated at total expenditures incurred before theyare ready for their intended use, including construction costs, original price of machineryequipment, other necessary expenses incurred to bring the construction in progress to get readyfor its intended use and borrowing costs of the specific loan for the construction or theproportion of the general loan used for the constructions incurred before they are ready for theirintended use. The construction in progress shall be transferred to fixed asset when theinstallation or construction is ready for the intended use. For construction in progress that hasbeen ready for their intended use but relevant budgets for the completion of projects have not

been completed, the estimated values of project budgets, prices, or actual costs should beincluded in the costs of relevant fixed assets, and depreciation should be provided according torelevant policies of the Company when the fixed assets are ready for intended use. After thecompletion of budgets needed for the completion of projects, the estimated values should besubstituted by actual costs, but depreciation already provided is not adjusted.

3.20 Borrowing Costs

(a) Recognition criteria and period for capitalization of borrowing costsThe Company shall capitalize the borrowing costs that are directly attributable to the acquisition,construction or production of qualifying assets when meet the following conditions:

(i) Expenditures for the asset are being incurred;(ii) Borrowing costs are being incurred, and;(iii) Acquisition, construction or production activities that are necessary to prepare the assetsfor their intended use or sale are in progress.Other borrowing cost, discounts or premiums on borrowings and exchange differences onforeign currency borrowings shall be recognized into current profit or loss when incurred.Capitalization of borrowing costs is suspended during periods in which the acquisition,construction or production of a qualifying asset is interrupted abnormally and the interruptionis for a continuous period of more than 3 months.Capitalization of such borrowing costs ceases when the qualifying assets being acquired,constructed or produced become ready for their intended use or sale. The expenditure incurredsubsequently shall be recognised as expenses when incurred.(b) Capitalization rate and measurement of capitalized amounts of borrowing costsWhen funds are borrowed specifically for purchase, construction or manufacturing of assetseligible for capitalization, the Company shall determine the amount of borrowing costs eligiblefor capitalisation as the actual borrowing costs incurred on that borrowing during the periodless any interest income on bank deposit or investment income on the temporary investment ofthose borrowings.Where funds allocated for purchase, construction or manufacturing of assets eligible forcapitalization are part of a general borrowing, the eligible amounts are determined by theweighted-average of the cumulative capital expenditures in excess of the specific borrowingmultiplied by the general borrowing capitalization rate. The capitalisation rate will be theweighted average of the borrowing costs applicable to the general borrowing.

3.21 Intangible Assets

(a) Measurement method of intangible assetsIntangible assets are recognised at actual cost at acquisition.(b) The useful life and amortisation of intangible assets

(i) The estimated useful lives of the intangible assets with finite useful lives are as follows:

For intangible assets with finite useful life, the estimated useful life and amortisation methodare reviewed annually at the end of each reporting period and adjusted when necessary. Nochange has incurred in current year in the estimated useful life and amortisation method uponreview.(ii) Assets of which the period to bring economic benefits to the Company are unforeseeableare regarded as intangible assets with indefinite useful lives. The Company reassesses the usefullives of those assets at every year end. If the useful lives of those assets are still indefinite,impairment test should be performed on those assets at the balance sheet date.(iii) Amortisation of the intangible assetsFor intangible assets with finite useful lives, their useful lives should be determined upon theiracquisition and systematically amortised on a straight-line basis [units of production method]over the useful life. The amortisation amount shall be recognised into current profit or loss orcapitalized as part of the cost of the related asset according to the beneficial items. The amountto be amortised is cost deducting residual value. For intangible assets which has impaired, thecumulative impairment provision shall be deducted as well. The residual value of an intangibleasset with a finite useful life shall be assumed to be zero unless: there is a commitment by athird party to purchase the asset at the end of its useful life; or there is an active market for theasset and residual value can be determined by reference to that market; and it is probable thatsuch a market will exist at the end of the asset’s useful life.Intangible assets with indefinite useful lives shall not be amortised. The Company reassessesthe useful lives of those assets at every year end. If there is evidence to indicate that the usefullives of those assets become finite, the useful lives shall be estimated and the intangible assetsshall be amortised systematically and reasonably within the estimated useful lives.(c) Scope of Research and Development ExpendituresThe Company classifies the expenses directly related to research and development activities asresearch and development expenditures, including remuneration of research and developmentstaff, direct material, depreciation cost and long-term amortised expense, design fee, equipment

commissioning fee, intangible assets amortisation cost, outsourcing research and developmentcost, and other expenses, etc.(d) Criteria of classifying expenditures on internal research and development projects intoresearch phase and development phasePreparation activities related to materials and other relevant aspects undertaken by the Companyfor the purpose of further development shall be treated as research phase.Expenditures incurred during the research phase of internal research and development projectsshall be recognised in profit or loss when incurred.Development activities after the research phase of the Company shall be treated as developmentphase.(e) Criteria for capitalization of qualifying expenditures during the development phaseExpenditures arising from development phase on internal research and development projectsshall be recognised as intangible assets only if all of the following conditions have been met:

(i) Technical feasibility of completing the intangible assets so that they will be available for useor sale;(ii) Its intention to complete the intangible asset and use or sell it;(iii) The method that the intangible assets generate economic benefits, including the Companycan demonstrate the existence of a market for the output of the intangible assets or the intangibleassets themselves or, if it is to be used internally, the usefulness of the intangible assets;(iv) The availability of adequate technical, financial and other resources to complete thedevelopment and to use or sell the intangible asset; and(v) Its ability to measure reliably the expenditure attributable to the intangible asset.

3.22 Impairment of Long-Term Assets

Impairment loss of long-term equity investment in subsidiaries, associates and joint ventures,investment properties subsequently measured at cost, fixed assets ,constructions in progress,intangible assets, and right of use assets, shall be determined according to following method:

The Company shall assess at the end of each reporting period whether there is any indicationthat an asset may be impaired. If any such indication exists, the Company shall estimate therecoverable amount of the asset and test for impairment. Irrespective of whether there is anyindication of impairment, the Company shall test for impairment of goodwill acquired in abusiness combination, intangible assets with an indefinite useful life or intangible assets not yetavailable for use annually.The recoverable amounts of the long-term assets are the higher of their fair values less costs todispose and the present values of the estimated future cash flows of the long-term assets. TheCompany estimate the recoverable amounts on an individual basis. If it is difficult to estimatethe recoverable amount of the individual asset, the Company estimates the recoverable amount

of the groups of assets that the individual asset belongs to. Identification of a group of asset isbased on whether the cash inflows from it are largely independent of the cash inflows fromother assets or groups of assets.If, and only if, the recoverable amount of an asset or a group of assets is less than its carryingamount, the carrying amount of the asset shall be reduced to its recoverable amount and theprovision for impairment loss shall be recognised accordingly.When test for impairment, if there is an indication that relevant group of assets or combinationof asset groups may be impaired, impairment testing for group of assets or combination of assetgroups excluding goodwill shall be conducted first, and the recoverable amount shall be thencalculated and the impairment loss shall be recognised accordingly. Then the group of assets orcombination of asset groups including goodwill shall be tested for impairment, by comparingthe carrying amount with its recoverable amount. If the recoverable amount is less than thecarrying amount, the Company shall recognise the impairment loss.The mentioned impairment loss will not be reversed in subsequent accounting period once ithad been recognised.

3.23 Long-term Deferred Expenses

Long-term deferred expenses are various expenses already incurred, which shall be amortisedover current and subsequent periods with the amortisation period exceeding one year.Long-term deferred expenses are evenly amortised over the beneficial period.

3.24 Employee Benefits

Employee benefits refer to all forms of consideration or compensation given by the Companyin exchange for service rendered by employees or for the termination of employmentrelationship. Employee benefits include short-term employee benefits, post-employmentbenefits, termination benefits and other long-term employee benefits. Benefits provided to anemployee's spouse, children, dependents, family members of decreased employees, or otherbeneficiaries are also employee benefits.According to liquidity, employee benefits are presented in the statement of financial position as“Employee benefits payable” and “Long-term employee benefits payable”.(a) Short-term employee benefits(i) Employee basic salary (salary, bonus, allowance, subsidy)The Company recognises, in the accounting period in which an employee provides service,actually occurred short-term employee benefits as a liability, with a corresponding charge tocurrent profit except for those recognised as capital expenditure based on the requirement ofaccounting standards.(ii) Employee welfareThe Company shall recognise the employee welfare based on actual amount when incurred intocurrent profit or loss or related capital expenditure. Employee welfare shall be measured at fair

value as it is a non-monetary benefits.(iii) Social insurance such as medical insurance, work injury insurance and maternity insurance,housing funds, labor union fund and employee education fundPayments made by the Company of social insurance for employees, such as medical insurance,work injury insurance and maternity insurance, payments of housing funds, and labor unionfund and employee education fund accrued in accordance with relevant requirements, in theaccounting period in which employees provide services, is calculated according to requiredaccrual bases and accrual ratio in determining the amount of employee benefits and the relatedliabilities, which shall be recognised in current profit or loss or the cost of relevant asset.(iv) Short-term paid absencesThe company shall recognise the related employee benefits arising from accumulating paidabsences when the employees render service that increases their entitlement to future paidabsences. The additional payable amounts shall be measured at the expected additionalpayments as a result of the unused entitlement that has accumulated. The Company shallrecognise relevant employee benefit of non-accumulating paid absences when the absencesactually occurred.(v)Short-term profit-sharing planThe Company shall recognise the related employee benefits payable under a profit-sharing planwhen all of the following conditions are satisfied:

? The Company has a present legal or constructive obligation to make such payments as aresult of past events; and? A reliable estimate of the amounts of employee benefits obligation arising from the profit-sharing plan can be made.(b) Post-employment benefits(i) Defined contribution plansThe Company shall recognise, in the accounting period in which an employee provides service,the contribution payable to a defined contribution plan as a liability, with a correspondingcharge to the current profit or loss or the cost of a relevant asset.When contributions to a defined contribution plan are not expected to be settled wholly beforetwelve months after the end of the annual reporting period in which the employees render therelated service, they shall be discounted using relevant discount rate (market yields at the endof the reporting period on high quality corporate bonds in active market or government bondswith the currency and term which shall be consistent with the currency and estimated term ofthe defined contribution obligations) to measure employee benefits payable.(ii) Defined benefit planThe present value of defined benefit obligation and current service costs

Based on the expected accumulative welfare unit method, the Company shall make estimatesabout demographic variables and financial variables in adopting the unbiased and consistentactuarial assumptions and measure defined benefit obligation, and determine the obligationperiod. The Company shall discount the obligation arising from defined benefit plan usingrelevant discount rate (market yields at the end of the reporting period on high quality corporatebonds in active market or government bonds with the currency and term which shall beconsistent with the currency and estimated term of the defined benefit obligations) in order todetermine the present value of the defined benefit obligation and the current service cost.The net defined benefit liability or assetThe net defined benefit liability (asset) is the deficit or surplus recognised as the present valueof the defined benefit obligation less the fair value of plan assets (if any).When the Company has a surplus in a defined benefit plan, it shall measure the net definedbenefit asset at the lower of the surplus in the defined benefit plan and the asset ceiling.The amount recognised in the cost of asset or current profit or lossService cost comprises current service cost, past service cost and any gain or loss on settlement.Other service cost shall be recognised in profit or loss unless accounting standards require orallow the inclusion of current service cost within the cost of assets.Net interest on the net defined benefit liability (asset) comprising interest income on plan assets,interest cost on the defined benefit obligation and interest on the effect of the asset ceiling, shallbe included in profit or loss.The amount recognised in other comprehensive incomeChanges in the net liability or asset of the defined benefit plan resulting from theremeasurements including:

? Actuarial gains and losses, the changes in the present value of the defined benefit obligationresulting from experience adjustments or the effects of changes in actuarial assumptions;? Return on plan assets, excluding amounts included in net interest on the net defined benefitliability or asset;? Any change in the effect of the asset ceiling, excluding amounts included in net interest onthe net defined benefit liability (asset).Remeasurements of the net defined benefit liability (asset) recognised in other comprehensiveincome shall not be reclassified to profit or loss in a subsequent period. Upon termination ofthe original defined benefit plan, the Company may, within equity, transfer the entire amountpreviously recognized in other comprehensive income to retained earning.(c) Termination benefitsThe Company providing termination benefits to employees shall recognise an employeebenefits liability for termination benefits, with a corresponding charge to the profit or loss of

the reporting period, at the earlier of the following dates:

(i) When the Company cannot unilaterally withdraw the offer of termination benefits becauseof an employment termination plan or a curtailment proposal.(ii) When the Company recognises costs or expenses related to a restructuring that involvesthe payment of termination benefits.If the termination benefits are not expected to be settled wholly before twelve months after theend of the annual reporting period, the Company shall discount the termination benefits usingrelevant discount rate (market yields at the end of the reporting period on high quality corporatebonds in active market or government bonds with the currency and term which shall beconsistent with the currency and estimated term of the defined benefit obligations) to measurethe employee benefits.(d) Other long-term employee benefits(i) Meet the conditions of the defined contribution planWhen other long-term employee benefits provided by the Company to the employees satisfiesthe conditions for classifying as a defined contribution plan, all those benefits payable shall beaccounted for as employee benefits payable at their discounted value.(ii) Meet the conditions of the defined benefit planAt the end of the reporting period, the Company recognised the cost of employee benefit fromother long-term employee benefits as the following components:

? Service costs;? Net interest cost for net liability or asset of other long-term employee benefits? Changes resulting from the remeasurements of the net liability or asset of other long-termemployee benefitsIn order to simplify the accounting treatment, the net amount of above items shall be recognisedin profit or loss or relevant cost of assets.

3.25 Estimated Liabilities

(a) Recognition criteria of estimated liabilitiesThe Company recognises the estimated liabilities when obligations related to contingenciessatisfy all the following conditions:

(i) That obligation is a current obligation of the Company;(ii) It is likely to cause any economic benefit to flow out of the Company as a result ofperformance of the obligation; and(iii) The amount of the obligation can be measured reliably.(b) Measurement method of estimated liabilities

The estimated liabilities of the Company are initially measured at the best estimate of expensesrequired for the performance of relevant present obligations. The Company, when determiningthe best estimate, has had a comprehensive consideration of risks with respect to contingencies,uncertainties and the time value of money. The carrying amount of the estimated liabilities shallbe reviewed at the end of every reporting period. If conclusive evidences indicate that thecarrying amount fails to be the best estimate of the estimated liabilities, the carrying amountshall be adjusted based on the updated best estimate.

3.26 Share-based Payments

(a) Classification of share-based paymentsShare-based payments of the Company include equity-settled share-based payments and cash-settled share-based payments.(b) Determining fair value of equity instruments(i) The fair value of shares granted to the employees can be determined by reference to thequotations in the active market, adjusted in accordance with the terms and conditions granted(excluding vesting conditions other than market conditions).(ii) For share option granted to the employees, it is usually difficult to obtain its market price.If the share option with similar terms and conditions is not available, the Company estimatesthe fair value of those options using an applicable option pricing model.(c) Basis of best estimate of equity instruments expected to vestEvery balance sheet date during the vesting period, the Company makes best estimate accordingto the most updated number of employees that are eligible to exercise their options and revisesthe number of equity instruments expected to vest in order to make the best estimate of equityinstruments expected to vest.(d) Accounting for implementation of share-based payment programsCash-settled share-based payment(i) For cash-settled share-based payment vested immediately after granting, the Company shallrecognise relevant costs or expenses at the fair value of the liability borne at grant date and acorresponding increase in liability. Until the liability is settled, the Company shall remeasurethe fair value of the liability at the end of each reporting period and at the date of settlement,with any changes in fair value recognised in profit or loss.(ii) If the share instrument do not vest until services during the vesting period are completed orperformance conditions are satisfied during the vesting period, at the end of each reportingperiod during the vesting period, the Company shall recognise relevant costs or expenses andthe corresponding increase in liability for services received in the reporting period at the fairvalue of the liability borne, based on the best available estimate of the number expected to vest.Equity-settled share-based payment

(i) For equity-settled share-based payment transaction in which services are received, if theequity instrument granted vest immediately, the Company shall recognise relevant costs orexpenses at the fair value of the equity instruments at grant date and the corresponding increasein capital reserve.(ii) If the equity instrument do not vest until services during the vesting period are completedor performance conditions are satisfied , at the end of each reporting period during the vestingperiod, the Company shall recognise relevant costs or expenses and the corresponding increasein capital reserve for services received in the reporting period at the fair value of the equityinstruments at grant date, based on the best available estimate of the number of equityinstruments expected to vest.(e) Accounting for modification of share-based payment programsWhen the Company modifies terms and conditions of the share-based payment program, if themodification increases the fair value of the equity instruments granted, the increased amountshould be recognised for service received accordingly; if the quantity granted of the equityinstruments is increased, the increased amount should be recgonised for service receivedaccordingly as well. If the modification reduces the total fair value of the share-based paymentarrangement, or the terms are changed in such a way that the arrangement is no longer for thebenefit of the employee, the entity is still required to account for the services received asconsideration for the equity instruments granted as if that modification had not occurred unlessa part or all of the equity instruments are cancelled.(f) Accounting for termination of share-based payment programsIf a grant of equity instruments is cancelled or settled during the vesting period (other than agrant cancelled by forfeiture when the vesting conditions are not satisfied), the Company shall:

(i) Account for the cancellation or settlement as an acceleration of vesting, and thereforerecognise immediately the amount that otherwise would have been recognised for servicesreceived over the remainder of the vesting period.(ii)Account for any payment made to the employee on the cancellation or settlement of the grantas the repurchase of an equity interest, and recognize any excess of the payment over the fairvalue of the equity instruments measured at the repurchase date as an expense.If the Company repurchases vested equity instruments, the payment made to the employee shallbe accounted for as a deduction from equity, and recognize any excess of the payment over thefair value of the equity instruments measured at the repurchase date shall be recognised incurrent profit or loss.

3.27 Revenue

(a) General PrincipleRevenue is defined as the gross inflow of economic benefits arising in the course of the ordinaryactivities of the Company when those inflows result in the increases in shareholders’ equity,

other than increases relating to contributions from shareholders.The Company shall recognise revenue when it satisfies a performance obligation in the contractas the customer obtains control of a good or service. Control of a good or service refers to theability to direct the use of, and obtain substantially all of the remaining economic benefits from,the good or service.When the contract has two or more obligation performances, the Company shall allocate thetransaction price to each performance obligation in proportion to a relative stand-alone sellingprice at contract inception of the promised good or service underlying each performanceobligation in the contract and recognize revenue based on the transaction price allocated to eachperformance obligation.The transaction price is the amount of consideration to which the Company expects to beentitled in exchange for transferring promised goods or services to a customer, excludingamounts collected on behalf of third parties. When determining the transaction price of thecontract, if the contract includes a variable consideration, the Company shall determine the bestestimate of the variable consideration based on the expected value or the most likely amountand include in the transaction price only to the extent that it is highly probable that a significantreversal in the amount of cumulative revenue recognised will not occur when the uncertaintyassociated with the variable consideration is subsequently resolved. If the contract contains asignificant financing component, the Company shall determine the transaction price at anamount that reflects the price that a customer would have paid for the promised goods orservices if the customer had paid cash for those goods or services when (or as) they transfer tothe customer. The difference between the transaction price and the promised consideration shallbe amortised using the effective interest method within the contract period. The Company neednot consider the effects of a significant financing component if the period between when theCompany transfers control of a good or service to a customer and when the customer pays forthat good or service will be one year or less.The Company satisfies a performance obligation over time, if one of the following criteria ismet; otherwise a performance obligation is satisfied at a point in time:

(i) the customer simultaneously receives and consumes the benefits provided by the Company’sperformance as the Company performs;(ii) the Company’s performance creates or enhances an asset (for example, work in progress)that the customer controls as the asset is created or enhanced;(iii) the Company’s performance does not create an asset with an alternative use to the Companyand the Company has an enforceable right to payment for performance completed to date.For each performance obligation satisfied over time, the Company shall recognise revenue overtime by measuring the progress towards complete satisfaction of that performance obligation,unless those progress cannot be reasonably measured. The Company measures the progress ofa performance obligation for the service rendered using input methods (or output methods). Insome circumstances, the Company cannot be able to reasonably measure the progress of a

performance obligation, but the Company expects to recover the costs incurred in satisfying theperformance obligation. In those circumstances, the Company shall recognise revenue only tothe extent of the costs incurred until such time that it can reasonably measure the progress ofthe performance obligation.The Company shall recognise revenue at the point in which a customer obtains control of apromised good or service if a performance obligation is satisfied at a point in time. To determinethe point in time at which a customer obtains control of a promised good or service, theCompany shall consider indicators of the transfer of control, which include, but are not limitedto, the followings:

(i) The Company has a present right to payment for the good or service – a customer is presentlyobliged to pay for the good or service;(ii) The Company has transferred legal title of an asset to a customer - the customer has legaltitle to the asset;(iii) The Company has transferred physical possession of an asset to a customer - the customerhas physical possession of the asset;(iv) The Company has transferred the significant risks and rewards of ownership of the asset toa customer - the customer has the significant risks and rewards of ownership of the asset;(v) The customer has accepted the asset.Sale with a right of returnFor sales with a right of return, when the customer obtains the control of a product, the Companyshall recognise revenue for the transferred products in the amount of consideration to which theCompany expects to be entitled and a refund liability at the amounts receivable for which theCompany does not expect to be entitled; meanwhile, an asset shall be recognised as receivableson the cost of return measured at the former carrying amount of the product expected to bereturned less any expected costs to recover those products (including potential decreases in thevalue to the entity of returned products), and the net amount of the former carrying amount ofthe product when transferred to the customer less above mentioned cost shall be recorded intothe cost of sales. At the end of each reporting period, the Company shall re-assess theexpectations about the sales return and remeasure above mentioned assets and liabilities.WarrantiesIn accordance with the contract, the law or other requirements, the Company provides awarranty in connection with the sale of a product or construction of a project. For warrantieswhich provide a customer with assurance that the related product will function as the partiesintended because it complies with agreed-upon specifications, the Company shall treat it inaccordance with " Accounting Standards for Business Enterprise No. 13-Contingencies". If awarranty, or a part of a warranty, provides a customer with a service in addition to the assurancethat the product complies with agreed-upon specifications, the Company shall treat it as aperformance obligation, and allocate the transaction price to the warranty based on the relative

proportion to the stand-alone selling price of the product and the service, and recognise revenuewhen the customer obtains the control of the service. In assessing whether a warranty providesa customer with a service in addition to the assurance that the product complies with agreed-upon specifications, the Company shall consider factors such as: whether the warranty isrequired by law; the length of the warranty coverage period and the nature of the tasks that theCompany promises to perform.Principal versus agent considerationsThe Company determines whether it is a principal or an agent of the transaction on the basis ofwhether it has control over the goods or services before they are transferred to customers. If theCompany obtains the control of the specified goods or services from another party and thentransfers the goods or services to the customer, the Company is therefore a principal, andrecognises revenue in the gross amount of consideration to which it expects to be entitled inexchange for the specified goods or services transferred. Otherwise, the Company is an agent,and shall recognise revenue in the amount of any fee or commission to which it expects to beentitled in exchange for arranging for the specified goods or services to be provided by anotherparty. The fee or commission might be the net amount of received or receivable considerationthat the Company retains after paying the other party the consideration received in exchangefor the goods or services to be provided by that party or determined based on the specifiedcommission amount or proportion.Consideration payable to a customerThe Company shall account for consideration payable to a customer as a reduction of thetransaction price unless the payment to the customer is in exchange for a distinct good or servicethat the customer transfers to the Company. The reduction of revenue shall be recognised when(or as) the later of either of the following events occurs: the Company recognises revenue forthe transfer of the related goods or services to the customer; and the Company pays or promisesto pay the consideration.Customers’ unexercised rightsUpon receipt of a prepayment for a good or service from a customer, the Company shallrecognise a contract liability in the amount of the prepayment and recognise revenue when itsatisfies its performance obligation. If the prepayment to the Company is non-refundable andthe customer may not exercise part or all of its contractual rights, and the Company expects tobe entitled to a breakage amount related to those unexercised rights of the customer, theCompany shall recognise the expected breakage amount as revenue in proportion to the patternof rights exercised by the customer; otherwise, the Company shall recognise the remainingbalance of above mentioned liability as revenue when the likelihood of the customer exercisingits remaining rights becomes remote.Contract modificationsWhen the construction contract modifications exist between the Company and the customer:

(i) The Company shall account for a contract modification as a separate contract if themodification results in the addition of promised construction services that are distinct andincrease of the price of the contract, and the price of the contract increases by an amount ofconsideration that reflects the Company’s stand-alone selling prices of the additional promisedconstruction services;(ii) If the contract modification is not accounted for as a separate contract in accordance withabove mentioned circumstance, and the remaining construction services are distinct from theconstruction services transferred on or before the date of the contract modification, theCompany shall account for the contract modification as if it were a termination of the existingcontract and the creation of a new contract with the combination of the remaining performanceobligations of the existing contract and the contract modification.(iii) If the contract modification is not accounted for as a separate contract in accordance withabove mentioned circumstance, and the remaining construction services cannot be distinct fromthe construction services transferred on or before the date of the contract modification, theCompany shall account for the contract modification as if it were a part of the existing contractand the effect that the contract modification has on the transaction price, and on the entity’smeasure of progress towards complete satisfaction of the performance obligation, is recognisedas an adjustment to revenue at the date of the contract modification.(b) Specific MethodRevenue recognition methods of the Company are as follows:

(i) Sales of watchSale of watch belongs to fulfilling performance obligations at a point of time.A. Online salesRevenue shall be recognized at the point that the goods are dispatched, the customer confirmedreceived the goods, and the platform has collected the paymentB. Offline salesRevenue shall be recognized at the point when the goods are delivered and payment bycustomer is collected.

Revenue shall be recognized at the point when the products are delivered to and accepted bythe customer, the payment has been received or the right to collect payment is obtained, andrelated economic benefits are probable to flow into the entityC. Consignment saleUnder consignment sales arrangements, revenue is recognized upon receiving the sales list fromthe consignee, confirming that control of goods has been transferred to the customer.D. Sale of consigned goods from others

Under sale arrangement of consigned goods from others, the Company recognizes revenueusing the net method when external consigned products are delivered to customers and controlof the goods has been transferred to the buyer(ii) Precision manufacturingPrecision manufacturing business belongs to fulfilling performance obligations at a point oftime. Revenue from domestic sales shall be recognized when the goods are delivered and theeconomic benefit associated with the goods is probable to flow into the Company. Revenuefrom export shall be recognized when the following criteria is satisfied: the Company declaredthe good at custom; obtained bill of lading; the right of collecting payment is obtained and itsprobable that the economic benefit associated with the goods flows into the Company.(iii) Property leasingFor the accounting treatment of the Company as a lessor, please refer to Note 3.30.

3.28 Government Grants

(a) Recognition of government grantsA government grant shall not be recgonised until there is reasonable assurance that:

(i) The Company will comply with the conditions attaching to them; and(ii) The grants will be received.(b) Measurement of government grantsMonetary grants from the government shall be measured at amount received or receivable, andnon-monetary grants from the government shall be measured at their fair value or at a nominalvalue of RMB 1.00 when reliable fair value is not available.(c) Accounting for government grants(i) Government grants related to assetsGovernment grants pertinent to assets mean the government grants that are obtained by theCompany used for purchase or construction, or forming the long-term assets by other ways.Government grants pertinent to assets shall be recognised as deferred income, and should berecognised in profit or loss on a systematic basis over the useful lives of the relevant assets.Grants measured at their nominal value shall be directly recognised in profit or loss of the periodwhen the grants are received. When the relevant assets are sold, transferred, written off ordamaged before the assets are terminated, the remaining deferred income shall be transferredinto profit or loss of the period of disposing relevant assets.(ii) Government grants related to incomeGovernment grants other than related to assets are classified as government grants related toincome. Government grants related to income are accounted for in accordance with thefollowing principles:

If the government grants related to income are used to compensate the enterprise’s relevantexpenses or losses in future periods, such government grants shall be recognised as deferredincome and included into profit or loss in the same period as the relevant expenses or losses arerecognised;If the government grants related to income are used to compensate the enterprise’s relevantexpenses or losses incurred, such government grants are directly recognised into current profitor loss.For government grants comprised of part related to assets as well as part related to income, eachpart is accounted for separately; if it is difficult to identify different part, the government grantsare accounted for as government grants related to income as a whole.Government grants related to daily operation activities are recognised in other income inaccordance with the nature of the activities, and government grants irrelevant to daily operationactivities are recognised in non-operating income.(iii) Loan interest subsidyWhen loan interest subsidy is allocated to the bank, and the bank provides a loan at lower-market rate of interest to the Company, the loan is recognised at the actual received amount,and the interest expense is calculated based on the principal of the loan and the lower-marketrate of interest.When loan interest subsidy is directly allocated to the Company, the subsidy shall be recognisedas offsetting the relevant borrowing cost.(iv) Repayment of the government grantsRepayment of the government grants shall be recorded by increasing the carrying amount ofthe asset if the book value of the asset has been written down, or reducing the balance of relevantdeferred income if deferred income balance exists, any excess will be recognised into currentprofit or loss; or directly recognised into current profit or loss for other circumstances.

3.29 Deferred Tax Assets and Deferred Tax Liabilities

Temporary differences are differences between the carrying amount of an asset or liability inthe statement of financial position and its tax base at the balance sheet date. The Companyrecognise and measure the effect of taxable temporary differences and deductible temporarydifferences on income tax as deferred tax liabilities or deferred tax assets using liability method.Deferred tax assets and deferred tax liabilities shall not be discounted.(a) Recognition of deferred tax assetsDeferred tax assets should be recognised for deductible temporary differences, the carryforwardof unused tax losses and the carryforward of unused tax credits to the extent that it is probablethat taxable profit will be available against which the deductible temporary differences, thecarryforward of unused tax losses and the carryforward of unused tax credits can be utilised atthe tax rates that are expected to apply to the period when the asset is realised, unless the

deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

(i) Is not a business combination; and(ii) At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)However, a single transaction that meets both of the above two conditions and where theinitially recognized assets and liabilities give rise to equal amounts of taxable temporarydifferences and deductible temporary differences is not eligible for the exemption from therequirement to initially recognize deferred tax liabilities and deferred tax assets under thisprovision. For the taxable temporary differences and deductible temporary differences arisingfrom the initial recognition of the assets and liabilities of such a transaction, the Companyrecognizes the corresponding deferred tax liabilities and deferred tax assets separately at thetime of the transaction.The Company shall recognise a deferred tax asset for all deductible temporary differencesarising from investments in subsidiaries, associates and joint ventures, only to the extent that,it is probable that:

(i) The temporary difference will reverse in the foreseeable future; and(ii) Taxable profit will be available against which the deductible temporary difference can beutilised.At the end of each reporting period, if there is sufficient evidence that it is probable that taxableprofit will be available against which the deductible temporary difference can be utilized, theCompany recognises a previously unrecognised deferred tax asset.The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period.The Company shall reduce the carrying amount of a deferred tax asset to the extent that it is nolonger probable that sufficient taxable profit will be available to allow the benefit of part or allof that deferred tax asset to be utilised. Any such reduction shall be reversed to the extent thatit becomes probable that sufficient taxable profit will be available.(b) Recognition of deferred tax liabilitiesA deferred tax liability shall be recognised for all taxable temporary differences at the tax ratethat are expected to apply to the period when the liability is settled.(i) No deferred tax liability shall be recognised for taxable temporary differences arising from:

? The initial recognition of goodwill; or? The initial recognition of an asset or liability in a transaction which: is not a businesscombination; and at the time of the transaction, affects neither accounting profit nor taxableprofit (tax loss)(ii) An entity shall recognise a deferred tax liability for all taxable temporary differencesassociated with investments in subsidiaries, associates, and joint ventures, except to the extentthat both of the following conditions are satisfied:

? The Company is able to control the timing of the reversal of the temporary difference; and? It is probable that the temporary difference will not reverse in the foreseeable future.(c) Recognition of deferred tax liabilities or assets involved in special transactions orevents(i) Deferred tax liabilities or assets related to business combinationFor the taxable temporary difference or deductible temporary difference arising from a businesscombination not under common control, a deferred tax liability or a deferred tax asset shall berecognised, and simultaneously, goodwill recognised in the business combination shall beadjusted based on relevant deferred tax expense (income).(ii) Items directly recognised in equityCurrent tax and deferred tax related to items that are recognised directly in equity shall berecognised in equity. Such items include: other comprehensive income generated from fairvalue fluctuation of other debt investments; an adjustment to the opening balance of retainedearnings resulting from either a change in accounting policy that is applied retrospectively orthe correction of a prior period (significant) error; amounts arising on initial recognition of theequity component of a compound financial instrument that contains both liability and equitycomponent.(iii) Unused tax losses and unused tax creditsUnused tax losses and unused tax credits generated from daily operation of the Company itselfDeductible loss refers to the loss calculated and permitted according to the requirement of taxlaw that can be offset against taxable income in future periods. The criteria for recognisingdeferred tax assets arising from the carryforward of unused tax losses and tax credits are thesame as the criteria for recognising deferred tax assets arising from deductible temporarydifferences. The Company recognises a deferred tax asset arising from unused tax losses or taxcredits only to the extent that there is convincing other evidence that sufficient taxable profitwill be available against which the unused tax losses or unused tax credits can be utilised bythe Company. Income taxes in current profit or loss shall be deducted as well.Unused tax losses and unused tax credits arising from a business combinationUnder a business combination, the acquiree’s deductible temporary differences which do notsatisfy the criteria at the acquisition date for recognition of deferred tax asset shall not berecognised. Within 12 months after the acquisition date, if new information regarding the factsand circumstances exists at the acquisition date and the economic benefit of the acquiree’sdeductible temporary differences at the acquisition is expected to be realised, the Companyshall recognise acquired deferred tax benefits and reduce the carrying amount of any goodwillrelated to this acquisition. If goodwill is reduced to zero, any remaining deferred tax benefitsshall be recognised in profit or loss. All other acquired deferred tax benefits realised shall berecognised in profit or loss.

(iv) Temporary difference generated in consolidation eliminationWhen preparing consolidated financial statements, if temporary difference between carryingvalue of the assets and liabilities in the consolidated financial statements and their taxable basesis generated from elimination of inter-company unrealized profit or loss, deferred tax assets ordeferred tax liabilities shall be recognised in the consolidated financial statements, and incometaxes expense in current profit or loss shall be adjusted as well except for deferred tax relatedto transactions or events recognised directly in equity and business combination.(v) Share-based payment settled by equityIf tax authority permits tax deduction that relates to share-based payment, during the period inwhich the expenses are recognised according to the accounting standards, the Companyestimates the tax base in accordance with available information at the end of the accountingperiod and the temporary difference arising from it. Deferred tax shall be recognised whencriteria of recognition are satisfied. If the amount of estimated future tax deduction exceeds theamount of the cumulative expenses related to share-based payment recognised according to theaccounting standards, the tax effect of the excess amount shall be recognised directly in equity.(d) Basis for deferred income tax assets and deferred income tax liabilities presented on anet basisThe Company shall offset deferred tax assets and deferred tax liabilities if, and only if: (i) theCompany has a legally enforceable right to set off current tax assets against current tax liabilities;and(ii) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by thesame taxation authority on either:

? the same taxable entity; or? different taxable entities which intend either to settle current tax liabilities and assets on anet basis, or to realise the assets and settle the liabilities simultaneously, in each future periodin which significant amounts of deferred tax liabilities or assets are expected to be settled orrecovered.

3.30 Leases

(a) Identifying a leaseAt inception of a contract, the Company shall assess whether the contract is, or contains, a lease.A contract is, or contains, a lease if the contract conveys the right to control the use of one ormore identified assets for a period of time in exchange for consideration. To assess whether acontract conveys the right to control the use of an identified asset for a period of time, theCompany shall assess whether, throughout the period of use, the customer has the right to obtainsubstantially all of the economic benefits from use of the identified asset and to direct the useof the identified asset.(b) Identifying a separate lease component

When a contract includes more than one separate lease components, the Company shall separatecomponents of the contract and account for each lease component separately. The right to usean underlying asset is a separate lease component if both conditions have been satisfied: (i) thelessee can benefit from use of the underlying asset either on its own or together with otherresources that are readily available to the lessee; (ii) the underlying asset is neither highlydependent on, nor highly interrelated with, the other underlying assets in the contract.(c) The Company as a lesseeAt the commencement date, the Company identifies the lease that has a lease term of 12 monthsor less and does not contain a purchase option as a short-term lease. A lease qualifies as a leaseof a low-value asset if the nature of the asset is such that, when new, the asset is typically oflow value. If the Company subleases an asset, or expects to sublease an asset, the head leasedoes not qualify as a lease of a low-value asset.For all the short-term leases or leases for which the underlying asset is of low value, theCompany shall recognise the lease payments associated with those leases as cost of relevantasset or expenses in current profit or loss on a straight-line basis over the lease term.Except for the election of simple treatment as short-term lease or lease of a low-value asset asmentioned above, at the commencement date, the Company shall recognise a right-of-use assetand a lease liability.(i) Right-of-use assetA right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for thelease term.At the commencement date, the Company shall initially measure the right-of-use asset at cost.The cost of the right-of-use asset shall comprise:

? the amount of the initial measurement of the lease liability；? any lease payments made at or before the commencement date, less any lease incentivesreceived;? any initial direct costs incurred by the lessee; and? an estimate of costs to be incurred by the lessee in dismantling and removing the underlyingasset, restoring the site on which it is located or restoring the underlying asset to the conditionrequired by the terms and conditions of the lease. The Company recognises and measures thecost in accordance with the recognition criteria and measurement method for estimatedliabilities, details please refer to Notes 3.25. Those costs incurred to produce inventories shallbe included in the cost of inventories.The right-of-use asset shall be depreciated according to the categories using straight‐linemethod. If it is reasonably certain that the ownership of the underlying asset shall be transferredto the lessee by the end of the lease term, the depreciation rate shall be determined based on theclassification of the right-of- use asset and estimated residual value rate from the

commencement date to the end of the useful life of the underlying asset. Otherwise, thedepreciation rate shall be determined based on the classification of the right-of-use asset fromthe commencement date to the earlier of the end of the useful life of the right-of-use asset orthe end of the lease term.After the commencement date, the Company shall remeasure the lease liability based on therevised present value of the lease payments and adjust the carrying amount of the right-of-useasset if there is a change in the in-substance fixed payments, or change in the amounts expectedto be payable under a residual value guarantee, or change in an index or a rate used to determinelease payments, or change in the assessment or exercising of an option to purchase theunderlying asset, or an option to extend or terminate the lease.(d) The Company as a lessorAt the commencement date, the Company shall classify a lease as a finance lease if it transferssubstantially all the risks and rewards incidental to ownership of an underlying asset, otherwiseit shall be classified as an operating lease.(i) Operating leasesThe Company shall recognise lease payments from operating leases as income on a straight-line basis over the term of the relevant lease and the initial direct costs incurred in obtaining anoperating lease shall be capitalised and recognised as an expense over the lease term on thesame basis as the lease income. The Company shall recognise the variable lease paymentsrelating to the operating lease but not included in the measurement of the lease receivables intocurrent profit or loss when incurred.(ii) Finance leasesAt the commencement date, the Company shall recognise the lease receivables at an accountequal to the net investment in the lease (the sum of the present value of the unguaranteedresidual values and the lease payment that are not received at the commencement datediscounted at the interest rate implicit in the lease) and derecognise the asset relating to thefinance lease. The Company shall recognise interest income using the interest rate implicit inthe lease over the lease term.The Company shall recognise the variable lease payments relating to the finance lease but notincluded in the measurement of the net investment in the lease into current profit or loss whenincurred.(e) Lease modifications(i) A lease modification accounted for as a separate leaseThe Company shall account for a modification to a lease as a separate lease, if both:

? the modification increases the scope of the lease by adding the right to use one or moreunderlying assets; and? the consideration for the lease increases by an amount commensurate with the stand-alone

price for the increase in scope.(ii) A lease modification not accounted for as a separate leaseThe Company as a lesseeAt the effective date of the lease modification, the Company shall redetermine the lease termof the modified lease and remeasure the lease liability by discounting the revised lease paymentsusing a revised discount rate. The revised discount rate is determined as the interest rate implicitin the lease for the remainder of the lease term, if that rate can be readily determined, or theincremental borrowing rate at the effective date of the modification, if the interest rate implicitin the lease cannot be readily determined.The Company shall account for the remeasurement of the lease liability by:

? decreasing the carrying amount of the right-of-use asset to reflect the partial or fulltermination of the lease for lease modifications that decrease the scope of the lease or shortenthe lease term. The Company shall recognise in profit or loss any gain or loss relating to thepartial or full termination of the lease.? Making a corresponding adjustment to the carrying amount of the right-of-use asset for allother lease modifications.The Company as a lessorThe Company shall account for a modification to an operating lease as a new lease from theeffective date of the modification, considering any prepaid or accrued lease payments relatingto the original lease as part of the lease payments for the new lease.For a modification to a finance lease that is not accounted for as a separate lease, the Companyshall account for the modification as follows:

? if the lease would have been classified as an operating lease had the modification been ineffect at the inception date, the Company shall account for the lease modification as a new leasefrom the effective date of the modification and measure the carrying amount of the underlyingasset as the net investment in the lease immediately before the effective date of the leasemodification;? if the lease would have been classified as a finance lease had the modification been in effectat the inception date, the Company shall account for the lease modification according to therequirements in the modification or renegotiation of the contract.(f) Sale and leasebackThe Company shall determine whether the transfer of an asset under the sale and leasebacktransaction is a sale of that asset according to the policies in Note 3.27.(i) The Company as a seller (lessee)If the transfer of the asset is not a sale, the Company shall continue to recognise the transferredasset and shall recognise a financial liability equal to the transfer proceeds. It shall account for

the financial liability according to Note 3.11. If the transfer of the asset is a sale, the Companyshall measure the right-of-use asset arising from the leaseback at the proportion of the previouscarrying amount of the asset that relates to the right of use retained by the Company.Accordingly, the Company shall recognise only the amount of any gain or loss that relates tothe rights transferred to the buyer-lessor.(ii) The Company as a buyer (lessor)If the transfer of the asset is not a sale, the Company shall not recognise the transferred assetand shall recognise a financial asset equal to the transfer proceeds. It shall account for thefinancial asset according to Note 3.11. If the transfer of the asset is a sale, the Company shallaccount for the purchase of the asset applying applicable Accounting Standards of BusinessEnterprises, and for the lease applying the lessor accounting requirements.

3.31 Safety Production Costs

According to the relevant regulations, the Company accrues the safety production costs.The safety production costs shall be recognised in the cost of the relevant products or currentprofit or loss when makes the accrual, and included in the “special reserve” accountsimultaneously.When the accrued safety production costs are used within the scope of the regulations, it shallbe treated as expense and directly deducted from the special reserve; if the fixed assets arecapitalized, the expenditure incurred shall be firstly collectively recorded in “construction inprogress” and recognised as fixed asset when the safety project has been completed for itsintended use. At the same time, the cost that capitalized as the fixed assets shall be deductedfrom the special reserve and the accumulated depreciation with the same amount shall berecognised. The fixed assets shall not be depreciated in subsequent reporting period.

3.32 Repurchase of Company’s Share

(a) If the Company reduces its registered capital through repurchase of the Company’s shareaccording to the approval required in relevant laws and regulations, the share capital shall bereduced at the par value of the shares deregistered, the difference between the considerationpaid for repurchase (including the transaction cost) and the par value of the shares shall adjustthe owner’s equity. Any excess of the total par value shall offset the capital reserve (sharepremium), surplus reserve and retained earnings in turn. If the consideration paid is less thanthe total par value, the difference shall increase the capital reserve (share premium).(b) Before being deregistered or transfered, shares repurchased by the Company shall be treatedas treasury stock and all expenditures of the repurchase shall be recognised as the cost oftreasury stock.(c) Any excess of the income generated from transferring the treasury stock over their cost shallincrease the capital reserve (share premium), and any less shall offset the capital reserve (sharepremium), surplus reserve and retained earnings in turn.

3.33 Restricted Stock

In the equity incentive plan, the Company shall grant restricted shares to the motivated target,and the motivated object first subscribes for the stock. If the subsequent unlocking conditionsspecified in the equity incentive plan are not met, the Company repurchases the stock at theprice agreed in advance. If the restricted shares issued to employees are subject to theprocedures for capital increase such as registration in accordance with relevant regulations, atgrant date, the Company shall recognise the share capital and capital reserve (share premium)based on the received subscription fees from the employees; treasury stocks and other payablesshall be recognised based on the repurchase obligation.

3.34 Changes in Significant Accounting Policies and Accounting Estimates(a) Changes in accounting policesThe Company has no significant changes in accounting polices for the reporting period..(b) Significant changes in accounting estimatesThe Company has no significant changes in accounting estimates for the reporting period.

4. TAXATION

4.1 Major Categories of Tax and Tax Rates Applicable to the Company

Tax rates of income tax of different subsidiaries are stated as below:

Notes:

(i) According to the relevant provisions of the Notice of the State Administration of Taxationon Issuing the Interim Measures for the Administration of Collection of Enterprise Income Taxon the Basis of Consolidation of Trans-regional Business Operations, the head office of theCompany and its branches shall be governed by the administrative measures for enterpriseincome tax, namely namely “centralized calculation, level-by-level administration, pre-payment at the locality, consolidated settlement and payment, and transfer to treasury”. 50% ofthe prepayment shall be apportioned among the branches and 50% shall be apportioned by thehead office;(ii) the companies enjoy the corporate income tax rate reduction for “key high-tech enterprisessupported by the state”;(iii) the company is incorporated in Hong Kong and is subject to Hong Kong Profits Tax at arate of 16.50% for the current year;(iv) the company is incorporated in Switzerland and is subject to the local tax rate, which thecomprehensive tax rate for the current year is 30%;(v) the companies qualify as small low-profit enterprises and are subject to corporate incometax at a rate of 20%.

4.2 Tax Preference

In accordance with the Corporate Income Tax Law of the People's Republic of China, high-techenterprises that are key areas of state support are subject to a reduced corporate income tax rateof 15%. The subsidiary, Shenzhen FIYTA Precision Technology Co., Ltd., was certified as ahigh-tech enterprise in 2024 with a certificate number of GR202444200965, valid for threeyears, and is subject to a corporate income tax rate of 15% from 2024 to 2026. The subsidiary,Shenzhen FIYTA Technology Development Co., Ltd., was certified as a high-tech enterprisein 2025 with a certificate number of GR202544201002, valid for three years, and is subject toa corporate income tax rate of 15% from 2025 to 2027.In accordance with the relevant provisions of the Announcement of the Ministry of Finance andthe State Administration of Taxation on Preferential Income Tax Policies for Small and Micro

Enterprises and Individual Businesses (Cai Shui [2023] No. 6), small low-profit enterprises areallowed to include only 25% of their income in the taxable income base and are then subject toa 20% corporate income tax rate.In accordance with the Notice of the Ministry of Finance and the State Administration ofTaxation on Extending the Loss Carryforward Period for High-Tech Enterprises andTechnology-Based Small and Medium-Sized Enterprises (Cai Shui [2018] No. 76), effectivefrom January 1, 2018, any unutilized losses incurred during the five accounting years prior toobtaining high-tech enterprise status may be carried forward to subsequent years. Themaximum carryforward period has been extended from five years to ten years.In accordance with the Announcement of the Ministry of Finance and the State Administrationof Taxation on Further Improving the Pre-Tax Additional Deduction Policy for R&DExpenses (Cai Shui [2023] No. 7), for R&D expenses actually incurred by enterprises that donot result in the creation of an intangible asset (and are therefore recorded in the current profitor loss), an additional 100% deduction may be claimed for tax purposes, on top of thestatutory deduction, starting from January 1, 2023. If the R&D activities result in the creationof an intangible asset, beginning January 1, 2023, 200% of the intangible asset’s cost may beamortized for tax purposes.Since 2019, Hong Kong has implemented a two-tiered profits tax regime. Under this system,the first HKD 2 million of profits is taxed at a rate of 8.25%, and any profits exceeding thatthreshold continue to be taxed at 16.5%.

5. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5.1 Monetary funds

Notes:

(i) Funds in finance company primarily refer to amounts held at AVIC Finance Co., Ltd..(ii) As of 31 December 2025, the Company has no pledged or frozen funds, nor any amountswith potential recovery risk.

5.2 Notes Receivable

(a) Notes receivable by category

(b) Notes receivable by bad debt provision method

(Continued)

For details of recognition criteria and explanation for provision of bad debt by groups, pleaserefer to Notes 3.11.(c) Changes of provision for bad debt during the reporting period

5.3 Accounts Receivable

(a) Accounts receivable by aging

(b) Accounts receivable by bad debt provision method

(Continued)

Detailed explanation of provision for bad debt:

(i) As at 31 December 2025, accounts receivable with bad debt provision recognisedindividually

(ii) As at 31 December 2025, accounts receivable with bad debt provision recognised by group

(c) Changes of provision for bad debt during the reporting period

(d) Details of accounts receivable written off during the current period

(e) Top five closing balances by entity

5.4 Advances to Suppliers

(a) Advances to suppliers by aging

(b) Top five closing balances by entity

5.5 Other Receivables

(a) Other receivables by aging

(b) Other receivables by nature

(c) Other receivables by bad debt provision methodA. As at 31 December 2025, provision for bad debt recognised based on three stages model

As at 31 December 2025, provision for bad debt at stage 1:

As at 31 December 2025, provision for bad debt at stage 3:

B. As at 31 December 2024, provision for bad debt recognised based on three stages model

As at 31 December 2024, provision for bad debt at stage 1:

As at 31 December 2024, provision for bad debt at stage 3:

Basis of provision for bad debt during the reporting period:

For details of recognition criteria and explanation for provision of bad debt by groups, pleaserefer to Notes 3.11(d) Changes of provision for bad debt during the reporting period

(e) Details of other receivables written off during the current period

(f) Top five closing balances by entity

5.6 Inventories

(a) Inventories by category

(b) Provision for impairment

5.7 Other Current Assets

5.8 Long-term Equity Investments

(Continued)

5.9 Investment Properties

(a) Investment properties accounted for using cost model

5.10 Fixed Assets

(a)Details of fixed assets

(b) Fixed assets without certificate of title

5.11 Right-of-use Assets

5.12 Intangible Assets

5.13 Long-term Deferred Expenses

5.14 Deferred Tax Assets and Deferred Tax Liabilities

(a) Deferred tax assets before offsetting

(b) Deferred tax liabilities before offsetting

(c) Net balance of deferred tax liabilities and deferred tax assets after offsetting

(d) Unrecognized deferred tax assets

(e) Deductible losses not recognised as deferred tax assets will expire in the followingperiods:

5.15 Other Non-current Assets

5.16 Short-term Borrowings

5.17 Accounts Payable

5.18 Receipts in advance

5.19 Contract liabilities

5.20 Employee Benefits Payable

(a) Details of employee benefits payable

(b) Short-term employee benefits

(c) Defined contribution plans

5.21 Taxes Payable

5.22 Other Payables

(a) Other payables by category

(b) Dividends payable

(c) Other payables

5.23 Non-current Liabilities Maturing within One Year

5.24 Other Current Liabilities

5.25 Lease liabilities

5.26 Share Capital

5.27 Capital Reserves

Notes:

(i) According to the resolution approved by the Company's Board of Directors and the GeneralMeeting of Shareholders on the Proposal for the Achievement of the Conditions for Lifting ofRestrictions in the Third Restriction Lifting Period under the 2018 A-Share Restricted StockIncentive Plan (Phase II), the Company completed the procedures for lifting restrictions on

20.4742 million A-share restricted shares that satisfied the conditions for lifting restrictionsduring the year 2025. The capital reserve of RMB 8,861,512.48 corresponding to the restrictedshares of the aforementioned incentive recipients was transferred from “Other capital reserves”to “Share premium”.(ii) The difference between the current year’s income tax pre-tax deduction amount and therelevant costs and expenses recognized during the waiting period, arising from the differencebetween the fair value at the time of unlocking the restricted shares and the grant price at thetime of grant, resulted in an income tax effect, which accordingly decreased “Other capitalreserves” by RMB 730,251.66.

5.28 Treasury Stock

Note:

(i) As stated in Note 5.27.1 to these financial statements, for the restricted shares for which therepurchase obligations are no longer required as the unlocking conditions have been met, thecorresponding repurchase obligations were derecognized, thereby reducing “Restricted SharePayment” by RMB 12,815,556.81.

5.29 Other Comprehensive Income

Items31 December

2024

31 December

2024

Changes during the reporting period

Changes during the reporting period

31 December 2025

31 December 2025Amountbefore tax

Amountbefore taxLess: Itemspreviouslyrecognized in othercomprehensive

income beingreclassified tocurrent profit or loss

Less: Itemspreviouslyrecognized in othercomprehensive

income beingreclassified tocurrent profit or lossLess: Itemspreviouslyrecognized inothercomprehensiveincome beingreclassified toretained earnings

Less: Itemspreviouslyrecognized inothercomprehensiveincome beingreclassified toretained earningsLess:

Incometaxexpenses

Less:

IncometaxexpensesAttributable toowners of the

Company

Attributable toowners of the

CompanyAttributableto non-controllinginterest

Attributableto non-controllinginterest(a)Items will not bereclassified to profit orloss

(a)Items will not bereclassified to profit orloss

(b)Items will bereclassified to profit orloss

(b)Items will bereclassified to profit orloss15,686,794.62

15,686,794.627,978,422.75

7,978,422.75

7,978,422.75

7,978,422.75

23,665,217.37

23,665,217.37Including: Exchangedifferences on translatingforeign operations

Including: Exchangedifferences on translatingforeign operations

15,686,794.62

15,686,794.627,978,422.75

7,978,422.75

7,978,422.75

7,978,422.75

23,665,217.37

23,665,217.37Total

Total15,686,794.62

15,686,794.627,978,422.75

7,978,422.75

7,978,422.75

7,978,422.75

23,665,217.37

5.30 Specific Reserves

5.31 Surplus Reserves

As of 31 December 2025, the Company's cumulative surplus reserve has reached 50% of itsregistered capital, and therefore, no further extraction will be made during current period.

5.32 Retained Earnings

5.33 Revenue and costs of sales

Principal activities by category

5.34 Taxes and Surcharges

5.35 Selling and Distribution Expenses

5.36 General and Administrative Expenses

5.37 Research and Development Expenses

5.38 Finance Costs

5.39 Other Income

5.40 Investment Income/(Losses)

5.41 Credit Impairment Losses

5.42 Asset Impairment Losses

5.43 Gains/ (losses) from Disposal of Assets

5.44 Non-operating Income

5.45 Non-operating Expenses

5.46 Income Tax Expenses

(a) Details of income tax expenses

(b) Reconciliation of accounting profit and income tax expenses

5.47 Other Comprehensive Income

For details of the other comprehensive income and related tax effect, transfer to profit or lossand adjustment of other comprehensive income, please refer to Note 5.29 Other ComprehensiveIncome.

5.48 Notes to the Statement of Cash Flow

(a) Cash relating to operating activities(i)Other cash received relating to operating activities

(ii) Other cash payments relating to operating activities

(b) Cash relating to investing activities(i)Other cash received relating to investing activities

(ii) Other cash payments relating to investing activities

(c) Cash relating to financing activities(i)Other cash payments relating to financing activities

(ii) Changes in liabilities arising from financing activities

5.49 Supplementary Information to the Statement of Cash Flows

(a) Supplementary information to the statement of cash flows

(b) The components of cash and cash equivalents

(c) Presented as cash and cash equivalents despite restrictions in scope of application

5.50 Foreign Currency Monetary Items

(a) Foreign currency monetary items at 31 December 2025:

(b) Overseas business entityPlease refer the Note 3.4, for the details of the main operating locations and functionalcurrencies of significant overseas operating entities .

5.51 Leases

(a) The Company as a lessee

(b) The Company as a lessor(i) Operating leaseA. Lease income

6. RESEARCH AND DEVELOPMENT EXPENDITURES

7. INTERESTS IN OTHER ENTITIES

7.1 Interests in Subsidiaries

(a) Composition of corporate group

7.2 Interests in Joint Arrangements or Associates

(a) Insignificant associates

(a) Main financial information of the insignificant associates

8. GOVERNMENT GTRANTS

8.1Government grants recognised in current profit or loss

9. RISKS RELATED TO FINANCIAL INSTRUMENTS

Risks related to the financial instruments of the Company arise from the recognition of variousfinancial assets and financial liabilities during its operation, including credit risk, liquidity riskand market risk.Management of the Company is responsible for determining risk management objectives andpolicies related to financial instruments. Operational management is responsible for the dailyrisk management through functional departments (e.g. credit management department of theCompany reviews each credit sale). Internal audit department is responsible for the dailysupervision of implementation of the risk management policies and procedures, and report theirfindings to the audit committee in a timely manner.Overall risk management objective of the Company is to establish risk management policies tominimize the risks without unduly affecting the competitiveness and resilience of the Company.

9.1 Credit Risk

Credit risk is the risk of one party of the financial instrument face to a financial loss becausethe other party of the financial instrument fails to fulfill its obligation. The credit risk of theCompany is related to cash and equivalent, notes receivable, accounts receivables, otherreceivables and long-term receivables. Credit risk of these financial assets is derived from thecounterparty’s breach of contract. The maximum risk exposure is equal to the carrying amountof these financial instruments.Cash and cash equivalent of the Company has lower credit risk, as they are mainly deposited insuch financial institutions as commercial bank, of which the Company thinks with higherreputation and financial position.For notes receivable, accounts receivable, accounts receivable financing and other receivables,the Company establishes related policies to control their credit risk exposure. The Companyassesses credit capability of its customers and determines their credit terms based on theirfinancial position, possibility of the guarantee from third party, credit record and other factors(such as current market status, etc.). The Company monitors its customers’ credit recordperiodically, and for those customers with poor credit record, the Company will take measuressuch as written call, shortening or cancelling their credit terms so as to ensure the overall creditrisk of the Company is controllable.(i) Determination of significant increases in credit riskThe Company assesses at each reporting date as to whether the credit risk on financial

instruments has increased significantly since initial recognition. When the Company determineswhether the credit risk has increased significantly since initial recognition, it considers basedon reasonable and supportable information that is available without undue cost or effort,including quantitative and qualitative analysis of historical information, external credit ratingsand forward-looking information. The Company determines the changes in the risk of a defaultoccurring over the expected life of the financial instrument through comparing the risk of adefault occurring on the financial instrument as at the reporting date with the risk of a defaultoccurring on the financial instrument as at the date of initial recognition based on individualfinancial instrument or a group of financial instruments with the similar credit riskcharacteristics.When met one or more of the following quantitative or qualitative criteria, the Companydetermines that the credit risk on financial instruments has increased significantly: thequantitative criteria applied mainly because as at the reporting date, the increase in theprobability of default occurring over the lifetime is more than a certain percentage since theinitial recognition; the qualitative criteria applied if the debtor has adverse changes in businessand economic conditions, early warning list of customer, and etc.(ii) Definition of credit-impaired financial assetsThe criteria adopted by the Company for determination of credit impairment are consistent withinternal credit risk management objectives of relevant financial instruments in considering bothquantitative and qualitative indicators.When the Company assesses whether the debtor has incurred the credit impairment, the mainfactors considered are as following: Significant financial difficulty of the issuer or the borrower;a breach of contract, e.g., default or past-due event; a lender having granted a concession to theborrower for economic or contractual reasons relating to the borrower’s financial difficulty thatthe lender would not otherwise consider; the probability that the borrower will enter bankruptcyor other financial re-organisation; the disappearance of an active market for the financial assetbecause of financial difficulties of the issuer or the borrower; the purchase or origination of afinancial asset at a deep discount that reflects the incurred credit losses.(iii) The parameter of expected credit loss measurementThe company measures impairment provision for different assets with the expected credit lossof 12-month or the lifetime based on whether there has been a significant increase in credit riskor credit impairment has occurred. The key parameters for expected credit loss measurementinclude default probability, default loss rate and default risk exposure. The Company sets upthe model of default probability, default loss rate and default risk exposure in considering thequantitative analysis of historical statistics (such as counterparties’ ratings, guarantee methodand collateral type, repayment method, etc.) and forward-looking information.Relevant definitions are as following:

Default probability refers to the probability of the debtor will fail to discharge the repaymentobligation over the next 12 months or the entire remaining lifetime;

Default loss rate refers to the Company's expectation of the loss degree of default risk exposure.The default loss rate varies depending on the type of counterparty, recourse method and priority,and the collateral. The default loss rate is the percentage of the risk exposure loss when defaulthas occurred and it is calculated over the next 12 months or the entire lifetime;The default risk exposure refers to the amount that the company should be repaid when defaulthas occurred in the next 12 months or the entire lifetime. Both the assessment of significantincrease in credit risk of forward-looking information and the calculation of expected creditlosses involve forward-looking information. Through historical data analysis, the Companyidentifies key economic indicators that have impact on the credit risk and expected credit lossesfor each business.The maximum exposure to credit risk of the Company is the carrying amount of each financialasset in the statement of financial position. The Company does not provide any other guaranteesthat may expose the Company to credit risk.For the accounts receivable of the Company, the amount of top 5 clients represents 26.91% ofthe total (31 December 2024: 22.77%).

9.2 Liquidity Risk

Liquidity risk is the risk of shortage of funds when fulfilling the obligation of settlement bydelivering cash or other financial assets. The Company is responsible for the capitalmanagement of all of its subsidiaries, including short-term investment of cash surplus anddealing with forecasted cash demand by raising loans. The Company’s policy is to monitor thedemand for short-term and long-term floating capital and whether the requirement of loancontracts is satisfied so as to ensure to maintain adequate cash and cash equivalents.As at 31 December 2025, the maturity profile of the Company’s financial liabilities is as follows:

Unit: RMB 10,000

(Continued)

9.3 Market Risk

(a) Foreign currency riskExcept for the operations of the Company’s subsidiaries located in Hong Kong and foreigncountries are denominated and settled in HKD, USD, BPD, RMB and SGD, other mainoperations of the Company are settled in RMB.Except that the Company’s subsidiary in Hong Kong uses HKD as settlement currency and sub-subsidiary in Swiss used CHF as settlement currency, the principal places of operations of theCompany are located in China and the major businesses are settled in RMB. However, theCompany’s recognized foreign currency assets and liabilities as well as the foreign currencytransactions in the future (the functional currencies of foreign assets and liabilities as well asthe transactions are mainly HKD and CHF) remain exposed to exchange rate risk.(i) Please refer to Note 5.50 Foreign Currency Monetary Items, for the details of the mainforeign currency risk exposures of the Company’s foreign currency assets and liabilities as at31 December 2025.(ii) Sensitivity analysisAs at 31 December 2025, if RMB appreciates or depreciates 5% against USD, while all otherrisk variables stay unchanged, net profit in current year of the Company will increase ordecrease by RMB 131,840 (31 December 2024: RMB 394,100).(b) Interest rate riskInterest rate risk of the Company primarily arises from its long-term interest-bearing debts, suchas long-term loans and bonds payables, etc. Financial liabilities with floating interest rate makethe Company subject to cash flow interest rate risk, and financial liabilities with fixed interestrate make the Company subject to fair value interest rate risk. The Company determines therelative proportion of the fixed interest contracts and floating interest contracts based on thecurrent market environment.Finance department of the Company’s headquarter monitors interest rate of the groupcontinuously. Increase of the interest rate will result in the increase of the cost of new interest-bearing debts and the interest expense of the unpaid interest-bearing debts with floating rate,and subsequently lead to significant negative impact on the financial performance of the

Company. The management makes adjustment in accordance with the update market conditionin a timely manner.As at 31 December 2025, the company does not have any long-term interest-bearing debt.

10. FAIR VALUE DISCLOSURES

10.1 Assets and Liabilities Measured at Fair Value at 31 December 2025As at 31 December 2025, the Company does not have financial instruments measured at fairvalue.

10.2 Fair Value of Financial Assets or Financial Liabilities which are not Measured atFair ValueFinancial assets and financial liabilities not measured at fair value include: accounts receivable,short-term borrowings, accounts payable, long-term borrowings due within one year, and equityinstrument investment that does not have public quotation in an active market and its fair valuecannot be measured reliably.The difference between fair value and carrying amount of the above financial assets andliabilities that not measured at fair value is insignificant.

11. RELATED PARTIES AND RELATED PARTY TRANSACTIONSRecognition of related parties: The Company has control or joint control of, or exercisesignificant influence over another party; or the Company and another party are controlled orjointly controlled by the same third party.

11.1 General Information of the Parent Company

(a) Details of the parent companyCATIC Shenzhen Holdings Limited is a subsidiary that 100.00% held, indirectly, by AVICInnovation Holding Limited.(b) Ultimate controlling party of the Company is AVIC Innovation Holding Limited.

11.2 General Information of Subsidiaries

Details of the subsidiaries please refer to Notes 7 INTERESTS IN OTHER ENTITIES.

11.3 Associates of the Company

Details of significant associates please refer to Notes 7 INTERESTS IN OTHER ENTITIES.

11.4 Other Related Parties of the Company

11.5 Related Party Transactions

(a) Purchases or sales of goods, rendering or receiving of servicesPurchases of goods, receiving of services:

Sales of goods and rendering of services:

(b) LeasesThe Company as lessor:

The Company as lessee:

(Continued)

(c) Key management personnel compensation

(d) Other related party transactionsThe deposit balance of our company held at AVIC Finance Company as at 31 December 2025amounted to RMB 552,559,173.96, of which the deposit interest received during the yeartotaled RMB 1,963,880.34.

11.6 Receivables and Payables with Related Parties

(a) Receivables

(b) Payables

12. SHARE-BASED PAYMENTS

12.1 The Stock payment overall situation

12.2 Equity-settled Share-based Payment

13. COMMITMENTS AND CONTINGENCIES

13.1 Significant Commitments

As of the balance sheet date, the significant external commitments of the Company includelease contracts that have been signed and are in progress or are about to be executed, along withtheir financial impacts. For detailed information, please refer to Note 5.25 Lease Liabilities andNote 5.51 Leases.Except for the commitments mentioned above, as of 31 December 2025, the Company has noother significant commitments that need to be disclosed.

13.2 Contingencies

As at 31 December 2025, the Company has no significant contingencies need to be disclosed.

14. EVENTS AFTER THE REPORTING PERIOD

14.1 Profit Distribution

Note: The profit distribution plan above shall be implemented after being reviewed andapproved by the general meeting of shareholders.

14.2 Others

(a) On 12 March 2026, upon the approval of the resolutions passed at the 14th Meeting of the11th Board of Directors, the Company and its wholly-owned subsidiaries proposed to apply forcredit facilities from banks and other financial institutions in 2026 through various methodsincluding credit, guarantee, mortgage and pledge, with the outstanding balance of actualborrowings under such credit facilities not exceeding RMB 1.2 billion. The proposal for thetotal credit facilities from banks is still pending approval by the Company's shareholders'meeting.(b) On 12 March 2026, upon the approval of the resolutions passed at the 14th Meeting of the11th Board of Directors, the Company proposed to provide guarantees for its wholly-ownedsubsidiaries in 2026 in respect of credit facilities applied from banks and other financialinstitutions, with the amount not exceeding RMB 300 million. Such limit is included within theactual borrowing limit of RMB 1.2 billion under the credit facilities. The proposal for theaforementioned guarantee limit is still pending approval by the Company's shareholders'meeting.As at 12 March 2026, the Company has no other events after the reporting period that requiredisclosure.

15. OTHER SIGNIFICANT MATTERS

15.1 Segment Information

The Company identifies operating segments according to its internal organization structure,management requirements and internal reporting systems. Then the reportable segments are tobe determined based on the Company’s operating segments:

(a) its business activities are engaged to generate revenue and incur expenses;(b) its operating results are regularly reviewed by the Company’s management to makedecisions on resources allocation and performance assessment;(c) its financial conditions, operating results, cash flow and related accounting information are

available to the Company.The Company determines the reporting segment based on the operating segment, and theoperating segment that meets any of the following conditions is determined as the reportingsegment:

(a) The segment income of the operating segment accounts for 10.00% or more of total incomeof all segments;(b) The absolute amount of profits (losses) of the segment account for 10.00% or more of thehigher of the absolute amount of total profits of the profiting segment and the absolute amountof total losses of the unprofitable segment.The Company’s business is simple. The business mainly involves manufacturing and sales ofwatch. The management considers the business as a whole in implementing management andassessing its performance. As a result, no segment information is disclosed in this financialstatement.

15.2 Others

As at 31 December 2025, the Company does not have other significant matters that require todisclose.

16. NOTES TO THE MAIN ITEMS OF THE FINANCIAL STATEMENTS OF THEPARENT COMPANY

16.1 Accounts Receivable

(a) Accounts receivable by aging

(b) Accounts receivable by bad debt provision method

(Continued)

Detailed explanation of provision for bad debt:

(i)As at 31 December 2025, accounts receivable with bad debt provision recognisedindividually

(ii) As at 31 December 2025, accounts receivable with bad debt provision recognised by group

(c) Changes of provision for bad debt during the reporting period

(d) No accounts receivable written off during the reporting period(e) Top five closing balances by entity

16.2 Other Receivables

(a) Other receivables by aging

(b) Other receivables by nature

(c) Other receivables by bad debt provision methodA. As at 31 December 2025, provision for bad debt recognised based on three stages model

As at 31 December 2025, provision for bad debt at stage 1:

B. As at 31 December 2024, provision for bad debt recognised based on three stages model

As at 31 December 2024, provision for bad debt at stage 1:

Basis of provision for bad debt during the reporting period:

For details of recognition criteria and explanation for provision of bad debt by groups, pleaserefer to Notes 3.11(d) Changes of provision for bad debt during the reporting period

(e) No other receivables written off during the reporting period(f) Top five closing balances by entity

16.3 Long-term Equity Investments

(a) Investments in subsidiaries

(b) Investments in associates

(Continued)

16.4 Revenue and Cost of Sales

16.5 Investment Income

17. SUPPLEMENTARY INFORMATION

17.1 Details of current non-recurring profit or loss

17.2 Return on Net Assets and Earnings Per Share (‘EPS’)

(a) 2025

(b) 2024

Name of the Company：FIYTA Precision Technology Co., Ltd.

Date: 12 March 2026