6-K 1 chinanaturalresources6k.htm CURRENT REPORT United States Securities & Exchange Commission EDGAR Filing


 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 6-K

______________

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of November 2006.

Commission File Number 0-26046

______________

CHINA NATURAL RESOURCES, INC.

(Translation of registrant’s name into English)

______________

Room 2105, West Tower, Shun Tak Centre,
200 Connaught Road C., Sheung Wan, Hong Kong

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.  Form 20-F ý        Form 40-F ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):   ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):   ¨

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12b3-2(b) under the Securities Exchange Act of 1934.   Yes ¨    No ý.

If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12b3-2(b): 82-____________.


 

 




Unaudited Results of Operations

In furtherance of Nasdaq Marketplace Rule 4350(b)(4), furnished herewith on behalf of China Natural Resources, Inc. are the following:

(a)

Unaudited Financial Statement:

Condensed Consolidated Statements Of Operations And Comprehensive Income (Loss) (Unaudited) For The Three and Six Months Ended June 30, 2006 and 2005

Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005

Condensed Consolidated Statements Of Cash Flows (Unaudited) For The Six Months Ended June 30, 2006 and 2005

Notes to Condensed Consolidated Financial Statements (Unaudited)

(b)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Exhibits

99.1

Press Release dated November 13, 2006.




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunder duly authorized.

Date:  November 13, 2006

 

CHINA NATURAL RESOURCES, INC.

  

By:

/s/ LI FEILIE

 

 

Li Feilie

 

 

President and Chief Executive Officer




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Amounts in thousands, except share and per share data)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2006

 

2005

 

2006

 

 

 

RMB

 

RMB

 

US$

 

RMB

 

RMB

 

US$

 

NET SALES

     

 

32,526

     

 

20,947

     

 

4,066

     

 

51,664

     

 

43,150

     

 

6,458

 

COST OF SALES

 

 

(8,961

)

 

(8,873

)

 

(1,120

)

 

(17,042

)

 

(17,309

)

 

(2,130

)

GROSS PROFIT

 

 

23,565

 

 

12,074

 

 

2,946

 

 

34,622

 

 

25,841

 

 

4,328

 

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES

 

 

(3,715

)

 

(1,814

)

 

(464

)

 

(7,106

)

 

(5,439

)

 

(888

)

INTEREST INCOME

 

 

135

 

 

240

 

 

17

 

 

235

 

 

270

 

 

29

 

OTHER INCOME/ (EXPENSE), NET

 

 

1,083

 

 

16

 

 

135

 

 

4,958

 

 

(24

)

 

620

 

INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES

 

 


21,068

 

 


10,516

 

 


2,634

 

 


32,709

 

 


20,648

 

 


4,089

 

INCOME TAXES

 

 

(3,338

)

 

(1,570

)

 

(417

)

 

(4,906

)

 

(3,430

)

 

(613

)

INCOME FROM CONTINUING
OPERATIONS

 

 

17,730

 

 

8,946

 

 

2,217

 

 

27,803

 

 

17,218

 

 

3,476

 

DISCONTINUED OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued advertising and HARC operations, net
of taxes of nil

 

 


(212

)

 


 

 


(27

)

 


(486

)

 


 

 


(61

)

NET INCOME

 

 

17,518

 

 

8,946

 

 

2,190

 

 

27,317

 

 

17,218

 

 

3,415

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation
adjustments

 

 


(3

)

 


 

 


 

 


(11

)

 


 

 


(1

)

COMPREHENSIVE INCOME

 

 

17,515

 

 

8,946

 

 

2,190

 

 

27,306

 

 

17,218

 

 

3,414

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.54

 

 

7.17

 

 

0.19

 

 

2.87

 

 

13.80

 

 

0.36

 

Loss from discontinued operations

 

 

(0.02

)

 

 

 

 

 

(0.05

)

 

 

 

(0.01

)

 

 

 

1.52

 

 

7.17

 

 

0.19

 

 

2.82

 

 

13.80

 

 

0.35

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.27

 

 

7.17

 

 

0.16

 

 

2.27

 

 

13.80

 

 

0.29

 

Loss from discontinued operations

 

 

(0.02

)

 

 

 

 

 

(0.04

)

 

 

 

(0.01

)

 

 

 

1.25

 

 

7.17

 

 

0.16

 

 

2.23

 

 

13.80

 

 

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

11,548,416

 

 

1,247,823

 

 

11,548,416

 

 

9,670,407

 

 

1,247,823

 

 

9,670,407

 

Diluted

 

 

13,959,662

 

 

1,247,823

 

 

13,959,662

 

 

12,240,535

 

 

1,247,823

 

 

12,240,535

 

See notes to condensed consolidated financial statements.




CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2006 AND DECEMBER 31, 2005

(Amounts in thousands, except share and per share data)

 

 

 

 

 

June 30,

2006

 

December 31,

2005

 

June 30,

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

Notes

 

(Unaudited)

 

(Note)

 

(Unaudited)

 

ASSETS

     

 

 

     

 

 

     

 

 

     

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

72,453

 

 

41,202

 

 

9,057

 

Trade receivables

 

 

 

 

 

502

 

 

4,622

 

 

63

 

Bills receivable

 

 

 

 

 

 

 

450

 

 

 

Other receivables, deposits and prepayments

 

 

 

 

 

1,055

 

 

422

 

 

132

 

Amounts due from a related company

 

 

5

 

 

 

 

20,503

 

 

 

Inventories

 

 

3

 

 

3,584

 

 

3,788

 

 

448

 

Assets held for sale

 

 

6

 

 

25,647

 

 

 

 

3,205

 

TOTAL CURRENT ASSETS

 

 

 

 

 

103,241

 

 

70,987

 

 

12,905

 

PROPERTY AND EQUIPMENT

 

 

4

 

 

36,294

 

 

33,656

 

 

4,537

 

GOODWILL

 

 

2

 

 

21,915

 

 

 

 

2,739

 

TOTAL ASSETS

 

 

 

 

 

161,450

 

 

104,643

 

 

20,181

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

1,011

 

 

934

 

 

126

 

Other payables

 

 

 

 

 

20,380

 

 

18,881

 

 

2,548

 

Advances from customers

 

 

 

 

 

7,040

 

 

1,174

 

 

880

 

Accrued liabilities

 

 

 

 

 

2,437

 

 

1,319

 

 

305

 

Current portion of capital lease

 

 

 

 

 

70

 

 

 

 

9

 

Amounts due to related parties

 

 

5

 

 

6,476

 

 

6,476

 

 

809

 

Amounts due to a director

 

 

5

 

 

13,482

 

 

23,644

 

 

1,685

 

Dividends payable

 

 

 

 

 

18,040

 

 

5

 

 

2,255

 

Taxes payable

 

 

 

 

 

4,224

 

 

2,545

 

 

528

 

Liabilities related to assets held for sale

 

 

 

 

 

2,528

 

 

 

 

316

 

TOTAL CURRENT LIABILITIES

 

 

 

 

 

75,688

 

 

54,978

 

 

9,461

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares, no par:

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized – 200,000,000 shares
Issued and outstanding –11,548,416 and 1,247,823
shares in 2006 and 2005, respectively

 

 

 

 

 

19,222

 

 

 

 

2,403

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

Reserves

 

 

 

 

 

35,359

 

 

3,912

 

 

4,420

 

Retained earnings

 

 

 

 

 

30,952

 

 

45,513

 

 

3,869

 

Accumulated other comprehensive income

 

 

 

 

 

229

 

 

240

 

 

28

 

TOTAL SHAREHOLDERS’ EQUITY

 

 

 

 

 

85,762

 

 

49,665

 

 

10,720

 

TOTAL LIABILITIES AND SHAREHOLDERS’
EQUITY

 

 

 

 

 

161,450

 

 

104,643

 

 

20,181

 

Note: The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

See notes to condensed consolidated financial statements.




CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Amounts in thousands)

 

 

Six months ended June 30,

 

 

 

2006

 

2005

 

2006

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

     

 

43,847

     

 

23,600

     

 

5,481

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,566

)

 

(1,375

)

 

(446

)

Advances to related companies

 

 

 

 

(20,097

)

 

 

Repayment to a director

 

 

(10,162

)

 

 

 

(1,270

)

Advances from a director

 

 

 

 

11,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by/(used in) investing activities

 

 

(13,728

)

 

(10,032

)

 

(1,716

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

Cash received in acquisition of subsidiaries

 

 

1,207

 

 

 

 

151

 

Repayment of principal of capital leases

 

 

(75

)

 

 

 

(9

)

Net cash used in financing activities by discontinued operations

 

 

9

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

1,141

 

 

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(9

)

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH
EQUIVALENTS

 

 

31,251

 

 

13,568

 

 

3,907

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, at beginning of period

 

 

41,202

 

 

19,647

 

 

5,150

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, at end of period

 

 

72,453

 

 

33,215

 

 

9,057

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

 

Business acquisition:

 

 

 

 

 

 

 

 

 

 

Fair value of assets acquired

 

 

50,558

 

 

 

 

6,320

 

Liabilities assumed

 

 

(3,308

)

 

 

 

(414

)

 

 

 

 

 

 

 

 

 

 

 

Common shares issued

 

 

47,250

 

 

 

 

5,906

 

See notes to condensed consolidated financial statements.




CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands of RMB, except share and per share data)


1.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 20-F for the year ended December 31, 2005, and to the Company’s Form 6-K filed on June 19, 2006.

For the convenience of the reader, amounts in Renminbi (“RMB”) have been translated into United States dollars (“US$”) at the rate of US$1.00 = RMB8.00 quoted by the People’s Bank of China as at June 30, 2006. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate.

Certain comparative amounts have been reclassified to conform with the current period classifications.

2.

ACQUISITION

On February 3, 2006 (the “Acquisition Date”), the Company consummated the acquisition of all of the issued and outstanding capital stock of Feishang Mining Holdings Limited (“FMH”), a British Virgin Islands corporation (the “Acquisition”). FMH, through its wholly owned subsidiary, Wuhu Feishang Mining Development Co. Ltd., is principally engaged in the mining of zinc, iron and other minerals for distribution in the PRC. The transaction was structured as a reorganization of FMH with and into the Company. As consideration for the Acquisition, the Company issued to the former FMH shareholder 9,980,593 of the Company’s common shares, as well as warrants (the “Warrants”) to purchase an additional 4,500,000 of the Company’s common shares. In connection with the Acquisition, the 320,000 series B preferred shares were converted into 320,000 common shares. The Warrants entitle the holder to purchase: 2,000,000 common shares of the Company at an exercise price of US$4.00 per share for a period of two years from the Acquisition Date; 1,500,000 common shares at an exercise price of US$4.50 per share for a period of three years from the Acquisition Date; and 1,000,000 common shares at an exercise price of US$5.00 per share for a period of four years from the Acquisition Date. Other than the exercise price and exercise period, all other terms and conditions of the Warrants are identical.

The acquisition of FMH by the Company was accounted for using the purchase method of accounting and is treated as a reverse acquisition because on a post-merger basis, the former FMH shareholder holds 86.4% of the outstanding common shares of the Company. As a result, FMH is deemed to be the acquirer for accounting purposes.




2.

ACQUISITION (Continued)

Accordingly, the accompanying financial statements represent the operations of FMH through February 2, 2006 and the consolidated operations of FMH and the Company subsequent to February 2, 2006. We have retroactively restated our issued share capital to reflect the acquisition by FMH.

The following table summarizes the initial estimated fair values of the Company’s assets and liabilities acquired by FMH at the Acquisition Date. The purchase price was determined by multiplying the number of outstanding shares immediately prior to consummating the acquisition of 1,567,823 by the closing price of our common shares the day prior to the public announcement of the Acquisition Agreement between the Company and FMH. The allocation of the purchase price is preliminary and subject to refinement:

(In thousands)

     

 

 

 

 

 

 

Purchase price (including direct costs) 

 

 

 

 

 

47,250

 

Current assets

 

 

3,074

 

 

 

 

Property and equipment

 

 

869

 

 

 

 

Investments

 

 

24,700

 

 

 

 

Total assets

 

 

28,643

 

 

 

 

Total liabilities assumed

 

 

(3,308

)

 

 

 

Net assets acquired

 

 

 

 

 

25,335

 

Goodwill resulting from the acquisition

 

 

 

 

 

21,915

 

The goodwill resulting from the acquisition is not expected to be deductible for tax purposes.

The following unaudited proforma financial information presents results of operations as if the above acquisitions had occurred at the beginning of the respective three and six-month periods ended June 30, 2006 and 2005:

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net sales

     

 

32,526

     

 

20,947

     

 

51,664

     

 

43,150

 

Income from continuing operations               

 

 

17,730

 

 

7,384

 

 

24,939

 

 

14,159

 

Loss from discontinued operations

 

 

(212

)

 

(6,476

)

 

(530)

 

 

(6,649

)

Net income

 

 

17,518

 

 

908

 

 

24,409

 

 

7,510

 

Basic income per share

 

 

1.52

 

 

0.08

 

 

2.52

 

 

0.65

 

Diluted income per share

 

 

1.25

 

 

0.08

 

 

1.99

 

 

0.64

 




3.

INVENTORIES

At June 30, 2006, inventories consisted of:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Raw materials        

     

 

2,142

     

 

2,425

 

Work in progress

 

 

392

 

 

392

 

Finished goods

 

 

1,050

 

 

971

 

 

 

 

3,584

 

 

3,788

 

4.

PROPERTY AND EQUIPMENT


 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

RMB

 

RMB

 

At cost:

     

 

 

     

 

 

 

Buildings

 

 

25,008

 

 

24,009

 

Machinery and equipment    

 

 

4,522

 

 

4,860

 

Motor vehicles

 

 

2,426

 

 

1,473

 

Mining rights

 

 

11,982

 

 

9,229

 

 

 

 

43,938

 

 

39,571

 

Accumulated depreciation

 

 

(7,644

)

 

(5,915

)

 

 

 

36,294

 

 

33,656

 

As at June 30, 2006, property and equipment included one leased motor vehicle with cost and accumulated depreciation of RMB963 (US$120) and RMB625 (US$78), respectively.




5.

RELATED PARTY BALANCES AND TRANSACTIONS

At June 30, 2006, amounted due to a related company and to a director comprise:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Due from a related company:

     

 

 

     

 

 

 

Anhui Xinke New Materials Co. Ltd. (“Xinke”)

 

 

 

 

20,503

 

 

 

 

 

 

 

 

 

Due to a related company:

 

 

 

 

 

 

 

Wuhu Feishang Non-Metal Material Co. Ltd. (“WFNM”)

 

 

6,476

 

 

6,476

 

 

 

 

 

 

 

 

 

Due to a director:

 

 

 

 

 

 

 

Mr. Li Feilie

 

 

 

 

 

 

 

 

 

 

13,482

 

 

23,644

 

During the period ended June 30, 2006, the amount due from Xinke was fully paid by offsetting the dividends payable to Mr. Li Feilie. The amount due to a director represents advances made by Mr. Li Feilie to the Company and expenses he paid on behalf of the Company. During the period ended June 30, 2006, RMB10,162 was repaid.

6.

SUBSEQUENT EVENTS

On July 31, 2006, the Company disposed of its 100% equity interest in iSense Limited (‘iSense”) to the director and former shareholder of iSense for consideration of RMB2,060 (US$257). On October 3, 2006, the Company consummated the sale of its 100% equity interest in Hainan Cihui Industrial Co. Ltd. (“HARC”) to an unaffiliated third party for total consideration of RMB30,900 (US$3,862). The assets and liabilities of iSense and HARC have been classified as held for sale as of June 30, 2006 and consisted of fixed assets of RMB452 (US$56), cash of RMB344 (US$43), trade receivables of RMB127 (US$16), other receivables of RMB24 (US$3), investment of RMB24,700 (US$3,087), accounts payable of RMB40 (US$5), other payables of RMB1,010 (US$126), tax payables of RMB19 (US$2), finance lease of RMB40 (US$5) and amounts due to related parties of RMB1,419 (US$178). The results of operations of iSense and HARC have been retroactively restated as discontinued operations. Revenues from discontinued operations were RMB212 (US$27) and RMB306 (US$38) for the three months and six months ended June 30, 2006. Loss before income taxes from discontinued operations were RMB212 (US$27) and RMB486 (US$61) for the three and six months ended June 30, 2006, respectively.




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NET SALES AND GROSS PROFIT

Sales for the six months ended June 30, 2006 increased by 20% compared to June 30, 2005. The increase was mainly due to the 100% increase in the average selling price of zinc, partly offset by the decrease in the sales volume of zinc as actual zinc mined was 41% lower during the current period.

Sales for the second quarter of 2006 increased by 55% compared to the corresponding period in 2005. The increase was mainly due to the increase in the average selling price of zinc of 153%, partly offset by the decrease in the sales volume of zinc of 15% as the actual zinc mined was lower during the current period.

The gross profit margin for the three months and six months ended June 30, 2006 was 72% and 67%, respectively, compared to 58% and 60% for the corresponding period in 2005. The increase was primarily due to the increase in selling price of zinc as a result of increased demand.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased by RMB1,667,000 (US$208,000) or 31% to RMB7,106,000 (US$888,000) for the six months ended June 30, 2006 from RMB5,439,000 (US$680,000) for the six months ended June 30, 2005. The increase was primarily attributable to the consolidation of CHNR’s expenses following the reverse acquisition.

Selling, general and administrative expenses increased by RMB1,901,000 (US$238,000) or 105% to RMB3,715,000 (US$464,000) for the second quarter of 2006 from RMB1,814,000 (US$227,000) for the second quarter of 2005. The increase was primarily attributable to consolidation of CHNR’s expenses following the reverse acquisition.

INTEREST INCOME, NET

Interest income decreased by RMB35,000 (US$4,000) or 13% to RMB235,000 (US$29,000) for the six months ended June 30, 2006 from RMB270,000 (US$34,000) for the six months ended June 30, 2005. The decrease was primarily due to a decrease in interest income earned on loans and advances to related parties in 2005 of RMB190,000 (US$24,000), partly offset by an increase in cash balances in 2006.

Interest income decreased by RMB105,000 (US$13,000) or 44% to RMB135,000 (US$17,000) for the second quarter of 2006 from RMB240,000 (US$30,000) for the second quarter of 2005. The decrease was primarily due to a decrease in interest income earned on loans and advances to related parties in 2005 of RMB133,000 (US$17,000).

OTHER (EXPENSE)/INCOME, NET

Other income, net for the three and six months ended June 30, 2006 primarily consisted of a net gain on trading of marketable securities of RMB1,083,000 (US$135,000) and RMB4,958,000 (US$620,000), respectively.

INCOME TAXES

Management believes that the Company is not subject to US taxes.

Under the current laws of the BVI, dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes and no withholding tax is imposed on payments of dividends to the Company.

The Company’s subsidiaries in the PRC are subject to PRC federal statutory tax rate applicable to foreign investment enterprises in Hainan and Wuhu of 15%.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary liquidity needs are to fund operating expenses and to expand business operations. The Company has financed its working capital requirements primarily through internally generated cash.




Net cash provided by operating activities for the six months ended June 30, 2006 was approximately RMB43,847,000 (US$5,481,000), as compared to RMB23,600,000 (US$2,950,000) for the corresponding period in 2005. Net cash inflows/outflows from the Company’s operating activities are attributable to the Company’s net income and changes in operating assets and liabilities. Net cash used in investing activities for the six months ended June 30, 2006 was primarily attributable to purchases of fixed assets and repayments of amounts due to a director.

The following summarizes the Company’s financial condition and liquidity at the dates indicated:

 

 

 

June 30,
2006

 

 

December 31,
2005

 

 

 

 

RMB

 

 

RMB

 

 

 

 

 

 

 

 

 

Current ratio

 

 

1.36x

 

 

1.29x

 

Working capital      

 

 

27,553,000

 

 

16,009,000

 

Ratio of long-term debt to
total shareholders’ equity

 

 

0x

 

 

0x

 

The Company has the following contractual obligations and commercial commitments as at June 30, 2006:

 

 

 

Total

 

 

< 1 year

 

 

2-5 years

 

 

 

 

RMB

 

 

RMB

 

 

RMB

 

Operating lease

     

 

48,000

     

 

48,000

     

 

 

Capital lease 

 

 

110,000

 

 

88,000

 

 

22,000

 

Except as disclosed above, there have been no other significant changes in financial condition and liquidity since the fiscal year ended December 31, 2005. The Company believes that internally generated funds will be sufficient to satisfy its anticipated working capital needs for at least the next twelve months.

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.