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Financial risk management objectives and policies

Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Market risk

(i) Currency risk

Several subsidiaries of the Company have bank balances and cash and trade receivables denominated in foreign currencies arising from income generated from provision of services, which expose the Group to foreign currency risk. Approximately 8.5% (2008: 11.6%) of the Group’s income generated from provisions of services is denominated in currencies other than the functional currency of the group entity providing the services. In addition, redeemable convertible preferred shares, a loan from a related party of the Group and certain trade payables are denominated in foreign currencies.

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:

Liabilities Assets

2009 2008 2009 2008

RMB’000 RMB’000 RMB’000 RMB’000 Hong Kong dollars 173,652 128,144 4,155 5,200

US dollars 19,400 17,602 23,440 30,759

Japanese Yen 2,484 234 17,669 6,065

It is the Group’s policy for each operating entity to operate in local currency as far as possible to minimise currency risk. The Group’s principal businesses are conducted in Renminbi. Since the impact of foreign exchange exposure is minimal, no hedging against foreign currency exposure has been carried out by the management but the management keep on monitoring the movement of all foreign currency exposure.

30. FINANCIAL INSTRUMENTS – continued

Financial risk management objectives and policies – continued Market risk – continued

(i) Currency risk – continued

Sensitivity analysis

The Group is mainly exposed to Hong Kong dollar, US dollar and Japanese Yen.

The following table details the Group’s sensitivity to a 5% increase and decrease in Renminbi against the relevant foreign currencies. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 5% change in foreign currency rates. A positive number below indicates a decrease in loss (2008: an increase in profit) where Renminbi strengthens 5% against the relevant currencies. For a 5% weakening of Renminbi against the relevant currencies, there would be an equal and opposite impact on the result, and the balances below would be negative.

Hong Kong US dollar Japanese

dollar Impact Impact Yen Impact

2009 2008 2009 2008 2009 2008

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Loss) profit for the year 8,732 6,570 (a) (205) 398 (b) (1,115) (69) (c) (a) This is mainly attributable to the exposure on Hong Kong dollar denominated bank balances and

redeemable convertible preferred shares at the year end.

(b) This is mainly attributable to the exposure on US dollar trade receivables, bank balances and a loan from a related party at year end.

(c) This is mainly attributable to the exposure on Japanese Yens trade receivables, bank balances at year end.

30. FINANCIAL INSTRUMENTS – continued

Financial risk management objectives and policies – continued Market risk – continued

(ii) Interest rate risk

The Group is exposed to fair value interest rate risk in relation to redeemable convertible preferred shares (see note 26 for details) and a loan from a related party (see note 24 for details).

The Group is also exposed to cash flow interest rate risk through the impact of rate changes on interest bearing financial assets which are mainly short-term bank deposits and borrowings at market rates. The Group currently does not have an interest rate hedging policy and will consider hedging significant interest rate exposure should the need arises.

Sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to interest rates for both the liability component of the redeemable convertible preferred shares and floating rate borrowings (see note 24) and short-term deposits at the end of the reporting period. A 50 basis points (2008: 50 basis points) increase or decrease is used for the liability component of the redeemable convertible preferred shares and floating rate borrowings and a 10 basis points (2008: 10 basis points) increase or decrease is used for short-term deposits when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. In respect of the liability component of the redeemable convertible preferred shares and floating rate borrowings, if interest rates had been 50 basis points (2008: 50 basis points) higher/lower and all other variables were held constant, the Group’s results for the year ended 31 December 2009 would increase/ decrease by RMB998,623 (2008: RMB1,079,821). This is attributable to the Group’s exposure to fair value change on the liability component of its redeemable convertible preferred shares.

In respect of short-term bank deposits, if interest rates had been 10 basis points (2008: 10 basis points) higher/lower and all other variables were held constant, the Group’s results for the year ended 31 December 2009 would increase/decrease by RMB310,000 (2008: increase/decrease by RMB287,000). This is attributable to the Group’s exposure to interest rates on its short-term bank deposits.

30. FINANCIAL INSTRUMENTS – continued

Financial risk management objectives and policies – continued Market risk – continued

(iii) Other price risk

The Group is required to estimate the fair value of the conversion option embedded in the redeemable convertible preferred shares at the end of the reporting period with changes in fair value to be recognised in profit or loss as long as the redeemable convertible preferred shares are outstanding. The fair value adjustment will be affected either positively or negatively, amongst others, by the changes in market interest rate, the Company’s share market price and share price volatility.

Sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to the Company’s share price risks at the reporting date only as the directors of the Company consider that the change in market interest rate may not have significant financial impact on the fair value of conversion option. If the Company’s share price had been 5% higher/lower and all other variables were held constant, the Group’s loss (2008: profit) for the year (as a result of changes in fair value of conversion option component of redeemable convertible preferred shares) would increase/decrease by RMB2,311,973/ RMB4,726,700 (2008: decrease/increase by RMB2,767,000).

In management’s opinion, the sensitivity analyses are unrepresentative of the inherent market risk as the pricing model used in the fair value valuation of the conversion option component of redeemable convertible preferred shares involves multiple variables and certain variables are interdependent.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 31 December 2009 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated statement of financial position. The Group reviews the recoverable amount of each individual trade receivable at each end of the reporting period to ensure that adequate impairment losses, if necessary, are made for irrecoverable amounts.

In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced. The credit risk on liquid funds is limited because the counterparties are authorised banks in the PRC.

The Group’s concentration of credit risk by geographical locations is mainly in the PRC, which accounted for 89.6% (2008: 91.7%) of the total trade receivable as at 31 December 2009. Trade receivables consist of a large number of customers, spread across diverse industries. In addition, there is concentration of credit risk on liquid funds which are deposited with several authorised banks in the PRC. Other than the above, the Group does not have any other significant concentration of credit risk.

30. FINANCIAL INSTRUMENTS – continued

Financial risk management objectives and policies – continued Liquidity risk

In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilisation of borrowings and ensures compliance with loan covenants.

As at 31 December 2009, the Group has available unutilised general borrowing facilities of approximately RMB23,745,000 (2008: RMB60,344,000). Details of which are set out in note 24.

The following table details the Group’s remaining contractual maturity for its financial liabilities. It has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.

Liquidity tables

Over 6 Carrying

months but Total amount

Less than not more undiscounted at

6 months than 1 year 1-2 years 2+ years cash flows 31.12.2009 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 2009

Trade and other payables 276,972 – – – 276,972 276,972

Bills payable 1,255 – – – 1,255 1,255

Amounts due to related companies 128 – – – 128 128 Dividend payable to shareholders 82 – – – 82 82

Borrowings 34,980 54,726 – – 89,706 87,000

Consideration payables 18,492 4,648 12,147 – 35,287 34,514 Loan from a related party 17,071 – – – 17,071 17,071 Redeemable convertible preferred shares 3,788 3,768 7,535 138,890 153,981 167,655 352,768 63,142 19,682 138,890 574,482 584,677

30. FINANCIAL INSTRUMENTS – continued

Financial risk management objectives and policies – continued Liquidity risk – continued

Liquidity tables – continued

Over 6 Carrying

months but Total amount Less than not more undiscounted at 6 months than 1 year 1-2 years 2+ years cash flows 31.12.2008 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 2008

Trade and other payables 276,089 – – – 276,089 276,089

Bills payable 13,163 – – – 13,163 13,163

Amounts due to related companies 22 – – – 22 22 Dividend payable to shareholders 82 – – – 82 82

Borrowings 21,701 34,641 – – 56,342 54,064

Consideration payables 8,447 – – – 8,447 8,447 Loan from a related party 17,087 – – – 17,087 16,491 Redeemable convertible preferred shares 3,789 3,774 7,547 146,658 161,768 127,699 340,380 38,415 7,547 146,658 533,000 496,057 Fair value

The fair value of financial assets and financial liabilities (including derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis or using prices or rates from observable current market transactions as input. For an option-based derivative, the fair value is estimated using option pricing model (for example, the binomial model).

The directors of the Company consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values.

Fair value measurements recognised in the statement of financial position

Financial instruments that are measured subsequent to initial recognition at fair value, are grouped in to Levels 1 to 3 based on the degree to which the fair value is observable.

• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets or liabilities.

• Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

30. FINANCIAL INSTRUMENTS – continued

Financial risk management objectives and policies – continued

Fair value measurements recognised in the statement of financial position – continued • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the

asset or liability that are not based on observable market data (unobservable inputs).

At the end of the reporting period, level 3 financial liability included redeemable convertible preferred shares (see note 26). During the year, the loss arising from changes in fair value recognised in profit or loss amounting to RMB47,746,000.