GUANGDONG BREWERY HOLDINGS LIMITED

Annual Report 1998

• Review of Operations
• Business Prospects
• Consolidated Profit And Loss Account
• Consolidated Balance Sheet
• Consolidated Cash Flow Statement

Financial Status

Hong Kong entered a period characterised by a contraction of available credit in the year 1998 which caused greater difficulties in obtaining finance when compared to the past. Given the healthy financial position of the Group, the satisfactory operating cash inflow, the consistent stability of Renminbi and the continued support from the holding company, the Group has not only successfully extended the repayment period of a US dollar loan during the year, but also lowered the Group's total liabilities and decreased the proportion of foreign currency loans, resulting in an improved financial status as compared to the year 1997.

The net proceeds from the new issue of shares in 1997 has been applied in the Group's operations according to the plan in the Prospectus.

Management Strengthening

During this year, the Group has successfully strengthened the management structure of Kingway beer by merging the management teams and sales force of both Kingway Plant I and Plant II. After such mergers, the efficiency in giving business directions, the strength of the sales force and staff morale have significantly increased. At the same time, the Group has paid special attention to the organizational structure and the professional standards of the sales force. A regional manager structure has been adopted for beer sales under which commission and penalties are linked to sales targets. This structure creates competition between regional managers and thus increases sales. The Group has also started regular reviews and studies on each of the internal sections with a view to continuously upgrading internal management standards.

Market Development and Brand Promotion

The sales volume of Kingway Plant I for the year 1998 amounted to 154,000 tons, representing an increase of 12.4% as compared to the year 1997. The sales volume of Kingway Plant II from the commencement of production in September 1998 up to the end of the year amounted to 7,000 tons.

The Group has embarked on a series of advertising and promotion campaigns this year, highlighted by the advertisement for Kingway beer starring Mr. Ke Shouliang, who is renowned for his heroic feat of the "Yellow River Leap". Since its launch in Mainland China and Hong Kong, the advertisement has been well received and proven successful. Kingway beer was recently designated as an official beer of the Great Hall of the People for state banquets, which is a good illustration of its enhanced brand recognition following various promotions.

Backed by effective promotion and our dedicated sales teams, Kingway beer was able to maintain the same price level as last year and has also achieved satisfactory growth in sales volume in the year.

During the year, Kingway beer achieved good progress in expanding its presence in the Guangdong market. However, its expansion outside Guangdong was adversely affected by the overall economic situation resulting from the financial turmoil in certain provinces and contracted market demand as a result of the flood crisis of the Changjiang River. In view of this, the Group has adjusted its market development strategies, focusing its resources on the exploration of priority markets including Guangxi, Hunan, Jiangxi and Fujiang. Given the improving market response to Kingway beer in Hong Kong both in terms of sales volume and brand recognition, the Group has confidence in its ability to develop the Hong Kong market.

Research, Development and Cost Control

The Group is well aware of the importance of product quality to the food and beverage industry. The Group entered into an agreement during the year with the China National Research Institute of Food and Fermentation Industries on technological cooperation for a term of three years, as part of our effort to further enhance the quality standards of Kingway beer.

Notwithstanding the increase in budgets for advertising and promotion, the Group implemented various cost reduction measures on other fronts in 1998. As a result of management's effective cost control and the decline in prices of some over-supplied raw materials, Kingway beer has benefited from a considerable drop in production costs as compared to last year.

Shandong Amber Brewery - Assoicated Company

The sales volume of Amber beer amounted to 146,000 tons in the year 1998, representing a decrease of 0.7% as compared to last year. Owing to the keen price competition in the low-end beer market in the northern regions, the profits attributable to the Group was below expectation.

Looking at the position for 1999, the economies of Mainland China and Hong Kong have not yet recovered. However, the Central Government of China has announced that it will continue to adopt measures in stimulating the economy. It is believed that the Mainland consumer market, including in the beer market, will remain relatively stable.

Competition in the market will continue to be keen, and our business will face even greater challenges in this year. The most important objectives of the Group for this year are market development and the increase of sales. The Group will focus its resources in strengthening the promotion of Kingway beer, so as to maintain its market shares in Shenzhen, Baoan and Eastern Guangdong. The Group will empower its sales force in Dongguan, Guangzhou and other Pearl River Delta cities, which have huge market potential for Kingway beer. Also, the Group will continue to develop the markets in the neighbouring provinces of Guangdong. At the same time, the Group will adopt more prudent policies in its financial management, including better credit control on beer sales, commitment to save costs and expenses, and measures on strengthening management and increasing efficiency. The Group is confident in the business development of Kingway beer in the year 1999.

Guangdong Enterprises (Holdings) Limited ("GDE"), the ultimate controlling shareholder of the Group, is currently undergoing a restructuring, following significant financial difficulties and a standstill of the financial creditiors of GDE announced in January 1999 and of the financial creditors of Guangdong Investment Limited ("GDI"), the controlling shareholder of the Group announced on 4 March 1999. The Group is not part of these standstill arrangements, but it is part of the restructuring plan to be proposed by the Guangdong Provincial Government to deal with difficulties at the GDE and GDI level. The Guangdong Provincial Government has clearly indicated its support. When the restructure of GDE is successfully completed, we believe that the Group's business in the long run will enjoy even greater support and development.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

CONSOLIDATED BALANCE SHEET

CONSOLIDATED CASH FLOW STATEMENT