CHAIRMAN'S STATEMENT

The last financial year has indeed been a challenging one for the Group. Despite earlier expectations of a promising year, FY2005 turned out poorly mainly because of an unexpected slump in orders from a large US-based mass-market client and changes in our cost environment. The primary factors affecting our cost environment in FY2005 were:-

1. the soaring cost of zinc alloy, our principal raw material;
2. the rising cost of labour; and
3. rising operating costs as a result of the de-pegging of the Yuan against the US currency.

The severity of the impact of these factors on our overall profitability necessitated a comprehensive review and re-look at our business strategy during the second half of FY2005.

With the goal of returning the Group to profitability, management's strategy is to improve overall gross profit margin through various measures, including shedding low margin business, followed by ¡°right-sizing¡± the manufacturing operations. With our many long-standing business relationships, we are confident that we can continue to maintain our reputation as the industry leader for high quality die-cast collectibles. Whilst the steps taken may involve short-term pain, we believe that we will emerge stronger and in a better position to get back to the path of profitability.

We also look to the continued development of our third-party mould manufacturing business. I am pleased to report that both our subsidiary company, Creative Master L&W Limited, and our associate company, Tamiya Creative Master Engineering Limited, which provides consultancy services in the third-party mould manufacturing business, have in FY2005 made their maiden contributions to Group profits. Though their contributions are not presently significant to the Group, we believe third-party mould manufacturing can be developed into an additional growth driver for the Group.

With the losses recorded for FY2005, we are not, regrettably, able to recommend any dividend to be paid in respect of FY2005. We hope, however, that we would soon be in a position to resume the payment of dividends in the near future and to reward shareholders for their support during this period of consolidation and restructuring of our business focus.

On behalf of the board of Directors, I would like to thank the staff and management team for their hard work and dedication to Creative Master during this challenging period. My appreciation also goes to all our shareholders, clients, business associates, suppliers and financiers for their support.

Chou Kong Seng
Chairman

CEO'S STATEMENT

Operations Review

We recorded revenue of HK$409.7 million in FY2005, a decrease of 8.0% from FY2004. Revenue from our mould manufacturing activities increased by 26.6% to HK$129.8 million during FY2005, but this was more than offset by declines in deliveries of finished goods, particularly products for the mass-market segment.

Geographically, our main markets continue to be North America and Europe. In FY2005, these regions contributed an aggregate 89.9% to our revenues. While revenue from North American clients declined 23.3% to HK$217.3 million due primarily to decline in sales of mass-market products, revenue from customers in Europe rose 20.7% from HK$125.0 million in FY2004 to HK$150.9 million this year. The increase in revenue from Europe is due mainly to increased orders from a substantial customer in France.

During the year, we saw a 30.0% increase in the minimum hourly wage rate for factory workers following a directive by the local Chinese government which took effect in March 2005, the de-pegging of the Yuan against the US currency as well as a significant increase in the price of zinc, the principal material used in the manufacture of our die-cast collectibles, which largely could not be passed on to customers until after year-end, as prices had already been committed.

Gross profit fell sharply by 46.9% for a combination of the reasons explained above and also because of provisions of HK$2.8 million for slow-moving inventories and HK$1.6 million for asset impairment arising from discontinued mass-market operations. As such, despite more emphasis on manufacturing efficiencies, cost controls and a reduction in Selling, General & Administrative Expenses, we incurred a loss attributable to shareholders of HK$15.8 million.

Our excellent reputation as manufacturers of high-quality collectibles had in 2003 and 2004 earned us numerous referrals, particularly to clients in the mass-market segment. Though this segment had in past years generated significant revenue at reasonable profitability, manufacturing for this segment entailed larger production runs but at lower price points, leading to correspondingly lower margins. Moreover, revenues from this sector were not as stable or predictable as for our hobby-collectible clients. The less profitable revenue mix, and the unexpected reduction in orders from our largest mass-market client contributed significantly to our loss in FY2005.

Strategy

For these reasons, we undertook during FY2005 a review and rationalisation of our entire client base with the aim of eliminating lower-margin and less stable business.

We negotiated price increases across the board. Prices were revised upwards to reflect the higher labour cost and also provided for a further adjustment which was index-linked to the zinc market price. While a majority of our clients have agreed to the price revisions, a minority have not, as a consequence of which we will no longer carry on business with them.

Our cost-cutting efforts have been aggressive and broad ranging. We started in the second half of FY2005 to reduce headcount and salaries. In addition, we have rationalised our manufacturing facilities by consolidating certain operations and discontinuing others located in two factories. We have also negotiated to sell most of the equipment in these factories at net book value and written off leasehold improvements and accrued certain other costs totalling HK$1.6 million in aggregate.

These measures taken should help us move ahead towards our goal of returning to profitability. We also intend to continue to expand our third-party mould manufacturing business though our 70%-owned subsidiary, Creative Master L&W Limited, and our 50%-owned associate, Tamiya Creative Master Engineering Limited, both of which became profitable in FY2005.

Capital Expenditure

We invested HK$27.5 million in plant and equipment in the past year, with the upgrade of existing finished goods manufacturing facilities and the acquisition of additional equipment for our profitable and expanding mould manufacturing businesses. The capital expenditure level in FY2005 was significantly lower than the HK$40.0 million invested in FY2004. We expect the level of capital expenditure in FY2006 to further reduce.

Outlook

We expect 2006 to be another challenging year. However, we believe that many of our initiatives started in 2005 as described above will place us in a better position to meet these challenges. The management team and all our employees will strive to improve on our performance in 2006.

Carl Tong Ka Wing
Chief Executive Officer