Xinhua Far East Changes Konka Group's Outlook to Negative; Its Issuer Credit Rating Remains BB+

Xinhua Far East Changes Konka Group's Outlook to Negative; Its Issuer Credit Rating Remains BB+

HONG KONG, July 10 /Xinhua-PRNewswire/ -- Xinhua Far East China Ratings ("Xinhua Far East") today changed the outlook for Konka Group Co., Ltd. ("Konka" or "the Company"; SZ A 000016, SZ B 200016) to negative from stable. The issuer credit rating for Konka remains BB+.

The rating action was prompted by deteriorating results in Konka's handset business amidst an increasingly difficult operating environment. The negative outlook also reflects Xinhua Far East's concerns about the Company's stagnant market position in the wake of a new round of market restructuring in the domestic LCD-TV market. The rating action also incorporates the fact that Konka's financial profile is gradually eroding, a trend which is unlikely to reverse while the handset and TV markets remain so competitive.

Konka's handset business suffered greatly in 2005, mainly as a result of the trying operating environment, which has been characterized by stagnant growth, new brand launches and ODM product inflows. Its handset business saw a 52.7% decline in revenue in 2005 from 2004, a drop which contributed to most of the company's 79.2% net profit decline over the same period. The significance of this business to the Company also diminished in proportion to total revenue, accounting for 14.8% in 2005 compared to 26.7% the previous year.

Moreover, the negative outlook reflects Xinhua Far East's concerns about Konka's market position in its primary market -- TVs. With market demand for LCD-TV products soaring in China since 2005, both domestic and foreign market players have increased their exposure, resulting in greater shipments and plummeting prices. Konka's TV business has stagnated over this period, with falling domestic TV market revenues despite higher export sales (which have come at the expense of lower profit margins). Xinhua Far East believes the new round of competition introduced into the domestic TV market will only intensify in the future, further challenging Konka's market position and management capability.

At the same time, the Company's financial profile has been gradually deteriorating. In the two years since 2004, its net cash flow from operating activity has been negative, with the trend likely to continue in 2006. Its very thin EBIT margin is consequently vulnerable to further profit squeezing. Working to the Company's favor, however, are its net cash position and low financial leverage, which provide somewhat of a cushion amidst the fierce competition.

One of China's major TV and handset manufacturers, Konka reported turnover of RMB11.5 billion in 2005. As of the end of 2005, its largest shareholder was Overseas Chinese Town Group Corporation, which held a 15.1% stake.

Konka is a constituent of the Xinhua/FTSE 600 Index and the Xinhua FTSE China B All-Share Index. As of market close on July 7, 2006, its total A- share market capitalization and investable capitalization were RMB1.58 billion and RMB1.18 billion respectively. Its B-share market cap and investable cap were USD77.0 million and USD30.8 million respectively as of the same date.

For the rating report summary, please visit www.xinhuafinance.com/creditrating .

Note to Editors:

About Xinhua FTSE 600 Index and China B All-Share Index

Xinhua FTSE 600 Index is a benchmark index comprising stocks from the Xinhua FTSE 200 and 400, comprising the largest 600 companies in China, ranked by market capitalisation. Xinhua FTSE China 200 Index is the large cap index in the Xinhua FTSE China A Share Index Series and includes the top 200 companies in China by market cap. Xinhua FTSE 400 index is the mid cap benchmark index in the FTSE Xinhua A Index Series, which includes the 400 companies in China after the top 200, ranked by market capitalisation.

Xinhua FTSE China B All-Share Index is the principle large cap benchmark index in the Xinhua FTSE China B Index Series, covering B shares listed on the Shanghai and Shenzhen stock exchanges, providing international investors with exposure to the mainland Chinese market. For daily data and further information, see www.xinhuaftse.com .

About Xinhua Far East China Ratings

Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance partner company in 2003 and the first China member of The Association of Credit Rating Agencies in Asia in December 2003.

Capitalizing on the synergy between Xinhua Finance and Shanghai Far East, Xinhua Far East's rating methodology and process blend unique local market knowledge with international rating standards. Xinhua Far East is committed to provide investors with independent, objective, timely and forward-looking credit opinions on Chinese companies. It aims to help investors differentiate the credit risks among the corporations in China, thereby, cultivating their awareness and promoting information disclosures and transparency in China market.

For more information, see www.xfn.com/creditrating .

About Xinhua Finance Limited

Xinhua Finance Limited is China's unchallenged leader in financial information and media, and is listed on the Mothers board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China's financial markets and the world, Xinhua Finance serves financial institutions, corporations and re-distributors through four focused and complementary service lines: Indices, Ratings, Financial News and Investor Relations. Founded in November 1999, the Company is headquartered in Shanghai with 20 news bureaus and offices in 19 locations across Asia, Australia, North America and Europe.

For more information, please visit www.xinhuafinance.com .

About Shanghai Far East Credit Rating Co., Ltd

Shanghai Far East Credit Rating Co., Ltd. is the first and leading professional credit rating company with comprehensive business coverage in China. It is an independent agency established by the Shanghai Academy of Social Sciences with the mission to develop internationally accepted standards for capital market in China. The company is a pioneer in conducting bond- rating business in China. For years, it has been authorized by the Shanghai branch of the PBOC to undertake loan certificate credit rating.

Since establishment, it has rated over 1,000 corporate long-term bonds and commercial papers, based on the principles of objectivity, fairness and independence. The company has also maintained over 50% market share in the loan certificate-rating sector in Shanghai for three consecutive years. With its strong local presence and knowledge, it provides investors with unique and the most insightful credit opinion.

For more information, see www.fareast-cr.com .

More information:

Hong Kong
Joy Tsang
Corporate & Investor Communications Director
Xinhua Finance
Tel: +852-3196-3983
+86-21-6113-5999
+852-9486-4364
Email: joy.tsang@xinhuafinance.com

US
Ms. Ishviene Arora
Taylor Rafferty (IR/PR Contact in US)
Tel: +1-212-889-4350
Email: ishviene.arora@taylor-rafferty.com

Web sites: http://www.xinhuafinance.com/creditrating
http://www.xinhuaftse.com
http://www.xfn.com/creditrating
http://www.xinhuafinance.com
http://www.fareast-cr.com

Source: Xinhua Far East China Ratings

CONTACT: Ms. Joy Tsang in Hong Kong of Xinhua Finance;
+852-3196-3983, or +852-9486-4364, or +86-21-6113-5999, or
joy.tsang@xinhuafinance.com ; or Ms. Ishviene Arora in US of Taylor Rafferty
for Xinhua Finance, +1-212-889-4350, or ishviene.arora@taylor-rafferty.com

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