万科Ａ(000002)2002年年度报告（英文版）

2002 Annual Report Important Notice: The Directors individually and collectively accept full responsibility for the truthfulness, accuracy and completeness of the information contained in this report and confirmed that to the best of their knowledge and belief, there are no other facts that the omission of which would make any statement in this announcement misleading. Directors Ning Gaoning, Song Lin, Wang Yin, Eric Li Ka Cheung and Chen Zhiyu were not able to attend the board meeting in person due to their business engagements. Among these directors, the first four have authorised Director Li Chi Wing to represent them and vote on their behalf at the board meeting. Director Chen Zhiyu has authorised Chairman Wang Shi to vote on his behalf at the board meeting. The Company’s Chairman, Wang Shi, General Manager, Yu Liang, and Supervisor of Finance, Wang Wenjin, declare that: the financial reports contained in the annual report are guaranteed to be authentic and complete. Chairman’s Statement……………………………………………………………………2 Corporate Information……………………………………………………………………4 Accounts and Financial Highlights………………………………………………………5 Change in Share Capital and Shareholders...…………………………….………………6 Management and Employees.……………………………………………………..……10 Management Structure...………………………………………………………………..15 General Meetings...……………………………………………………………………..17 Directors’ Report………………………………………………………………………..18 Report of Supervisory Committee.……………………………………………………..39 Significant Events..……………………………………………………………………..41 A Chronology of 2001………………………………………………………………….44 Financial Report….……………………………………………………………………..45 Directory of Articles Reviewed…………………………………………………….…..87 1 1 Chairman’s Statement In the past year, the Group obtained encouraging returns from the continued expansion of its real estate business after the completion of its specialized restructure. The Group recorded steady growth in its results, with turnover and net profit amounted to RMB4,374 million and RMB382 million, representing increases of 3.50% and 1.66% from those of the previous year respectively. Earnings per share increased to RMB0.61. Net profit after deducting profit on sales of discontinuing operation went up by 99.27% from those of the previous year respectively. Review During the reported period, the property market of the PRC remained robust, with sales volume rising steadily. The market in general attained equilibrium. While the government continued to identify the property sector as one of the core industries to facilitate national economic growth, it strengthened monitoring and control of the market and made appropriate policy adjustments. Changes in the land transfer policy had once led to over intensified regional investments, which became catabatic in the second half of the year. The changes in land transfer policy helped to lay a solid foundation for the healthy development of the market. At the same time, the personal credit facilities offered by financial institutions provided a strong support for the steady growth in demand. The Group reported an expected outstanding performance in the past year since its implementation of market expansion strategy in 2000 and the completed formation of strategic alignment in the industry. Development and sales of property projects experienced rapid growth, with its sales revenue, net profit and area sold reaching RMB4,226 million, RMB382 million and 1.12 million square metres, representing increases of 32.8%, 68.5% and 62.3% from those of the previous year respectively. The Group obtained stable returns from its business development in Shenzhen, Shanghai, Beijing, Shenyang and Chengdu, which continued to be the principal profit contributor of the Group. The four markets, namely Wuhan, Nanjing, Changchun and Nanchang, that the Group entered in 2001 generated encouraging results, making significant profit contribution to the Group. In the meantime, the Group’s businesses in the aforesaid markets were gradually reaching the maturity stage, showing favourable development prospects. The success enjoyed in these markets not only translated into profit contribution from one single market, but also help the Group formulate its development plan for the next three years. The plan will help the Group to identify the right focus, enabling the Group to move towards intensive and regional development. During the reported period, the principal development strategies of the Group were to consolidate and improve resources allocation in its existing markets, and continued to look for new land resources in these markets. Besides, the Group carried out extensive study on strategies for development in the Zhujiang delta and Yangtze River delta. In 2 Shanghai, Shenzhen, Wuhan, Chengdu and Nanchang, the Group paved the way for sustainable development by obtaining certain amount of project resources in these cities. Moreover, the Group made its first move according to its intensive regional investment strategy, which targeted at the Zhujiang delta with Shenzhen as the nexus, by obtaining some project resources in Nanhai district of Foshan city. In the meantime, the Group possessed 7.06 million square metres of project resources to be developed. The Group has successfully issued convertible bonds of RMB1.5 billion, which provided strong support for the expansion of the operating scale of the Group’s core business. The Group’s overall financial and cash positions remained sound, with a reasonable asset-liability ratio. In the past year, the Group further enhanced its management efficiency. On business management front, the Group streamlined the flow of property development by fine-tuning and implementing the operation process of “specialised integration” and monitored the various project stages including planning and design, construction, property management and customer services, resulting in outstanding business operation. With an aim to enhance product quality and service, the Group, for the first time, conducted an extensive survey of customers’ satisfaction through a third party. The findings of the survey revealed the Group’s existing and impending problems, its niches and strengths, all of which would help the Group to achieve continued improvement in product and service and to attract more customers. During the year, the level of staff satisfaction had risen in the areas of the job itself and the working environment, the Group’s leadership and values, reward from work, future promotion and development. The company’s corporate culture had attracted many talented management people, further strengthening the management team. On brand building and marketing aspects, the brand’s theme line, “Live a boundless life” was well-recognised by customers, the market and staff. Prospects In view of the steady growth in demand, the residential properties will continue to be one of the driving forces for the national economic development in 2003. The residential market will therefore maintain stable growth. Enterprises with leading position and reputable brand name in the industry will have more development opportunities arisen from the following conditions: the government strengthened monitoring and made major adjustments to the macro economy; land assignment and mortgage financing increased; customers’ brand name awareness was created; and severe market competition. In the coming year, the Group will respond to government’s adjustments to the land policy and will keep a close scrutiny of the market changes. In addition to maintaining continued healthy growth, the Group will also initiate the formation of a new development plan. According to the intensive development focus, the Group will proceed with the regional development strategies, pursuant to which the Group will 3 expand to the cities within the Zhujiang delta and Yangtze River delta regions. The development approach will be based on the expansion of project resources in each individual city. In the coming year, the Group will examine and identify the strategies for development in the next three years and explore the core competitiveness of the Company in accordance with the changes in government policies and the market. With an egalitarian, win-win and learning attitude, the Group will actively explore possible collaboration opportunities for its various business divisions by examining different types of cooperation. I would like to take this opportunity to express my sincere gratitude to investors for their faith in the Company, to customers for their ardent support, and to our staff for their aggressiveness and dedication to the Company. Wang Shi Chairman Shenzhen, 18 March 2003 2 Corporate Information 1. Company Name (Chinese): 万科企业股份有限公司 Company Name (English): China Vanke Co., Ltd. (Vanke) 2. Legal Person Representative: Wang Shi 3. Secretary of the Company’s Board of Directors: Shirley L Xiao E-mail Address: xiaol@vanke.com Investor Relation: Xue Mantian E-mail Address: xuemt@vanke.com 4. Contact Address: The Company Office Address 5. Telephone Number: 0755-25606666 Fax Number: 0755-83152041 6. Registered Company Address and Office Address: No 63, Meilin Road, Futian District, Shenzhen, the People’s Republic of China Postal Code: 518049 7. Home Page of the Company: http://www.vanke.com 4 E-mail Address: zb@vanke.com 8. Media for Disclosure of Information “China Security Journal”, “Securities Times” and one Hong Kong English newspaper Website for Annual Report Posting: www.cninfo.com.cn 9. Place for Annual Report Collection: The Company’s Secretarial Office of Board of Directors 10. Stock Exchange on which the Company’s shares are listed: Shenzhen Stock Exchange 11. Company’s Share Abbreviation and Stock Codes on the Stock Exchange: Vanke A, 000002 Vanke B, 200002 12. First registration date of the Company: 30 May 1984 Location: Shenzhen Latest registration date: 24 May 2002 13. Corporate legal person registration no.: 4403011019092 14. Taxation registration code Local taxation registration code: 440304192181490 State taxation registration code: 440301192181490 15. The name and address of the Certified Public Accountants engaged by the Company: Name: KPMG Peat Marwick Huazhen Certified Public Accountants Address:16th Floor, Rm.1608, Block 2, China World Trade Centre, 1 Jianguomen Street, Beijing Name: KPMG Certified Public Accountants Address: 8th Floor, Prince Bldg., 10 Charter Road, Central, Hong Kong 3 Accounts and Financial Highlights 3.1 Three-year financial information summary (Unit: RMB) 5 2002 2001 2000 Revenue 4,374,017,880 4,226,113,439 3,703,432,859 Operating profit 525,852,261 499,068,815 398,176,532 Share of losses less (1,609,252) (64,850) (2,842,125) profits of associated companies Profit before tax 524,243,009 499,003,965 395,334,407 Taxation (126,591,097) (114,936,333) (77,611,744) Profit after tax 397,651,912 384,067,632 317,722,663 Minority interest (15,627,034) (8,268,501) (8,276,578) Net profit for the year 382,024,878 375,799,131 309,446,085 Earnings per share 0.61 0.60 0.49 Dividend 0.20 0.20 0.18 Note: The annual results were audited in accordance with International Accounting Standards. 3.2 Impact of IAS Adjustments on Net Profit and Net Asset for the year ended 31 December 2002 (Expressed in Renminbi Yuan) Net profit for the year Net asset at 2002.Jan-Dec 2002.Dec. 31 As determined persuant to PRC accounting 382,421,274 3,380,769,043 regulation: Adjustments to align with IAS: Recognition and amortisation of negative goodwill 1,445,978 3,090,293 Recognition and amortisation of goodwill 2,785,899 (2,389,315) Deferred tax assets (4,628,273) 2,936,250 Deferred tax liabilities (6,158,939) - Difference in revaluation of asset (17,146,128) - Dividend declared after year end 126,194,943 - Amortisation of discount on convertible bonds 15,802,683 - Discount on convertible bonds 116,785,201 - As restated in conformity with IAS 382,024,878 3,619,884,031 4 Change in Share Capital and Shareholders 4.1 Structure of Share Capital 6 (1) Change in Share Capital Structure of the Company Share Type Balance, （+，-） Balance, beginning Converted from end of the sum of the year convertible bonds year 1. Unlisted Shares a) State-owned hares 52,750,318 52,750,318 b) Legal Person Shares 57,754,610 57,754,610 Total Unlisted Shares 110,504,928 110,504,928 2. Listed Shares a) A Shares 398,711,877 +2,772 +2,772 398,714,649 b) B Shares 121,755,136 121,755,136 Total Listed Shares 520,467,013 +2,772 +2,772 520,469,785 Total Shares 630,971,941 +2,772 +2,772 630,974,713 Note: The changes in the Company’s total share capital and shareholding structure during the year, were due to the following reason: a) During the reported period, the Company did not engage in share placing, distribution of bonus shares, the transfer of capital surplus reserve to share capital, new share issue, but proceeded with the conversion of the Company’s convertible bonds, resulting in an increase of 2,772 shares of the Company’s listed A shares. b) A total of 48,192(24,096 separately) transferable shares held by Mr. Yao Mumin and Mr. Xu Gang, former Directors of the Company became transferable in December 2002 and thus led to a change in the shareholding structure of the Company. (2) Issue and Listing of Shares in the Last 3 Years The Company conducted 1999 rights issue at the beginning of 2000. Based on a total share capital of 545,537,481 shares after the 1998 bonus share issue, the rights issue was placed on the basis of 2.727 rights shares for every 10 existing shares. The subscription price was set at RMB7.5 per share. The registration period for placing of rights shares was between 7 January 2000 and 10 January 2000 and the payment period for rights shares was from 11 January 2000 to 24 January 2000. Since holders of the Company's State-owned shares, B shares, and major shareholders of legal person shares have undertaken not to exercise the rights to subscribe rights shares and have not transferred their rights, total number of rights shares being placed was 85,434,460 shares, including 85,431,546 public A shares and 2,914 legal person 7 shares. The 85,291,745 transferable shares were listed on the Shenzhen Stock Exchange on February 16, 2000. The 2001 proposal of issuing convertible bonds of the Company was implemented in June 2002, with the issue of 15 million convertible bonds to the public at a face value of RMB100 each. The total issue amount was RMB1.5 billion. The term of the convertible bonds was five years, with a nominal rate of 1.5%. The registration day of shareholding was 11 June 2002, while the payment period ran from 11 June to 13 June. Application for purchase of the bonds commenced on 13 June. The issue ended on 19 June. Dealings in the Company’s convertible bonds on the Shenzhen Stock Exchange commenced on 28 June 2002. Abbreviation and code of the convertible bonds are “Vanke bonds” and “125002”, respectively. The conversion of the convertible bonds into the Company’s A shares began on 13 December 2002 4.2 Description of Shareholders (1) As at 31 December 2002, the Company had 208,473 shareholders, including 195,506 A share holders (including 6 members of the Company's senior management) and 12,967 B share holders. (2) As at 31 December 2002, the top 10 shareholders of the Company were as follows: Change in number Percentage of shares Number of shares held held as during the at the end of the at Dec. 31 Shareholders reported period reported period Share Types 2002 (%) State-owned 12.37 China Resources National - 78,075,749 A shares shares, Legal Corporation Person shares Credit Lyonnais Securities 2.71 -6,205 17,073,528 B shares (Asia) Ltd Foreign Hua’an Securities Co., Ltd. +4,237,199 15,975,786 A shares 2.53 Liu Yuansheng - 12,158,127 A shares 1.93 Jing Fu Securities Investment 1.66 +6,095,974 10,444,040 A shares Fund Holy Time Group Limited +607,558 7,207,558 B shares Foreign 1.14 Staff Union Committee Legal Person 0.93 - 5,895,078 A shares of China Vanke Co., Ltd. shares Jing Hong Securities 0.88 +1,492,129 5,563,029 A shares Investment Fund Shanxi Securities Co., Ltd. - 3,679,833 A shares Legal Person 0.58 8 shares Yu Yang Securities 0.45 -1,374,119 2,856,005 A shares Investment Fund Notes: a) The 17,073,528 B shares in the Company (2.71% of the Company’s total share capital) held by Credit Lyonnais Securities (Asia) Ltd.-the Company’s second largest shareholder, is beneficially owned by China Resources Land Limited, which is a connected company of China Resources (Holdings) Co., Ltd. (“CRH”). CRH and CRNC are connected companies. The 6,205 shares reduced during the period originally held by the nominal shareholder was beneficially owned by other shareholders. b) Jing Fu Securities Investment Fund and Jing Hong Securities Investment Fund are connected funds. (3) Largest Shareholder CRNC is the largest shareholder of the Company. Established in 1986 with a registered capital of RMB9,658 million, its major asset is the 100 per cent equity interest in CRH. CRNC is a state-owned enterprise managed by the Central Enterprise Managing Committee. It is principally engaged in distribution, property development, high technology development and strategic investments. The registered address of CRNC is No.8 Jianguomenwai North Street, Dongcheng District of Beijing, and Mr. Chen Xinhua is the Legal Person Representative. As at the end of the reported period, CRNC and its related companies own a total of 95,149,277 shares in the Company, representing 15.08 per cent of the Company’s total share capital. 4.3 Major Convertible Bonds Holders (as at 31 December, 2002) No. of bonds held as at the Face value of bonds Bond holders end of reported period (RMB) China Resources (Holdings) Co., 2,295,420 229,542,000 Ltd. Huaxia Development Securities 736,390 73,639,000 Investment Fund Peng Hua Business Development 572,870 57,287,000 Securities Investment Fund Shanghai Yangyang Daduoli Special 556,170 55,617,000 Tack Co., Ltd. Xingye Securities Co., Ltd. 551,110 55,111,000 Tong Sheng Securities Investment 469,000 46,900,000 Fund Yin Feng Securities Investment Fund 395,270 39,527,000 9 Hua’an Securities Co., Ltd. 360,860 36,086,000 Tong Yi Securities Investment Fund 309,100 30,910,000 Xing Ke Securities Investment Fund 279,450 27,945,000 Notes: a) The initial conversion price of the Company’s convertible bonds was RMB12.10 per share. As the Company implemented the dividend distribution proposal for the year 2001, under which a cash dividend of RMB0.2 per share was paid, on 17 July 2002, the initial conversion price of the convertible bonds was adjusted to RMB11.90 per share after dividend payment. b) Since the conversion of the Company’s convertible bonds into the Company’s A shares began on 13 December 2002, there had been 330 convertible bonds had been converted into a total amount of 2,772 A shares of the Company up to 31 December 2002. 4.4 Trading in the Company’s Share a) A shares First Highest Lowest Closing Total Total Total transaction price of price of price at the transaction volume in amount in Year price the year the year year end days billion shares billion yuan 2000 9.80 16.25(03/01) 9.60(01/04) 13.99 239 1.7737 23.4515 2001 14.00 15.99(09/25) 12.12(10/22) 13.35 236 0.9280 13.4603 2002 13.01 13.78(03/12) 9.40(12/31) 9.65 232 0.4127 5.0724 b) B shares First Highest Lowest Closing Total Total Total amount transaction price of price of price at the transaction volume in in million Year price the year the year year end days million shares HKD 2000 3.07 4.88(08/22) 2.99(01/05) 4.8 231 107.39 428 2001 4.70 11.36(05/28) 4.20(02/12) 8.87 230 284.66 2,788 2002 8.88 8.91(01/04) 4.95(11/18) 5.48 232 66.08 522 5 The Company’s Management and Employees 5.1Directors, members of the Supervisory Committee and senior management Brief Introduction to Directors Wang Shi, male, born in 1951, is the founder of the Company. He organized “Shenzhen 10 Exhibition Center of Modern Science and Education Equipment”, the predecessor of Vanke, in 1984, and acted as General Manager. The company was reorganized into China Vanke Co. Ltd., a shareholding company, in 1988, at which time Mr. Wang became Chairman and General Manager as well as Legal Person Representative of the Company. Mr. Wang no longer acted as the General Manager with effect from 1999. In 2002, he was re-appointed as the Chairman of the Company for a three-year term. Ning Gaoning, male, born in 1958. He became a Director of the Company in 2000, and was re-appointed as a Director and became the Deputy Chairman of the Company in 2002 for a three-year term. In 1999, he became the Deputy Chairman and General Manager of CRH and CRNC, the Chairman of China Resources Ent. Ltd. and China Resources Beijing Land Limited. Song Lin, male, born in 1963. He became a Director of the Company in 2001, and was re-appointed as a Director in 2002 for a three-year term. In 2000, he became the Executive Director and Deputy General Manager of CRH and in 2001, the Deputy Chairman and Managing Director of China Resources Ent. Ltd. He is also the Chairman of China Resources Logic Limited. Yu Liang, male, born in 1965, joined China Vanke in 1990. He was appointed as a Director in 1994 and became the Deputy General Manager in 1996. In 2002, he was re-appointed as the Director for a three-year term. He became the Executive Deputy General Manager and in charge of finance of the Company in 1999. He became the General Manager in 2001. Chen Zhiyu, male, born in 1954. He became a Director of the Company in 1997, and was re-appointed a Director in 2002 for a three-year term. He is the Director of Jenston International (HK) Limited. Wang Yin, male, born in 1956. In 2002, he was elected as a Director of the Company with a three-year term. He had worked for the Foreign Trade and Economic Cooperation Department. He became a Director and Assistant General Manager of CRH in 2000 and the Managing Director of China Resources Land Limited in 2001. He became a Director and Deputy General Manager of CRH in 2003. Mo Jun, male, born in 1967, joined China Vanke in 1991 and became a Director in 2002 for a three-year term. He became the Deputy General Manager of the Company in 2000. In 2001, he became the Executive Deputy General Manager of the Company. Brief Introduction to Independent Directors Sun Jianyi, male, born in 1953. He was appointed as a Director in 1995. In 2002, he was re-appointed as an Independent Director for a three-year term. He is currently the Executive Deputy General Manager of Ping An Insurance Company of China, and Vice 11 CEO since January 2003. Eric Li Ka Cheung, male, born in 1953, a citizen of Hong Kong Special Administrative Region. In 2002, he was elected as an Independent Director of the Company with a three-year term. He is the Chief Accountant at Li, Tang, Chen & Co., Certified Public Accountants, a member of the Hong Kong Legislative Council as well as a member of the Tenth National Committee of Chinese People’s Political Consultative Conference. Li Chi Wing, male, born in 1959, a citizen of Hong Kong Special Administrative Region. In 2002, he was elected as an Independent Director of the Company with a three-year term. He is Executive Director of DTZ Debenham Tie Leung and Managing Director of DTZ Debenham Tie Leung Property Management Company Limited. Feng Jia, male, born in 1956, he used to be the Deputy General Manager of the Company and became a Director in 1998, then he expired in 2001 after his three-year term. He was appointed as an Independent Director in 2002 for a three-year term. He is currently the Chairman and General Manager of Shenzhen International Corporate Service Co., Ltd. Brief Introduction to Members of the Supervisory Committee Ding Fuyuan, male, born in 1950, joined China Vanke in 1990. He became a member of the first Supervisory Committee of the Company in 1993. He was appointed as the Chief Supervisor in 1995 and acted as a Convenor of the Supervisory Committee of the Company in 2001 for a three-year term. He is the Secretary of Communist Party Committee of the Company. Jiang Wei, male, born in 1963. He was appointed as a member of the Supervisory Committee in 2001 for a three-year term. He joined CRH in 1988. Since 2000, he has been the Director and General Manager of Financial Department of CRH and since 2002, Director and the Supervisor of Finance. Xie Dong, male, born in 1965, joined China Vanke in 1992. He was representative of the China Vanke staff union. He was elected as a member of the Supervisory Committee in 1997. He is the Supervisor of Human Resources of the Company. Senior Management For biography regarding Richard L. Yu and Mo Jun, please refer to the “Brief Introduction to Directors”. Ding Changfeng, male, born in 1970, joined China Vanke in 1992, has been the Deputy General Manager of the Company since 2001. Liu Aiming, male, born in 1969, joined China Vanke as Deputy General Manager of the 12 Company in 2002. Chen Zhiping, male, born in 1964, joined China Vanke in 1990, has been the Deputy General Manager of the Company since 2001. Wang Wenjin, male, born in 1966, joined China Vanke in 1993, has been the Supervisor of Finance of the Company since 2002. Shirley L. Xiao, female, born in 1964, joined China Vanke in 1994 as Deputy Chief of the Company’s Office. She became the Secretary of the Board and Chief of the Company’s Office in 1995. Change in Shareholding of Directors, Members of Supervisory Committee and Senior Management No. of Shares Held at No. of Shares Held Name beginning of 2002 at the end of 2002 Wang Shi 139,559 139,559 Sun Jianyi 24,096 24,096 Yu Liang 38,914 38,914 Ding Fuyuan 40,255 40,255 Note: Mr. Sun Jianyi is an Independent Director. The remuneration of each of the Company’s senior management is determined in accordance with the market standard and the overall operating results of the Company for the year. The Company follows the principle of its remuneration policy, which is “based on market principles, offer competitive salaries to retain and attract high-calibre professionals”. In collaboration with a consultancy firm, the Company conducted a survey of the salary levels in the industry and, based on the survey findings, determined the overall remuneration range for its staff, including the senior management. The actual remuneration (including bonus) of each employee was calculated according to the above-mentioned factors and individual performance. The remuneration of the General Manager (whose performance appraisal was conducted by the Chairman) was also determined in accordance with the aforesaid principles. Remuneration of the Company’s Directors, members of Supervisory Committee and senior management for the year amounted to RMB4.39 million, of which one person received between RMB600,000 and RMB650,000; one person between RMB500,000 and RMB590,000; four person between RMB400,000 and RMB490,000; four persons between RMB300,000 and RMB390,000; and one below RMB300,000. The three Directors with highest remuneration received RMB1.64 million, while the 3 senior 13 management with highest remuneration received RMB1.41 million. Ning Gaoning, Song Lin, Chen Zhiyu, Wang Yin and Jiang Wei, the five directors and members of the Supervisory Committee, received a monthly salary of RMB2,500 (including tax) during their tenure, while Sun Jianyi, Eric Li Ka Cheung, Li Chi Wing and Feng Jia, the four independent directors, received a monthly salary of RMB5,000 (including tax) during their tenure, without other types of remuneration or allowance. Reasons for the resignation of Directors, members of the Supervisory Committee and senior management during the reporting period During the reported period, due to shareholders’ opinions and the change of shareholding in the Company, Yan Biao, Zhong Yi, Xu Gang and Xue Bo handed in their resignation as directors. Chen Geng and Yao Mumin also handed in their resignation as directors due to hectic business schedule and health condition respectively. The resignations from the aforementioned directors were approved by the Board of Directors. Huang Tieying did not stand for re-election after the expiry of his three-year term in the Board of Director. Subsequent Event Due to health condition, Chen Zuwang resigned from the position of Deputy General Manager of the Company in March 2003. The Board has approved his resignation. Appointment of Deputy General Manager, Supervisor of Finance and Secretary of the Board of Directors of the Company Wang Wenjin was appointed as the Supervisor of Finance of the Company at the Eighth Meeting of the Twelfth Board of Directors. The First Meeting of the Thirteenth Board of Directors approved the continued appointment of Shirley L. Xiao as the Secretary of the Board of Directors. At the Fourth Meeting of the Thirteenth Board of Directors, Liu Aiming was appointed as the Company’s Deputy General Manager. 5.2 Number and breakdown of staff As at 31 December 2002, there were 6,055 employees (including 8 retired staff) under the Company’s payroll, of which 36% with tertiary qualifications. The breakdown of staff by job nature was as follows: 262 sales personnel (sales and planning), 866 real estate personnel (engineering, design, cost management, project development and related affairs, and property management), 491 other professional personnel (finance, audit, IT, legal, human resources, customer relation and data management), and 4,436 property management and administration supportive staff (security, cleaning, logistics, other property management staff and drivers). The breakdown of staff by age was as follows: 3,587 employees (59%) were below 30; 2,216 employees (37%) were between 30 and 40; and 252 employees (4%) were over 40. The average age of staff was 30. 14 6 STRUCTURE OF CORPORATE GOVERNANCE 6.1 Explanations in Accordance with the Regulations on Corporate Governance The Company has been in compliance with the Company Law, the Securities Law and other laws and regulations in relation to the management of listed companies, with a view to continue to fine-tune the Company’s corporate governance structure and standardise its operation procedures. In accordance with the “Regulations on the Management of Listed Companies”, the Company will elaborate on the competition with the Company’s single largest shareholder China Resources National Corporation and its related companies (“CRNC Group”) in similar businesses. Investors are urged to pay attention to this matter. China Resources Land (Beijing) Limited ("CRL Beijing"), a 50.43% owned subsidiary of the Company’s single largest shareholder CRNC Group, is competing with the Company in residential property business. As such, to the Company, there exists the risk of competition in similar businesses between the Company and the substantial shareholder and its related parties. The above-mentioned competition originated from the transfer of the Company’s legal person shares to CRNC Group in 2000. As a result, CRNC Group owns 15.08% of the Company’s total share capital and, through its shareholding of 50.43% in CRL Beijing, implements the development strategies of its property business. On the surface, competition emerges in similar businesses. Since its establishment, CRL Beijing has completed close to 50 property development projects of various types. In 2000, residential projects including Leisure Garden, Phoenix City, Majestic Garden, Jing Tong Sunny Up Town developed by CRL Beijing in Beijing were well received by the market. In 2001, CRL Beijing’s turnover from sales of commodity housing amounted to RMB3 billion. Currently, CRL Beijing’s total assets and net assets are close to RMB8 billion and RMB4 billion respectively, while area developed has been accumulated to 2 million square metres. In 2002, CRL Beijing began to adjust its business strategies to meet market demand, by carrying out nationwide expansion, in addition to its base in Beijing. As the first step of its national development strategy, CRL Beijing established regional companies in Shanghai and Chengdu, and obtained an area of 200,000 square metres in Dong Jia Du area of Huangpu district, along the bank of the Huangpu River in Shanghai city and a residential project with a gross floor area of almost 700,000 square metres in the Second Ring Road of Chengdu city. CRL Beijing will consider entering the markets of Nanjing and Chongqing in the next three years. Working groups have been dispatched to these two markets to make preliminary preparation. CRL Beijing will fine-tune its projects and products in a systematic and well-planned manner and according to principle and 15 strategies, and will ensure the accomplishment of the aforementioned refining work through specialised business activities, market-driven operation, modernised management. Although CRL Beijing’s product positioning in terms of geographical location, market and target customer differs from that of the Company, CRL Beijing’s development strategy, development projects in Beijing, as well as land bank in Shanghai and Chengdu pose risk to the Company of competition for customer base in the same business sectors. The competition in similar businesses will spread with CRL Beijing’s implementation of a trans-regional expansion plan for its property development business. However, such type of competition is completely market-driven. To ensure China Vanke’s property business development, CRNC Group has made an undertaking to the Company that it will provide as much support to China Vanke as it did in the past, and that it will remain impartial in the event of any competition between the investment projects of China Vanke and that of CRNC and its subsidiaries, and in the event of any disagreements or disputes arising from such competition.Until now, the Company’s normal business development and expansion has not been affected by CRL Beijing’s business expansion and CRNC Group’s being the Company’s single largest shareholder. 6.2 Performance of the Independent Director At the Fourteenth AGM of the Company held in June 2002, Sun Jianyi, Eric Li Ka Cheung, Li Chi Wing and Feng Jia were elected as independent directors. The four independent directors, having taken into account the interest of the Company’s shareholders and particularly that of the minority shareholders, gave independent advice during discussion of the various resolutions considered at the Board of Directors’ meetings held in 2002, and therefore have fulfilled their duties as independent directors in good faith. 6.3 The independence of business operation, employees, assets, organisation and finance from the Company's controlling shareholder The Company's single largest shareholder is CRNC and its related (which together held 15.08 per cent of the share capital of the Company at the end of the year). The Company's business operation, employees, assets, organisation and finance are completely independent from those of its single largest shareholder. This allows the Company to maintain independence in business integrity and autonomy in operation. 6.4 The establishment and implementation of appraisal and 16 incentive systems for senior management The Company joined hands with a consultancy firm to introduce a balanced scorecard as the performance management system. According to the balanced scorecard concept, the performance measurement benchmarks for the senior management are set according to the business objectives during the year, which in turn are governed by the objectives of the Company’s medium to long-term development strategies. Evaluation of the Company’s performance is subject to four areas, including finance, customers, internal logistics and staff training and development. Senior management are required to report duties on a year basis and are evaluated according to the performance measurement benchmarks. By appointing an independent third party to conduct a staff satisfaction survey and customer satisfaction survey, the Company can undertake appraisals with objective data. At the start of the year, the performance measurement benchmarks for the senior management are set according to the business objectives for the year, which in turn are governed by the objectives of the Company’s medium to long-term development strategies. At the end of the year, the Company’s General Manager will determine the remuneration of the senior management according to the Company’s operating results for the year, customer satisfaction, potential for sustainable development, staff satisfaction, and the salary level in the industry. The performance of the General Manager will be reviewed by the Chairman. To attract and maintain high-level talent and to encourage them to render long-term service to the Company, the Board of Directors passed the “resolution regarding the preferential house purchasing policy”, pursuant to which the Group’s medium to high-level management talent and excellent employees with significant contribution will be given preferential terms to buy housing developed by Vanke as medium- to long-term welfare. The related resolution was disclosed in the announcement of the Fourth Meeting of the Thirteenth Board. 7 General Meetings 7.1 The Fourteenth Annual General Meeting The Fourteenth AGM was held at the Vanke Architecture Research Centre, Meilin Road of Shenzhen, on 12 June 2002. The notice for convening the AGM was published in China Securities Journal, Securities Times and Hong Kong iMail on 23 April 2002. The last day for verifying the qualification of shareholders was 24 May 2002. A total of 40 proxies and/or shareholders, representing 158,958,315 shares in the Company or 25.19 per cent of the Company’s total share capital, attended the AGM. The following resolutions were approved at the meeting: (1) the amendment of the Company’s articles of association; (2) the Working Report of the Board of Directors for the year 2001; (3) the Audited Financial Report and Auditors’ Report for the year 2001; (4) the dividend distribution proposal of year 2001; (5) the profit allocation policy of year 2002; (6) 17 confirmation of termination of Zhongtianqin Certified Public Accountants and appointment of KPMG Peat Marwick Huazhen Certified Public Accountants as the Company’s auditors for the year 2001; (7) the appointment of KPMG Huazhen Certified Public Accountants and KPMG Certified Public Accountants as the Company’s auditors for the year 2002, with auditors’ remuneration of RMB700,000 and HK$1,000,000 respectively; (8) the election of Wang Shi, Ning Gaoning, Song Lin, Richard L. Yu, Chen Zhiyu, Wang Yin and Mo Jun as directors and Sun Jianyi, Eric Li Ka Cheung, Li Chi Wing and Feng Jia as independent directors to form the Thirteenth Board of Directors of the Company; (9) the proposal on the remunerations of directors, independent directors and members of the Supervisory Committee; (10) the Work Report of the Supervisory Committee for the year 2001. The above resolutions were published in China Securities Journal, Securities Times and Hong Kong iMail on 13 June 2002. 7.2 Election, Change of Directors and Members of Supervisory Committee Please refer to the above paragraphs for details, namely, “Reasons for the resignation of Directors, Members of the Supervisory Committee and Senior Management during the year under review” and “The Fourteenth Annual General Meeting”. 8 Directors’ Report 8.1 Management’s Discussion and Analysis During the reported period, with the continued rapid development of the national economy, the property market of the PRC remained robust. In general, supply and demand were in balance. According to the latest statistics from the National Bureau of Statistics of the PRC, property investment and the area of commodity housing sold in the PRC in 2002 increased by 21.9% and 20.2% from those of last year. In May 2002, the Ministry of Land and Resources promulgated “Regulations on Transfer of Land Use Right of State-owned Land through Competitive Bidding, Public Auction and Public Trading”. Affected by the changes in land policy, a trend of large-scale land resources acquisition emerged in certain regions of the PRC, causing land price to soar rapidly within a short period of time. As a result, growth rate of property investment in the first half of 2002 exceeded that of last year and the growth rate of sales during the same period. However, after the early warning from the central bank and the industry’s self-motivated adjustment, the growth rate of property investment significantly slowed down to reasonable level. Simultaneously, market sales showed a steady upward trend. As at the end of December, the area amount of commodity housing sold and that of commodity residential properties sold in the PRC increased by 23.7% and 23.1% from those of the same period of the previous year 18 respectively. 2002 marked the third year of the Group’s implementation of its market and scale expansion strategy. While existing markets, including Shenzhen, Shanghai, Beijing, maintained steady growth, the new markets of Wuhan, Nanjing, Changchun and Nanchang began to contribute expected returns according to schedule. The Group’s property development business increased its operating scale and profit, and displayed good development prospects. During the year, the Group booked a total gross floor area of 1.12 million square metres and a revenue of RMB4,226 million, representing increases of 62.3% and 32.8% from those of the previous year. The Group accounted for 0.94% of the national market share. The Group’s market share in Shenzhen, Shanghai, Beijing, Tianjin, Chengdu stood at 2.37%, 0.97%, 0.89%, 1.68%, and 1.96% respectively (source of information: National Bureau of Statistics of China, www.realestate.cei.gov.cn). In the past year, the Group continued to intensify investment in its existing markets. The Group had identified new projects in Shenzhen, Shenyang, Chengdu, Nanchang, Wuhan and Tianjin. As the expansion strategy began to produce results, the Group started to conduct extensive research and to proceed with the regional development strategies directed at the Zhujiang delta and Yangtze River delta. Moreover, the Group also tried to adopt regional management approach. During the period, the Group succeeded in obtaining a piece of land in Nanhai district of Foshan city. As at the end of 2002, the Group possessed 7.06 million square metres construction area of land resources to be developed, of which 1.86 million square metres was newly added resources. For the year 2002, the Group reported the area of new construction was 1.67 million square metres, area of completed construction was 1.18 million square metres and sales of 1.17 million square metres, which represented increases of 45.2%, 37.9% and 74.3% from those of the previous year. The net profit of the Company’s property development business was RMB382 million, representing an increase of 68.5% from that of the previous year. During the year, the Group’s major projects available for sale in Shenzhen included Shenzhen Four Seasons Flower City, Shenzhen Paradiso and phase III of Shenzhen Metropolitan Apartments. The development of phases V, VI and VII of Shenzhen Four Seasons Flower City, which were launched during the year, during the period, 140,000 square metres was sold, the project has now been completed, and an aggregate 92% of the project has been sold. Located in Red Wood district by the side of Shenzhen Bay, phase I of Shenzhen Paradiso has been launched to the market for pre-sale since July 2002, and 49,000 square metres has already been sold. This project has obvious advantage over other competing residential developments in the area. During the year, phase III of Shenzhen Metropolitan Apartments commenced sales, with sales remaining 19 stable. In Shanghai, phases I and II of Shanghai Holiday Town and phases I and II in the new district to the south of Vanke City Garden were the major projects for sale. The first phase of these two projects, together constituting an aggregate area of 44,000 square metres, was sold out respectively. The second phase of the two projects, with an aggregate area of 112,000 square metres, reported an average of 95% being sold. Beijing Green Garden continued to experience brisk sales, while sales of Beijing Star Garden remained stable. A total of 138,000 square metres of the two projects was sold. In Shenyang, the development of the Garden New Town project was basically completed during the year, with 52,000 square metres sold and an aggregate 95% being sold. The first phase of Shenyang Metropolitan Apartments and Shenyang Four Seasons Flower City raised market awareness; 98,000 square metres of these two projects together had been sold. Phases II of Chengdu City Garden maintained robust sales. During the period, 83,000 square metres and an aggregate of 86% of Chengdu City Garden had been sold. In Wuhan, Nanjing, Changchun, Nanchang, the Group’s brand image received lots of publicity and began to produce results. During the period, 125,000 square metres and 94% of Wuhan Four Seasons Flower City had been sold. Phase I of Nanjing Metropolitan Apartments, with a total area of 69,000 square metres, was sold out within only five months. 71,000 square metres and 85% of phase I of Changchun City Garden had been sold. 81,000 square metres and 97% of phases I and II of Nanchang Four Seasons Flower City had been sold. During the period, the Group’s corporate image, planning and design, project construction received public recognition. Vanke Architecture Research Centre received three Golden Stone Awards in the “Planning and Design Category”, “Quality Construction Category”, “Good Enterprise Image Category”. Shenzhen Paradiso was also granted the Golden Stone Award in the “Planning and Design Category”; Wuhan Four Seasons Flower City was awarded “China’s Prestigious Development Prize” at the 4th China (Shenzhen) International Housing and Archi-Tech Trade Fair; Tianjin Garden New Town was accredited as “Well Planned and Implemented Project in Tianjin City” by Tianjin Municipality Planning Bureau; Shenyang Garden New Town was accredited as “A Model Community of Ecology and Environment Protection in Shenyang City”; Shenzhen Vanke Real Estate Co. Ltd. was awarded the First Prize of the annual Comprehensive Real Estate Development Capacity in Shenzhen of Year 2001 for the fourth consecutive year. During the past year, the management continued to streamline operation process and to enhance management efficiency. On operation front, the management actively implemented the operation process of “specialised integration”, fine-tuning the flow of all systems, results and standards, and proceeded with the completion of this programme. Taking account of customers, the Group strived for preparation and establishment of a customer service system, resulting in higher efficiency in solving problems. By conducting extensive surveys of customers’ satisfaction, the Group aimed at making continued improvement in its products and services, thereby maintaining customers 20 satisfaction and increasing their loyalty. On evaluation of its employee relations, the Group used balanced scorecard, a management tool, and adopted corresponding measures, as well as promoted corporate core values, to stimulate employees’ understanding of the Group’s development strategy and the formulation of objectives and action plans, thereby strengthening the formation of corporate culture. During the year, the Group implemented the brand-building strategy of “Live a boundless life”. The first phase of the strategy – “Know your way of living. Build a life you desire” had earned recognition from the market. While reporting the aforesaid achievement and results, the Group also specifically urged investors to pay attention to the loss of RMB38.7 million made by the Group’s subsidiary, Tianjin Company. The main reasons for the loss were as follows: 1) The Tianjin Glass Factory project, which had been planned to be booked for the year, was not booked due to a hold-up in the completion of procedures. The 22,000 square metres of area sold of the People Tree project could not be booked due to the incompletion of the project as scheduled. 2) Given that People Tree’s planned net site area available for use was reduced and Tianjin Garden New Town project’s construction area was reduced, the project’s cost increased and gross profit dropped. Moreover, the profit generated from booked projects was not sufficient to cover the cost of managing Tianjin Company’s relatively large total amount of assets and its overhead. 3) Tianjin Company made a provision for customer compensation of approximately RMB11 million for the delay in project completion and maintenance of the project at the latter stages. 4) The company took the responsibility for loss incurred in property management and paid for a subsidy of approximately RMB9.8 million. 5) A provision for diminution in value of RMB3.44 million was made for inventories of projects. In addition to external influence, the management believed that the imbalanced project development, and the ineffective internal operational management were also the important reasons for Tianjin Company’s loss. The management considered that, given time, these two factors could be improved through adjustment and effort. 8.2 Company’s Operations (1) The scope and operations of the Company’s core business The Company's core business is property development. China Vanke has been engaged in the development of properties since 1988. It was among the first developers of residential properties for sale in the PRC. The Company decided to focus on property development in 1992, and has since concentrated its efforts on the development of residential properties. Following the sale of its interests in Vanguard in 2001, the Group has completed its business rationalisation. Turnover RMB ‘000 % 21 Property 4,226,431 96.63 Others 147,587 3.37 Net Profit RMB ‘000 % Property 382,334 100.08 Others -309 -0.08 Breakdown of turnover (RMB million) and net profit (RMB million) of property development by regions Turnover RMB ‘000 % Shenzhen 1,020,085 24.13 Shanghai 686,017 16.23 Beijing 607,622 14.37 Shenyang 461,945 10.93 Nanjing 342,733 8.11 Wuhan 272,884 6.46 Chengdu 251,780 5.96 Changchun 200,596 4.75 Nanchang 165,766 3.92 Tianjin 217,699 5.14 Others -696 - Net Profit and Booked Area RMB ‘000 % Sqm’000 % Shenzhen 156,480 37.36 207 18.53 Shanghai 73,482 17.55 147 13.14 Beijing 24,805 5.92 127 11.39 Shenyang 30,019 7.17 149 13.36 Nanjing 32,133 7.67 69 6.14 Wuhan 28,499 6.81 116 10.40 Chengdu 37,130 8.87 87 7.80 Changchun 20,308 4.85 68 6.06 Nanchang 15,920 3.80 80 7.21 Tianjin (35,959) - 67 5.97 Others (484) - (0) - Note: During the period, the ratio of the Company’s revenue to booked area showed that the Group’s booked price of RMB3,947 per square metre in 2002 was lowered by RMB908 when compared with RMB4,855 per square metre of the previous year. The downward adjustment was mainly attributable to the structure of booked projects: 1) the 22 average market price of the three profit-contributing markets of Wuhan, Changchun and Nanchang was far below that of other markets; 2) during the period, large-scale medium-end projects accounted for a relatively large proportion in the booked projects. Turnover, Cost, Gross Profit Margin and Market Share of Major Products The Group specializes in property development business with commodity residential properties as its major products. In 2002, the booked area, turnover and booked cost was 1.12 million square metres, RMB4.23 billion and RMB3.34 billion respectively. The gross profit margin for the year was 21.02%. In 2002, the commodity residential properties sold in the PRC amounts to RMB471 billion, the Company’s market share was 0.94%(source of information: National Bureau of Statistics of China, www.realestate.cei.gov.cn). (2) Operating Results of the Wholly-owned Subsidiaries and Holding Companies (Unit: RMB ‘000) Company Name Percenta Commerci Net profit Total Asset Major operating ge of al sales in in 2002 at the end project equity 2002 of 2002 in 2002 held 1,020,085 156,480 2,355,899 Shenzhen Vanke Real 100 Four Seasons Flower Estate Company City, The Metropolitan Limited Apartments, Paradiso, East Coast 686,017 73,482 1,472,708 Shanghai Vanke City 100 Holiday Town, City Garden Development Garden New Area Company Limited South Part, Baoshan, Jinfeng 607,622 24,805 1,424,300 Beijing Vanke 100 Star Garden, Green Enterprise Garden Shareholding Company Limited 251,780 37,130 384,128 Chengdu Vanke Real 100 City Garden Estate Company Limited 23,250 (38,692) 1,093,068 Tianjin Vanke 100 Garden New Town, 23 Real Estate People Tree Company Limited 461,945 30,019 743,450 Shenyang Vanke 100 Four Seasons Flower Real Estate City, The Metropolitan Development Apartments Company Limited 272,884 28,499 347,728 Wuhan Vanke Real 100 Four Seasons Flower Estate Company City Limited 342,733 32,133 199,832 Nanjing Vanke 100 The Metropolitan Real Estate Company Apartments Limited 200,596 20,308 196,304 Changchun Vanke 100 City Garden Real Estate Development Company Limited 165,766 15,920 110,839 Jiangxi Vanke Yida 50 Four Seasons Flower Real Estate City Development Company Limited Note: As for the registered capital of the above subsidiaries, please refer to note 14. The Group’s Major Property Projects in 2002 (unit: square metre) Total Area under Planned construction Completed Accumulated Project Name Location Area in 2002 Area in 2002 Completed Area Shenzhen Four Seasons Longgang 178,506 89,929 175,636 175,636 Flower City (second district) Shenzhen Four Seasons Longgang 52,055 - 52,055 52,055 Flower City (third district) Shenzhen Metropolitan Futian 183,200 - 55,306 182,785 Apartments Shenzhen Paradiso Futian 265,828 91,072 - - Shenzhen East Coast Yantian 214,800 77,000 - - Shanghai Holiday Town Minhang 576,000 227,000 88,000 170,000 Shanghai City Garden New Minhang 155,752 137,173 38,409 38,409 Area(south part) 24 Shanghai Baoshan Project Baoshan 227,205 184,923 - - Shanghai Jinfeng Project Minhang 92,500 33,709 - - Beijing Star Garden Chaoyang 393,302 85,606 - 161,635 Beijing Green Garden Chaoyang 314,591 63,721 63,721 177,682 Tianjin Garden New Town Beichen 336,313 9,233 21,874 317,256 Tianjin People Tree Beichen 112,275 51,134 50,623 50,623 Shenyang Metropolitan Dadong 164,676 124,597 47,932 47,932 Apartments Shenyang Four Seasons Yuhong 566,157 173,437 94,588 94,588 Flower City Changchun City Garden Erdao 185,983 32,620 96,778 96,778 Chengdu City Garden Jinjiang 576,000 73,217 89,500 194,780 Wuhan Four Seasons Dongxihu 263,618 72,536 142,468 142,468 Flower City(east district) Nanjing Metropolitan Jianye 148,488 39,300 82,500 82,500 Apartments Nanchang Four Seasons Gaoxin 247,386 102,386 84,386 84,386 Flower City Total: 1,668,594 1,183,777 (3) Major Suppliers and Customers A. The Company's five largest suppliers and aggregate purchase amount from these suppliers as a percentage of the total purchase for the year Property development is the Company’s core business. Development projects are contracted out to construction companies by means of tendering. As such, most of the building materials are supplied by construction companies. The products the Company directly procured from suppliers included mechanical equipment and external or internal decoration materials. Such equipment and materials are purchased through centralised procurement on the Internet. For this procurement method, the Company has formed a strategic network of suppliers. In 2002, the purchase amount from the five largest suppliers was RMB112.56 million, accounting for 22.67% of the total direct purchase amount of the Company. B. The Company's major customers and sales to the five largest customers as a percentage of the total sales for the year The Company's property development mainly focuses on commodity housing. Most of its customers are individual consumers, buying properties from the Company’ projects across different cities. Only a few of them are institutional buyers or bulk purchasers. As a result, sales to major customers only account for a small proportion of the year’s turnover. The booked revenue of the Company for year 2002 amounted to RMB4.37 25 billion. Sales to the five largest customers amounted to RMB65 million, representing 1.54% of the total revenue of the year. (4) Issues and challenges encountered in operation and solutions to the issues In 2002, the overall market experienced robust development, attaining equilibrium in general. During the year, property investment increased on 2001’s, but with a growth rate lower than that of 2001. Area under construction, area completed and sold continued to rise, while market prices slightly increased. The over intensified regional investments did not affect the market as a whole. During the period, competitive bidding and public auction were generally implemented for the trading of land for commodity housing in various regions, and some areas applied the new land benchmark price. The prosperous outlook of the industry had attracted the inflow of new capital, and there emerged an upward trend for the land transaction price. To certain extent, these factors made it more difficult for the Company to obtain project resources through participating in competitive bidding. But the adjustments to the land policy paved the way for the industry to reach its maturity and for the creation of a fair and open competitive environment. In the face of land policy changes, the Board of Directors and management paid high regard to the exploration of ways in obtaining project resources for the Company’s sustainable development. As at the end of 2002, the Group’s inventories of project resources amounts to 7.06 million square metres of construction area. Given that the Group carried out its development in different phases, the land assignment procedures of certain of the Group’s projects were still under processing. With the new changes in the State’s land policy, the implementation rules of the land policy in various regions were in the process of formulation and preparation for launch. As such, there may exist uncertainty in the inventory level of the above-mentioned projects, which may result in lower inventories of projects of the Group, but will not affect the Group’s operation, profit and cost in the short run. The management urged investors to be alert of this factor. The Company will pay close attention to the market and the development trend of relevant business. Through research and evaluation of the industry prospects and development cycle, the Company will grasp at the opportunities of obtaining project resources by means of making swift response to policy changes such as participating in public auction, competitive bidding, cooperative development. In the new year, the Group will further increase its inventory of project resources. In proportion to the operating scale, the Group’s total inventories increased to RMB5,736 million at the end of 2002. Inventories of completed properties rose correspondingly to RMB1,325 million, representing an increase of 12.95% from that of the same period last year. Considering that the Group’s area completed and sold and its operating scale for the full year of 2002 greatly exceed 2001’s, the management believes the aforementioned increase in inventories of completed properties is still under control. In 2003, the Group will ensure rapid growth in sales revenue, while fully exploiting the 26 project development cycle and sales strategies through analysing regional markets and changes in customers’ needs. The Group will also fully utilise its existing resources to speed up sales and reduce the build-up of new inventories. During the current year, the Group will try the best to change the loss of Tianjin Company. Major operating measures are as follows: 1) After a delay of one year in the development of Tianjin Crystal City project (Glass Factory project), an area of 87,000 square metres was scheduled to be completed and booked in the current year, which would bring a new source of profit. 2) To solve the problem of inefficient management, the Group will facilitate Tianjin Company’s staff quality and management quality improvement programmes by replenishing Tianjin Company’s workforce with management talent. 3) On project operation front, the Group will strengthen monitoring and control of project planning and design, building and construction and property management, and will provide technical support. 4) With respect to customer services, by initiating communications and harmonic relationship, the Group will encourage Tianjin Company to establish positive interactions with customers initiating communications and harmonic relationship in order to effectively solve customer’s problems with regard to the preliminary stage of the project. Moreover, Tianjin Company will make greater efforts to get the best results of the relevant lawsuits. 5) During the current year, the overall planning of Tianjin Dongli Lake project will be completed and construction of phase I will commence, with the completion of urban facilities round the peripheral of the project. Sales are expected to commence in the second quarter of 2004, which could reduce costs up front by using proceeds from the sales to finance development costs of subsequent phases. 6) The Group will allocate its resources to decide a new project in Tianjin, thereby further expanding the source of operating profit for Tianjin Company in 2004. Through all these efforts, the Group will help bring Tianjin Company back on track to healthy and steady developments. (5) Explanation on changes in the business plan for the year The Company has not disclosed any profit forecast for 2002, nor any plans related to income, cost or expenditure. Therefore, the Company does not need to make special explanation on changes of plan. In 2002, the Company’s area under construction and area completed amounted to 1.67 million square metres and 1.18 million square metres respectively, while the area sold and booked floor area were 1.17 million square metres and 1.12 million square metres respectively. In 2001 annual report, the Company disclosed ‘It is estimated that total floor areas under construction and completed will amount to 1.62 million square metres and 1.14 million square metres respectively. A remarkable growth is also expected in total sales floor area and booked floor area, forecasting at over 1 million square metres respectively for the year 2002.’ The Company’s achievement in 2002 slightly exceeded the disclosed targets. 27 8.2 Investment of the Company During the year under review, the Group’s net long-term investment amount decreased by RMB13,265,848, representing a decrease of 17.2% from that of the previous year. Please refer to notes 15 and 16 for name of investments, principal operating activities and percentage of equity investment held by the Group. (1) Use of proceeds In 2002, the Group raised the amount of RMB1.5 billion through the issue of the Company’s convertible bonds. The use of proceeds is as follows: Investment Amount Amount Expected Return on Progress of project promised completely return on investment project (%) for applied to investment of booked investment investment (%) sales (%) (RMB (RMB ‘000) ‘000) Shenzhen Four 250,000 198,620 20.0 33.8 100 Seasons Flower City Shenzhen 400,000 284,080 22.4 ** 52 Paradiso Shanghai 300,000 300,000 13.5 12.1 32 Holiday Town Beijing Green 300,000 279,370 17.9 17.7 55 Garden Chengdu City 250,000 193,270 19.5 22.4 32 Garden Total 1,500,000 1,255,340 Use, progress of application and expected return of proceeds: A Shenzhen Paradiso Phase 1 was scheduled to be completed in mid 2003. Although no floor area had been booked. The return on investment was 26.3%, which was higher than the estimated return on investment. B The profit indicator of Shanghai Holiday Town project was slightly lower than the expected level mainly because retail shops and villas, which have higher profit margin, have yet to be launched for sale. C Proceeds raised from the capital market and not yet used have been deposited in a special account. As of the date of the announcement of the report, the balance of the planned investment amount for Shenzhen Four Seasons Slower City (second district) 28 has been fully utilised, as a result of the extraordinary item created by the accrued payments for construction costs. (2) Use of capital not from the capital market Equity investment A. During the period, the Company established a new wholly-owned subsidiary – Shenzhen Xinwan Co., Ltd., with a registered capital of RMB1 million. It is engaged in property development. B. During the period, the Company established a new wholly-owned subsidiary – Shenyang Vanke Four Seasons Flower City Real Estate Development Co., Ltd., with a registered capital of RMB10 million. It is principally engaged in the development and operation of Shenyang Vanke Four Seasons Flower City project. C. During the period, the Company established a new wholly-owned subsidiary – Shenyang Vanke Metropolitan Apartments Real Estate Development Co., Ltd., with a registered capital of RMB10 million. It is principally engaged in the development and operation of Shenyang Vanke Metropolitan Apartments project. D. During the period, the Company established a new wholly-owned subsidiary – Changchun Vanke Property Management Co., Ltd., with a registered capital of RMB500,000. It is engaged in property management. E. During the period, the Company established a new wholly-owned subsidiary – Shanghai Vanke Real Estate Agent Consultancy Co., Ltd., with a registered capital of RMB1 million. It is engaged in the real estate intermediary services. F. During the period, the Company established a new wholly-owned subsidiary – Shanghai Huaou Real Estate Co., Ltd., with a registered capital of RMB8 million. It is principally engaged in the development and operation of Shanghai Jinfeng project. G. During the period, the Company promoted for the establishment of Shanghai Vanke Zhongshi Real Estate Co., Ltd., with a registered capital of RMB20 million. Shanghai Vanke Zhongshi Real Estate Co., Ltd., in which the Company owns 50% equity interests, is principally engaged in property development. As of the date of this report, the amount of equity interest investment had been received and the relevant business registration procedures had been completed. H. During the period, the Company increased its shareholding of Anshan Wanshan Real Estate Development Co., Ltd. As of the end of the reported period, the Company increased its shareholding in Anshan Wanshan Real Estate Development Co., Ltd. from 35% to 65%. I. During the period, the Company increased investment in its wholly-owned subsidiary – Chengdu Vanke Real Estate Co., Ltd. from RMB30 million to RMB80 million. The proceeds from additional investment had been received. J. During the period, the Company increased its shareholding of Beijing Haikai Vanke Real Estate Development Co., Ltd. As of the end of the reported period, the Company increased its shareholding in Haikai Vanke Real Estate Development Co., Ltd. from 80% to 100%. 29 Other investments During the reported year, the Company’s property development business added the following 15 new projects. The total site area and planned construction area were 5.7 million square metres and 5.66 million square metres respectively. Region New projects Location( Site area Planned Progress status (sq. metres) Construction District) area (sq. metres) Shenzhen Xichong Project Yantian 6.8 5.1 Pre-construction Foushan Nanhai Project Nanhai 43.8 44.7 Pre-construction Shanghai Xinlong Rd. Pre-construction Minhang 11.0 12.0 Project Additional Site for City Garden Under construction Minhang 3.0 3.0 New Area South Part Wuhan Sanwan Project Hongshan 89.8 89.8 Pre-construction Four Seasons Nanchang Flower City Gaoxin 37.4 31.7 Pre-construction Phase II Total 191.8 186.3 Remark: By the end of 2002, the Company had paid RMB111.22 million land cost for the above projects. 8.3 Financial Status of the Company During the reported period, the Company maintained steady growth in its operation with improved asset quality. The Company's financial position remained healthy, and the land resources acquired in the year laid a solid foundation for the continued development of the Company. RMB’000 Financial Status 31/12/2002 31/12/2001 +/- % Reason for Change Total Assets 8,189,799 6,469,799 26.59 Issue of convertible bonds received and steady growth of total assets Fixed Assets 611,362 524,929 16.47 Normal growth after expansion of operating scale and transfer from inventory Non-current 1,521,023 261,000 482.77 Issue of RMB1.5 billion Liabilities convertible bonds Shareholders’ 3,619,884 3,237,172 11.82 Increase in net profit Equity 30 Gross Profit 889,353 824,167 7.91 Growth in property business Operating Profit 525,852 499,069 5.37 Growth in property business Net Profit 382,025 375,799 1.66 Growth in operating profit 8.4 The impact of changes in operating environment, policies and regulations In August 2002, six ministries and commissions including The Ministry of Construction promulgated “Regarding facilitating adjustment to the property market as a whole, certain opinions about promotion of healthy growth in the property market” to maintain a balance between aggregate market supply and aggregate market demand by requiring all local governments to fulfil their duties completely through adopting measures to deal with issues including the establishment of information system, land supply, project development and monetary housing subsidies. The Group believes the above-mentioned policies will help maintain stable and healthy development of the property market, which in turn is advantageous to the rapid and healthy growth of the Group’s core business. With respect to the land market, the Ministry of Land Resources promulgated “Regulations on Transfer of Land Use Right of State-owned Land through Competitive Bidding, Public Auction and Public Trading” in May 2002 and enforced them since 1 July 2002. The regulations will facilitate the establishment of an open, fair and impartial land market by regulating the transfer of land use right of State-owned land through competitive bidding, public auction and public trading in various situations, and thereby are advantageous to the healthy development of the property industry. However, during the transition period, the policy implementation in various areas resulted in the slowdown of land assignment activities, sudden upsurges in land price, and payment pressure, which caused rise in capital cost of companies within the industry. In the short run, these changes in the policy will have certain impact on the Company’s project inventory. As such, the Company will, on the one hand, continue to rationally participate in competitive bidding, public auction and public trading, and to actively explore new ways to obtain project resources. 8.5 Business development plan for the year 2003 In 2003, the Group will continue to scale up its development in the existing markets, and increase project resources in those markets. Besides, the Group will extend its reach to the new markets of Zhujiang delta region and Yangtze River delta region, and proactively look for appropriate project management opportunities. The Group has 25 projects under development in 2003. It is estimated that areas under construction and area completed will amount to 1.81 million square metres and 1.71 31 million square metres respectively, while the planned area sold and booked floor area will amount to 1.45 million square metres. Major Projects in 2003 (unit: square metre) Project Planed Planned Planned Resources as at Construction Commenced Completed the end of 2002 Project Name Location Site Area Area Area in 2003 Area in 2003 (sqm.’000) Shenzhen Paradiso Futian 40,234 265,828 81,148 174,583 81.1 Shenzhen East Coast Yantian 268,484 214,800 67,000 77,000 137.8 Shenzhen Xichong Project(a tentative Yantian 67,571 50,678 50,678 - 50.7 name) Shanghai Holiday Town Minhang 599,647 576,000 139,400 115,000 220.0 Shanghai City Garden New Minhang 210,000 155,752 - 117,343 - Area(south part) Shanghai Pudong Pudong 430,530 288,455 36,000 - 288.0 Project(a tentative name) Shanghai Baoshan Baoshan 214,344 227,205 35,540 184,923 35.5 Project(a tentative name) Shanghai Jinfeng Minshang 317,485 92,500 27,251 33,709 59.0 Project(a tentative name) Shanghai Jinlonglu Minshang 97,000 120,000 - - 120.0 Project(a tentative name) Beijing Star Garden Chaoyang 112,348 360,950 88,673 85,606 88.7 Beijing Green Garden Chaoyang 251,639 314,591 136,909 41,188 136.9 Beijing Tianxiu Haidian 98,811 147,544 100,000 50,000 147.5 Project(a tentative name) Tianjin Garden New Town Beichen 550,896 393,302 - 9,233 66.8 Tianjin People Tree Beichen 194,101 112,275 5,699 56,833 5.7 Tianjin Crystal City Hexi 350,175 337,218 87,700 87,700 337.0 (Glass Factory Project) Tianjin Dongli Lake Project Dongli 2,730,014 1,365,007 43,000 - 1,365.0 (a tentative name) Shenyang Metropolitan Dadong 83,300 164,676 40,079 76,665 40.1 Apartments Shenyang Four Seasons Yuhong 446,900 566,157 92,500 93,498 385.7 Flower City Wuhan Four Seasons Dongxihu 272,780 263,618 96,150 121,150 96.2 Flower City(east district) Wuhan Four Seasons Dongxihu 933,338 998,672 - - 998.7 Flower City(west district) Wuhan Sanwan Project Hongshan 898,500 898,500 120,000 - 899.0 (a tentative name) Wuhan Juno Tower Jiangan 6,943 48,300 - - 48.3 Chengdu City Garden Jinjiang 507,000 576,000 124,000 124,000 381.0 Chengdu Qianfeng Factory Project Chenghua 45,000 108,923 69,000 - - (a tentative name) Changchun City Garden Erdao 142,000 185,983 89,205 89,205 89.2 32 Nanjing Metropolitan Jianye 51,568 148,488 60,000 39,300 60.0 Apartments Nanchang Four Seasons Gaoxin 224,668 247,386 145,000 138,000 161.2 Flower City Nanchang Four Seasons Gaoxin 374,300 316,700 - - 316.7 Flower City Phase II Guangzhou Nanhai Project Nanhai 438,000 447,000 75,000 - 447.0 (a tentative name) Total: 1,809,932 1,714,936 7,062.8 Special Remark: (1) The above project schedule may be adjusted due to the following factors: A. changes in macro-economy and real estate market and the sales progress of the relevant projects; B. further specification and change of the policy on transfer of land use right may present uncertainties to the Company’s projects held for development; C. approval requirements may be tightened by new rules and regulations such that the application progress for permits will be slowed down, and thereby affect the schedule of projects development; and D. unfavourable weather conditions may delay the progress of projects and affect the booked value of completed floor area. (2) Among the projects of which collaboration agreements had been entered into or tenders had been approved and pending for development at the end of 2002, the Group has completed land transfer agreements for a construction area of 3.31 million square metres; and 4.02 million square metres are either state-owned property or have completed the procedure of government appropriation. 8.6 Work Report of the Board of Directors (1) During 2002, the Board of Directors held 6 board meetings. A. On 12 March 2002, the Eighth Meeting of the Twelfth Board of Directors was held to consider and approve the following resolutions: “2001 Auditors’ Report” (draft); the proposal on profit allocation and dividend distribution for the year 2001; the 2002 profit appropriation policy; 2001 Annual Report and Summary of 2001 Annual Report; the appropriation of the provision for diminution in asset value and loss management; the 2002 working plan of the general manager; resolution regarding the extension of surety for a loan made by Shenzhen Color Splendor Graphics Limited; resolution regarding the change of the Company’s Supervisor of Finance; resolution regarding remuneration policy for management executives; resolution regarding the appointment of auditors of the Company for the year 2002; resolution regarding the notice of AGM. The related resolutions were published in China Securities Journal, Securities Times and Hong Kong iMail on 15 March 2002. B. On 19 April 2002, the Ninth Meeting of the Twelfth Board of Directors was held to 33 consider and approve the following resolutions: the 2002 first quarterly report and financial statements; resolution regarding the change of the Company’s business scope stated in its business licence, resolutions regarding amendment of the Company’s Articles of Association; resolutions regarding the re-election of directors; resolutions regarding the remunerations of directors, independent directors and members of the Supervisory Committee; resolutions regarding convention of the Fourteenth AGM; resolution regarding the establishment of Changchun Vanke Property Management Co. Ltd.; resolution regarding the refinement of the leasing agreement with Shenzhen Vanguard Department Store Co Ltd; resolution regarding the confirmation of the terms of issue of the Company’s convertible bonds. The related resolutions were published in China Securities Journal, Securities Times and Hong Kong iMail on 23 April 2002. C. On 12 June 2002, the First Meeting of the Thirteenth Board of Directors was held to consider and approve the following resolutions: the election of the chairman of the Thirteenth Board of Directors; the election of the deputy chairman of the Thirteenth Board of Directors; the election of the secretary of the Thirteenth Board of Directors; resolution regarding the authorisation of the Chairman for negotiating banking facilities and surety on behalf of the Board of Directors; resolution regarding the authorisation of the Chairman for participating in land bidding and auction on behalf of the Board of Directors; resolution regarding the increase in the registered capital of Chengdu Vanke Real Estate Company Limited; resolution regarding the preparation for inspection and self-assessment of a modern enterprise system. The related resolutions were published in China Securities Journal, Securities Times and Hong Kong iMail on 13 June 2002. D. On 16 August 2002, the Second Meeting of the Thirteenth Board of Directors was held to consider and approve the following resolutions: 2002 Interim Report, financial statements and summary of the Interim Report; resolutions regarding the proposal of no dividend distribution and no transfer of surplus reserve to share capital for the 2002 interim period; resolution regarding the appropriation of the provision for diminution in asset value and loss management; [resolution regarding the transfer of Hong Kong Pacific Company’s equity interests in Anshan Vanshan Properties Development Company Limited. The related resolutions were published in China Securities Journal, Securities Times and Hong Kong iMail on 21 August 2002. E. On 24 October 2002, the Third Meeting of the Thirteenth Board of Directors was held to consider and approve the following resolutions: the 2002 third quarterly report and the financial statements; resolution regarding the establishment of a Nanjing branch of Shanghai Vanke Property Management Company Limited; resolution regarding the disposal of equity interests in Shenzhen Color Splendor Graphics Limited. The related resolutions were published in China Securities Journal, Securities Times and 34 Hong Kong iMail on 28 October 2002. F. On 6 December 2002, the Fourth Meeting of the Thirteenth Board of Directors was held to consider and approve the following resolutions: the appointment of Liu Aiming as the Deputy General Manager; resolution regarding the preferential house purchasing policy; resolution regarding the establishment of [Shanghai Vanke Zhongshi Real Estate Company Limited]; resolution regarding the subsequent approval of the Michonggang project at Huangqi district of Nanhai; regarding the establishment of Nanhai Vanke Real Estate Company Limited; resolution regarding the project listing of Guangchuan Machinery Factory and Guangchuan Container Plant; resolution regarding the listing of the Shenyang Nanjing Street project; resolution regarding the listing of Daqidazhong project in Dalian. The related resolutions were published in China Securities Journal, Securities Times and Hong Kong iMail on 7 December 2002. (2) The Board of Directors considered and approved the following resolutions through 11 votings by communication means: A. On 19 February 2002, the resolution regarding the establishment of two project companies was submitted for the Board of Directors’ approval through voting by communication means. B. On 4 April 2002, the resolution regarding the establishment of Shanghai Vanke Real Estate Agent Consultancy Company Limited was submitted for the Board of Directors’ approval through voting by communication means. C. On 19 April 2002, the resolution regarding the postponement of the AGM was submitted for the Board of Directors’ approval through voting by communication means. D. On 30 May 2002, the resolution regarding the adjustment of the nominal interest rate of the Company’s convertible bonds was submitted for the Board of Directors’ approval through voting by communication means. E. On 24 June 2002, the resolution regarding the production of a self-assessment report on a modern enterprise system by listed companies was submitted for the Board of Directors’ approval through voting by communication means. F. On 5 July 2002, resolution regarding the listing of Chengdu Lijingwan project was submitted for approval from all the Directors through voting by communication means. G. On 16 July 2002, the following resolutions were submitted for the Board of Directors’ approval through voting by communication means: regarding the listing of Honglingjin Park project in Beijing; regarding participating in the formation of 35 Shanghai Alliance Investment Management Company Limited. H. On 10 September 2002, the following resolutions were submitted for the Board of Directors’ approval through voting by communication means: regarding the listing of the Sanwan project in Wuhan; regarding the listing of Guangzhou Haiyingju project; regarding the listing of [the dayi district of Nanchang Four Seasons Flower City project. I. On 18 September 2002, the following resolutions were submitted for the Board of Directors’ approval through voting by communication means: regarding the listing of the phase 4 of Shenyang Garden New Town; regarding the listing of Shenzhen Bantian Huayu project. J. On 12 November 2002, the following resolutions were submitted for the Board of Directors’ approval through voting by communication means: regarding the establishment of a Wuchang branch of Wuhan Vanke Real Estate Development Company Limited; regarding the listing of Tianjing Guangdonglu project. K. On 23 December 2002, the following resolutions were submitted for the Board of Directors’ approval through voting by communication means: regarding the change in investors of Shanghai Vanke Zhongshi Real Estate Company Limited; regarding the project listing of Jinghong Xincun in Minhang district of Shanghai; regarding the project listing of the south part of Xinlonglu in Minhang district of Shanghai. The details about the progress of the signing of the relevant agreements on project listing was disclosed in China Securities Journal, Securities Times and Hong Kong iMail on 21 August 2002 and 7 December 2002. (3) The directors’ implementation of the resolutions approved at general meetings In accordance with the authorisation by the Fourteenth AGM, the Board had organised the 2001 dividend distribution. The distribution plan was as follows: RMB2.0 (including tax) cash dividend paid for every 10 existing shares held. The registration trading day for entitlement to dividend distribution was 16 July 2002, while the ex-rights date was 17 July 2002. After tax dividend in cash for holders of public A share was RMB1.6 for every 10 shares held. The exchange rate for B share cash dividend was HK$1.00 = RMB1.0606. The First SGM of the year 2001 held on 15 August 2001 authorised the Board of Directors to take charge of the issue of convertible bonds and related issues: the Board of Directors to determine the issue plan, the timing and scale of issue, the interest rate, the schedule and method of interest payment and repayment of principal, conversion price, and issuing methods according to the actual circumstances in accordance with the relevant law, regulations and the proposal for the implementation of the issue; the 36 authorisation of the Board of Directors to amend the Company’s Articles of Association in accordance with the situation of the issue and conversion of the convertible bonds; the authorisation of the Board to determine other matters related to the issue of convertible bonds in accordance with relevant law and policy. With the approval of China Securities Regulatory Commission’s Public Offering Supervision Issue [2002] No. 52, the proposal of issuing convertible bonds of the Company was implemented in June 2002, with the issue of 15 million convertible bonds to the public at a face value of RMB100 each. The total issue amount was RMB1.5 billion. The term of the convertible bonds was five years, with a nominal rate of 1.5%. The registration day of shareholding was 11 June 2002, while the payment period ran from 11 June to 13 June. Application for purchase of the bonds commenced on 13 June. The issue ended on 19 June. Dealings in the Company’s convertible bonds on the Shenzhen Stock Exchange commenced on 28 June 2002. Abbreviation and code of the convertible bonds are “Vanke bonds” and “125002”, respectively. For details on the proposal, please refer to China Securities Journal, Securities Times and Shanghai Securities Journal on 7 June 2002. 8.7 Profit, Dividend Distribution and Transfer of Capital Surplus Reserves to Share Capital Proposal Net profit of the Company in 2002 prepared in accordance with PRC accounting regulations and IAS were RMB382,421,274 and RMB382,024,878 respectively, profit available for distribution were RMB387,038,412 and RMB417,177,933 respectively. The upper limit of profit available for distribution was based on the lower of the unappropriated profit calculated in accordance with PRC accounting regulations and that calculated in accordance with IAS. Therefore, the Company’s profit available for distribution in 2002 was RMB387,038,412.06, which was the profit prepared in accordance with PRC accounting regulations. According to relevant rules and regulations, the Board of Directors proposed the following distribution proposal: (1) to appropriate 10% of the 2002 net profit calculated in accordance with the PRC accounting regulations to statutory surplus reserve; (2) to appropriate 5% of the 2002 net profit calculated in accordance with the PRC accounting regulations to statutory public welfare fund; (3) to appropriate 50% of the 2002 net profit calculated in accordance with the PRC accounting regulations to discretionary surplus reserve; (4) to appropriate for dividend distribution from the net profit for the year, basing on the Company’s total share capital and a dividend of RMB0.20 per share; 37 (5) the balance of the unappropriated profit will be brought forward to the following financial year and reserved for dividend distribution. The allocation of the profit available for appropriation of RMB387,038,412.06 is as follows: Amount % share of profit (RMB) available for appropriation statutory surplus reserve 38,242,127.41 9.88% statutory public welfare fund 19,121,063.70 4.94% discretionary surplus reserve 191,210,637.03 49.40% dividend distribution for the year 126,194,942.60 32.61% The unappropriated profit prepared in 12,269,641.32 3.17% accordance with PRC accounting regulations brought forward to the following financial year The unappropriated profit prepared in 42,409,162.26 accordance with IAS brought forward to the following financial year Dividend distribution proposal. The dividend will be paid in cash on the basis of RMB2.0 (including tax) for every 10 existing shares held. Calculated on a total share capital of 630,974,713 shares as at the end of 2002, a total of RMB126,194,942.6 will be paid. Dividend of B shares will be paid in Hong Kong dollars, based on the benchmark exchange rate of Renminbi for Hong Kong dollars, published by the People’s Bank of China on the first working day after the approval of profit and dividend distribution proposal at the Company’s forthcoming General Meeting. Transfer of Capital Surplus Reserve to Share Capital Proposal: The Board of Directors proposed to transfer capital surplus reserve to share capital by transferring 10 shares from the capital surplus reserve for every 10 shares held by all shareholders after considering shareholders’ proposal, the Company’s profit prospects, assets condition and market environment. Calculated on the total share capital of 630,974,713 shares as of 31 December 2002, the total number of transferred shares will be 630,974,713 shares (each share has a face value of RMB1) . Upon the transfer, the total share capital will consist of 1,261,949,426 shares. The total amount involved in the transfer of capital surplus reserve to share capital will be RMB630,974,713. Prior to the transfer, the total amount of capital surplus reserve is RMB1,435,442,203.51. After the transfer, the balance of capital surplus reserve will be RMB804,467,490.51. 38 Special Notes: Given that the Company’s issued convertible bonds became convertible starting 13 December 2002, by the time when the proposals on dividend distribution and transfer of capital surplus reserve to share capital are approved at the Annual General Meeting and when they are implemented, the Company’s share capital may have increased. As such, the Board of Directors proposed to implement dividend distribution and transfer of capital surplus reserve to share capital to all shareholders based on the total share capital as at the close of the market on the registration trading day for entitlement. If on the registration day for entitlement to dividend distribution, the Company’s total share capital increases due to the conversion of the Company’s convertible bonds to Company’s shares, 10 shares are to be transferred from capital surplus for every 10 shares held, and the dividend amount for each ordinary share will not change. However, under this situation, the amount of shares to be transferred from capital surplus reserve to share capital and the total amount of dividend payment will increase correspondingly. The dividend distribution and transfer of capital surplus reserve to share capital proposals mentioned above are subject to the shareholders’ approval at the General Meeting. 8.8 Media for Disclosure of Information The Company has chosen China Securities Journal, Securities Times and a Hong Kong English publication for placing notices and announcements of the Company. 9 Report of Supervisory Committee On behalf of the Supervisory Committee, I hereby present the activity report of the Committee for the year 2002 as follows: A total of five meetings were held by the Supervisory Committee during the reported period: (1) The Seventh Meeting of the Fourth Supervisory Committee was held on 12 March 2002. The meeting reviewed and confirmed the report of the Supervisory Committee for the year 2001, the Company’s audit report for the year 2001, the Company’s appropriation and handling of the assets diminution provision for the year 2001, the Company’s proposal for the distribution of profits and dividends for the year 2001 and the Company’s proposal for the profit distribution policy for the year 2002. (2) The Eighth Meeting of the Fourth Supervisory Committee was held on 19 April 2002. The meeting reviewed and confirmed the 2002 first quarterly report and financial statements, regarding the proposal for the amendment of the Company’s Articles of Association, and the resolution regarding the remuneration of Directors, Independent Directors and members of Supervisory Committee. 39 (3) The Ninth Meeting of the Fourth Supervisory Committee was held on 16 August 2002. The meeting reviewed and confirmed the interim report and financial statements of 2002, the resolution that no dividend payment and no transfer of surplus reserve to share capital for interim 2002, and the resolution regarding the transfer of [Hong Kong Pacific Company]’s equity interests in [Anshan Wanshan Properties Development Company Limited]. (4) The Tenth Meeting of the Fourth Supervisory Committee was held on 24 October 2002. The meeting reviewed and confirmed 2002 third quarterly report and financial statements, and the resolution regarding the disposal of equity interests in Shenzhen Color Splendor Graphics Limited.. (5) The Eleventh Meeting of the Fourth Supervisory Committee was held on 6 December 2002. The meeting reviewed and confirmed the resolution regarding the appointment of Liu Ai Ming as Deputy General Manager, and resolution regarding the preferential house purchasing policy. Independent opinions of the Supervisory Committee for the following events: (1) Regulatory compliance: Members of Supervisory Committee were present at all meetings of the Board during the year and paid visits to the subsidiaries of the Company in Shenzhen, Shanghai, Beijing, Shenyang, Tianjin, Chengdu, Wuhan, Changchun, etc. In the opinion of the Supervisory Committee, all the decisions of the Company for the year were in compliance with the applicable laws, and the internal control system was robust throughout the year. In addition, the Directors and operation managers of the Company were in compliance with the laws, rules and the Company’s Articles of Association. They did not exercise their duties against the interest of the Company, nor did they abuse their power in any way to endanger the interest of the shareholders and employees. (2) Financial monitoring: In the opinion of the Supervisory Committee, the audit opinions from KPMG Huazhen and KPMG are non-biased and their reports provide a true view of the actual financial position and operating results of the Company. (3) Use of proceeds from the latest fund raising exercise: The proceeds from the Company’s issuance of RMB1.5 billion convertible bonds were received in June 2002. The Supervisory Committee monitored the applications of proceeds through reviewing financial statements, inspecting investment projects and etc. The actual investments in various projects were in line with the amount promised for use in investment projects, and the progress of the investment projects was satisfactory. (4) Provisions: The Board of Directors had appropriated the provision of assets diminution for 2002 in accordance with the requirements of “Notice Regarding the 40 Formulation of ‘Corporate Accounting Principles’” (Cai Kuai [2000] No 25), the “Notice Regarding the Requirement for Implementation of ‘Corporate Accounting Principles’” (Cai Kuai [2001] No 17), the “Notice Regarding the Implementation of ‘Corporate Accounting Principles’ and Issues Regarding the Relevant Accounting Standards” (Cai Kuai [2002] No 18) the “Notice Regarding the Disclosure Requirement in Relation to the Adoption of New Accounting Principles and Policies by Listed Companies and Prospective Listed Companies” (Zheng Jian Kuai Ji [2001] No 14) promulgated by the Ministry of Finance, and the Company’s revised “internal control system regarding appropriation for assets diminution provision and handling of loss”. The treatment complied with relevant regulations and the Company’s internal control system, and fit the Company’s actual situation, which was beneficial to the Company’s long-term development. (5) Business operation of the Company: In 2002, the management’s contribution to the Company should be fully recognised due to the fact that the Company realised its business plan successfully and steadily increased the scale of its core business and profit, while making breakthrough in specialised integration and customer relations management. In 2002, Tianjin Company significantly cut its loss, although the loss had yet to be eliminated. The Supervisory Committee wishes, the Company should continue to set the reorganisation of Tianjin Company’s management structure and operation as one of its major tasks in 2003, and should fully utilise the Company’s overall resources to help bring Tianjin Company back on track to healthy and steady development. Ding Fuyuan Convenor of the Supervisory Committee 18 March 2003 10 Significant Events 10.1 Material Litigation or Arbitration The Company disclosed in its 2001 interim report and 2002 interim report respectively the proceedings regarding the dispute over the pre-sale contract for units commenced by Singaporean citizens Chen Mengzhe and Chen Jinfeng against Tianjin Vanke Shine (Group) Co., Ltd., Tianjin Vanke Shine Development Co., Ltd. and Tianjin Wanxing Property Management Co., Ltd., as well as the lawsuit lodged by Tianjin Heping Jiangong (Group) Co., Ltd. against Tianjin Vanke Real Estate Co., Ltd. regarding the dispute over the balance of construction fee. The two cases are still proceeding in court. However, in accordance with the precautionary principle, the Tianjin subsidiary has accumulated provisions for loss in interest payment of RMB15.35 million for the case commenced by Chen Mengzhe and Chen Jinfeng. 10.2 Acquisition And Disposal Of Assets During The Period 41 Under Review During the year, the Company did not acquire and dispose material assets. 10.3 Material Connected Transaction During the year, the Company had not engaged in any material connected transaction. 10.4 Major contracts and their implementation (1) Superintending, handling, renting other companies’ assets or other companies’ superintending, handling, renting the listed company’s assets During the period under review, the Company did not put any material assets under custodial management nor sub-contract nor rent any assets from other companies, nor had the Company’s any material assets been put under custodial management nor sub-contracted nor rented by other companies. (2) Major surety The Company offered to the headquarters of China Construction Bank a surety for a bank loan of RMB160 million for Beijing Vanke Co. Ltd., a wholly-owned subsidiary of the Company, for the period from May 2001 to November 2004. (3) Trust management for financial assets During the reported period, the Company did not make any trust arrangement for its financial assets. (4) Other major contracts On 18 April 2002, the Company and the Shenzhen Branch of China Construction Bank entered into an “Integrated Finance Limit Agreement” with an integrated credit line of RMB500 million. On 12 December 2002, the Company and the Bank of China (“BOC”) entered into a “Credit Line Supplement Agreement” in Beijing, pursuant to which BOC will increase the credit line of the Company to RMB1.5 billion. The above cooperation agreement had been implemented smoothly. During the year, the Group had entered into agreements on several projects such as the Shenzhen Longgang Xichong Seaside Villa Project. For details, please refer to “Project investments” under the section “Use of capital not from the capital market”. 10.5 Implementation of Undertaking made by the Company or shareholders holding 5% or above equity interest in the Company The profit distribution policy for the year 2002 was announced in the 2001 annual report. The Board of Directors resolved to implement transfer of surplus reserve to share capital, in addition to the bonus and dividend distribution that was promised previously, after 42 considering shareholder’s proposal, the Company’s profit prospects, assets condition and market environment. The Board of Directors believes the above-mentioned arrangement is in the interest of the shareholders and is advantageous to the Company’s position and influential power in the capital market. CRNC, the Company’s largest shareholder, made a significant undertaking to the Company in 2001: CRNC would provide as much support to the Company as it did in the past, as long as such support was beneficial to the Company’s development, and that it would remain impartial in the event of any competition between the investment projects of the Company and that of CRNC and its subsidiaries, and in the event of any disagreements or disputes arising from such competition. CRNC has fulfilled its undertaking. 10.6 Appointment and Termination of the service of Certified Public Accountants At the Fourteenth AGM, the Group resolved to terminate the appointment of Zhong Tian Qin Certified Public Accountants and to appoint KPMG Huazhen and KPMG as the auditors of the Company to audit the Company’s 2002 accounts in accordance with the PRC and IAS accounting regulations. The appointment of accounting firms for the Company and its subsidiaries are as follows: 2002 2001 Year of Audited item Auditors Audit fee Service Auditors Audit fee The Group’s consolidated financial report and annual financial reports of its subsidiaries in Beijing, Tianjin, Shanghai, Shenzhen, Shenyang in accordance with the PRC KPMG KPMG Accounting Standards Huazhen RMB700,000.00 2 Huazhen RMB700,000.00 The Group’s consolidated financial report in accordance with the IAS KPMG HK$1,000,000.00 10 KPMG HK$1,260,000.00 The annual financial reports of the Group’s regional Dailian subsidiaries in Dailian, Hualian Changchun, Anshan CPA RMB75,000.00 1 Yuehua CPA RMB75,000.00 The annual financial reports Deloitte Deloitte of the Group’s regional Touche Touche subsidiaries in Wuhan, Tohmatsu Tohmatsu Chengdu, Nanjing, Shanghai Shanghai Nanchang CPA RMB180,000.00 2 CPA RMB140,000.00 43 The annual financial report Fan, Chan HK$20,000.00 of the Group’s regional & Co. (estimated Fan, Chan & subsidiary in Hong Kong CPA amount) 10 Co. CPA HK$24,000.00 Remarks:The above-mentioned audit fee included the travel expenditure incurred during the auditing period. 10.7 No disciplinary action was taken against the Company and the Company's Directors, members of Supervisory Committee and senior management during the reported period. 10.8 Changes in Members of Board of Directors Please refer to the sections, “Reasons for the resignation of Directors, Members of the Supervisory Committee and Senior Management during the year under review” and “The Fourteenth Annual General Meeting”. 10.9 Other Significant Events (1) Change of Articles of Association The amendment of the Company’s Articles of Association was approved at the Fourteenth AGM. Please refer to China Securities Journal, Securities Times on 23 April 2002 for the content of the amendment. (2) Change of business address Pursuant to the Board of Directors’ approval through distant voting, the business address of the Company was changed on 21 January 2002 to No 63, Meilin Road, Futian District, Shenzhen, the PRC, postal code of 518049. The Company’s registered address had been changed accordingly. 11 A Chronology of 2002 In January, the business address of the Company was changed to Vanke Architecture Research Centre, No 63, Meilin Road, Futian District, Shenzhen, the PRC. During the year, the Group’s finance limit and credit line further increased. In April, the Company and the Shenzhen Branch of China Construction Bank entered into an “Integrated Finance Limit Agreement” with an integrated credit line of RMB500 million. In December, the Company and the Bank of China (“BOC”) entered into a “Credit Line Supplement Agreement” in Beijing, pursuant to which BOC will increase the credit line of the Company to RMB1.5 billion. In June, the Fourteenth AGM was held at Vanke Architecture Research Centre. The meeting considered and approved the resolutions regarding the work report of the Board 44 of Directors, the work report of the Supervisory Committee, the bonus and dividend distribution policy, the appointment of auditors. election of Wang Shi, Ning Gaoning, Song Lin, Richard L. Yu, Chen Zhiyu, Wang Yin and Mo Jun as Directors and Sun Jianyi, Eric Li Ka Cheung, Li Chi Wing and Feng Jia as Independent Directors to form the Thirteenth Board of Directors of the Company. In June, with the approval of China Securities Regulatory Commission’s Public Offering Supervision Issue [2002] No 52, the Company proceed with its proposal of issuing 15 million convertible bonds of the Company to the public at a face value of RMB100 each. The total issue amount was RMB1.5 billion. The successful issuance of the Company’s convertible bonds provides strong support to the expansion of the Company’s operation scale. In November, with the approval of the Board of Directors, Shenzhen Vanke Real Estate Company Limited, a wholly-owned subsidiary of the Company, succeeded in bidding for a piece of land in Michonggang, Huangqi district in Nanhai, through which the Company entered the Zhujiang Delta market. 12 Report of the Auditors 45 Report of the independent auditors to the shareholders of China Vanke Co., Ltd. We have audited the consolidated balance sheet of China Vanke Co., Ltd. (the “Company”) and its subsidiaries (together with the Company referred to as the “Group”) as of 31 December 2002 and the related consolidated statements of income and cash flows for the year then ended, set out on pages 2 to 40. These consolidated financial statements are the responsibility of the Group’s directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as promulgated by the International Federation of Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the directors, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2002, and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board. KPMG Certified Public Accountants Hong Kong, 46 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Consolidated income statement for the year ended 31 December 2002 (Expressed in Renminbi Yuan) Note 2002 2001 RMB RMB Revenue 2 4,374,017,880 4,226,113,439 Cost of sales 3,484,664,562 (3,401,946,882) Gross profit 889,353,318 824,166,557 Gain on sales of discontinuing operation 3 - 216,568,750 Other operating income 5 23,055,613 19,848,636 Distribution costs (126,595,071) (286,039,287) Administrative expenses (257,148,473) (272,344,032) Other operating expenses 6 (13,520,312) (10,771,682) Profit from operations 515,145,075 491,428,942 Net financing income 8 10,707,186 7,639,873 Operating profit 525,852,261 499,068,815 Share of losses less profits of associates (1,609,252) (64,850) Profit before tax 524,243,009 499,003,965 Taxation 9(a) (126,591,097) (114,936,333) Profit after tax 397,651,912 384,067,632 Minority interests (15,627,034) (8,268,501) Net profit for the year 23 382,024,878 375,799,131 =========== =========== Basic earnings per share 10 0.61 0.60 === === Diluted earnings per share 10 0.55 0.60 === === 47 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Consolidated statement of changes in equity for the year ended 31 December 2002 (Expressed in Renminbi Yuan) 2002 2001 RMB RMB RMB RMB Shareholders’ equity at 1 January 3,237,171,844 2,974,930,134 Adjustment on translation of foreign subsidiaries 420,381 17,528 Net gains not recognised in the consolidated income statement 420,381 17,528 Net profit for the year 382,024,878 375,799,131 Dividend paid (126,194,388) (113,574,949) Movement in convertible bonds issued: Convertible bonds issued 132,590,802 - Share issued upon conversion of convertible bonds 30,007 - Share issuing cost (554) - Deferred tax recognition (6,158,939) - Net increase in shareholders equity arising from convertible bonds issued 126,461,316 - Shareholders’ equity at 31 December 3,619,884,031 3,237,171,844 ============ =========== 48 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Consolidated balance sheet at 31 December 2002 (Expressed in Renminbi Yuan) Note 2002 2001 RMB RMB ASSETS Non-current assets Fixed assets 12 611,362,240 524,929,176 Construction in progress 13 - 21,622,103 Intangible assets 14 (201,189) 66,119 Investments in associates 16 9,213,085 31,078,933 Other investments 17 54,811,347 46,211,347 Deferred tax assets 18 2,936,250 7,564,523 Properties held for development 2,683,815,424 2,114,962,363 3,361,937,157 2,746,434,564 ------------------- ------------------- Current assets Inventories 19 6,408,648 4,980,641 Completed properties for sale 1,324,527,208 1,172,668,914 Properties under development 1,720,767,323 1,188,992,111 Trade and other receivables 20 588,754,484 551,343,223 Cash and cash equivalents 21 1,187,403,819 805,379,673 4,827,861,482 3,723,364,562 ------------------- ------------------- Total assets 8,189,798,639 6,469,799,126 =========== =========== EQUITY AND LIABILITIES Capital and reserves Share capital 22 630,974,713 630,971,941 Reserves 23 2,988,909,318 2,606,199,903 3,619,884,031 3,237,171,844 ------------------- ------------------- Minority interests 45,689,832 1,992,330 ------------------- ------------------- 49 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Consolidated balance sheet at 31 December 2002 (continued) (Expressed in Renminbi Yuan) Note 2002 2001 RMB RMB Non-current liabilities Interest-bearing bank loans 24 160,000,000 261,000,000 Convertible bonds 25 1,354,864,346 - Deferred tax liabilities 18 & 23 6,158,939 - 1,521,023,285 261,000,000 ------------------- ------------------- Current liabilities Interest-bearing bank loans 24 460,000,000 1,353,000,000 Trade and other payables 26 2,438,124,766 1,481,897,249 Provisions 27 24,523,672 37,201,012 Taxation 9(b) 80,553,053 97,536,691 3,003,201,491 2,969,634,952 ------------------- ------------------- Total equity and liabilities 8,189,798,639 6,469,799,126 =========== =========== Approved by the Board of Directors on Wang Shi ) Yu Liang ) ) Directors ) ) 50 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Consolidated cash flow statement for the year ended 31 December 2002 (Expressed in Renminbi Yuan) Note 2002 2001 RMB RMB OPERATING ACTIVITIES Net cash inflow/(outflow) from operating activities 31 91,383,491 (1,441,849,965) ------------------- ------------------- INVESTING ACTIVITIES Proceed of capital injection from minority interest 10,000,000 31,400,000 Disposal of a subsidiary, net of cash disposed of 4(b) - 435,892,374 Acquisition of subsidiary, net of cash acquired 4(b) 5,160,131 (1,348,563) Acquisition of interest in associates - (10,000,000) Acquisition of other investment (8,600,000) - Disposal of fixed assets 31,663,173 162,854,759 Acquisition of fixed assets (82,415,607) (220,589,472) Addition of construction in progress (25,669,730) (21,622,103) Proceeds from disposal of marketable securities - 1,836,500 Proceeds from disposal of an associate 300,000 - Proceeds from disposal of other investments - 1,018,918 Interest received 10,821,821 15,130,978 Dividend received 1,135,227 420,725 Net cash (outflow)/inflow from investing activities (57,604,985) 394,994,116 ------------------- ------------------- 51 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Consolidated cash flow statement for the year ended 31 December 2002 (continued) (Expressed in Renminbi Yuan) Note 2002 2001 RMB RMB FINANCING ACTIVITIES Net proceeds from issuance of convertible bonds 1,468,319,647 - Net increase in borrowings - 3,162,000,000 Repayment of borrowings (994,300,000) (2,194,000,000) Dividend paid to minority interest - (3,780,000) Dividend paid (126,194,388) (113,574,949) Net cash inflow from financing activities 347,825,259 850,645,051 ------------------- ------------------- Net increase/(decrease) in cash and cash equivalents 381,603,765 (196,210,798) Effect of foreign exchange rates 420,381 17,528 Cash and cash equivalents at 1 January 21 805,379,673 1,001,572,943 Cash and cash equivalents at 31 December 21 1,187,403,819 805,379,673 =========== =========== 52 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 Notes on the financial statements (Expressed in Renminbi Yuan) 1 Significant accounting policies China Vanke Co., Ltd is a company domiciled in the People’s Republic of China (“PRC”). The consolidated financial statements of the Company for the year ended 31 December 2002 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates. The consolidated financial statements of the Group were authorised for issue by the Directors on 13 March 2003. (a) Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board (“IASB”) and interpretations issued by the Standing Interpretation Committee of the IASB. (b) Basis of preparation The financial statements are presented in Renminbi Yuan. The measurement basis used is historical cost. The accounting policies have been consistently applied by the Group and are consistent with those of the previous year. (c) Basis of consolidation (i) Subsidiaries Subsidiaries are those enterprises controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements of the Group from the date that control effectively commences until the date that control effectively ceases. A list of the Group’s principal subsidiaries is set out in note 15. (ii) Associates Associates are those enterprises in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements of the Group include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Group’s share of losses exceeds the carrying amount of the associates, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associates. A list of the Group’s principal associates is set out in note 16. 53 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (c) Basis of consolidation (continued) (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements of the Group. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the enterprise against the investment in associates. Unrealised losses are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment. (d) Translation of foreign currencies Foreign currency transactions during the year are translated into Renminbi Yuan at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities in foreign currencies are translated into Renminbi Yuan at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the consolidated income statement. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to Renminbi at the foreign exchange rate ruling at the dates of transaction. The assets and liabilities of foreign subsidiaries are translated into Renminbi Yuan at the foreign exchange rates ruling at the balance sheet date while items of income and expense are translated at rates approximating the foreign exchange rates at the dates of the transaction. Foreign exchange differences arising on translation are dealt with in reserves. (e) Fixed assets and depreciation (i) Fixed assets are stated at purchase price or production cost less accumulated depreciation and impairment losses (note 1(v)). The cost for self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads and borrowing costs. Where an item of fixed assets comprises major components having different useful lives, they are accounted for as separate items of fixed assets. (ii) Subsequent expenditure Expenditure incurred to replace a component of an item of fixed assets, including inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of fixed assets. All other expenditure is recognised in the consolidated income statement as an expenses as incurred. 54 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (e) Fixed assets and depreciation (continued) (iii) Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of items of fixed assets, and major components that are accounted for separately. The estimated useful lives are as follows: Estimated residual value as a percentage Year of costs Buildings 12.5 - 25 4% Investment properties 25 4% Improvements to premises 5 years or over terms of leases - Plant and machinery 5 - 10 4% Furniture, fixtures and equipment 5 - 10 4% Motor vehicles 5 4% Investment properties are interests in properties in respect of which construction work and development have been completed and which are held for their investment potential. (f) Construction in progress Construction in progress is stated at cost. No depreciation is provided for. Construction in progress will be classified as fixed assets once construction work has been completed and the asset is in use. (g) Intangible assets (i) Goodwill Goodwill arising on an acquisition represents the excess of the cost of the acquisition over the fair value of the net identifiable assets acquired. Goodwill is stated at cost less accumulated amortisation and impairment losses (note 1(v)). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investments in associates. Goodwill is amortised from the date of initial recognition on a straight-line basis to the consolidated income statement over its estimated useful life not exceeding five years. The unamortised balance of goodwill is reviewed at least annually. Where the balance exceeds the value of expected future benefits, the difference is charged to the consolidated income statement immediately. 55 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (g) Intangible assets (continued) (ii) Negative goodwill Negative goodwill arising on an acquisition represents the excess of the fair value of the net identifiable assets acquired over the cost of acquisition. To the extent that negative goodwill relates to an expectation of future losses and expenses that are identified in the plan of acquisition and can be measured reliably, but which have not yet been recognised, it is recognised in the consolidated income statement when the future losses and expenses are recognised. Any remaining negative goodwill, but not exceeding the fair values of the non-monetary assets acquired, is recognised in the consolidated income statement over the weighted average useful life of those assets that are depreciable/amortisable. Negative goodwill in excess of the fair values of the non-monetary assets acquired is recognised immediately in the consolidated income statement. (h) Other investments Other investments represent investments in unquoted shares of various companies in which the Group neither holds, directly or indirectly, 20% or more of the voting powers nor exercises significant influence. The investments are carried at cost less any impairment losses (note 1(v)). On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is recognised in the consolidated income statement. (i) Taxation Taxation in the consolidated income statement comprises current tax net of tax refunds from government authorities and the change in deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using the tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 56 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (j) Properties held for development Properties held for development are stated at cost less provision for anticipated losses, where appropriate. (k) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Work in progress and manufactured finished goods are valued at production cost including direct production costs (cost of materials and labour) and an appropriate proportion of production overheads. The cost of raw materials is computed using the weighted average cost method. (l) Completed properties for sale Completed properties for sale are stated at the lower of cost and net realisable value. Cost is determined by apportionment of the total land and development costs attributable to unsold properties, and an appropriate proportion of production overheads and borrowing costs. Net realisable value represents the estimated selling price less the estimated costs necessary to make the sale. (m) Properties under development Properties under development held for sale are stated at the lower of cost and net realisable value. Cost includes cost of land use rights acquired, construction costs and an appropriate proportion of production overheads and borrowing costs during the period of construction. Net realisable value represents the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. (n) Trade and other receivables Trade and other receivables are stated at their cost, less impairment losses (note 1(v)). (o) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents, for the purpose of the consolidated cash flow statement. 57 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (p)Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the consolidated income statement over the period of the borrowings on an effective interest basis. (q) Trade and other payables Trade and other payables are stated at their cost. (r) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (s) Revenue (i) Revenue from the sale of completed properties is recognised upon signing of the sale and purchase agreement when the significant risks and rewards of ownership have been transferred to the buyer. Deposits and instalments received on properties sold prior to the date of revenue recognised are included in the consolidated balance sheet under deposits received in advance. (ii) Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to customers. (iii) Revenue from services is recognised when services are rendered. (iv) Rental income from investment properties is recognised on a straight-line basis over the terms of the respective leases. (v) The above revenue is net of the relevant taxes and tax refunds from government authorities. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods. 58 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (t) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the consolidated income statement as an integral part of the total lease payments made. (ii) Net financing costs Net financing costs comprise interest payable on borrowings, interest receivable on funds invested, dividend income and foreign exchange gains and losses that are recognised in the consolidated income statement (note 1(d)). Interest income is recognised in the consolidated income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognised in the consolidated income statement on the date that the dividend is declared. All interest and other costs incurred in connection with borrowings are expensed as incurred as part of net financing costs, except amounts capitalised as stipulated in note 1(u). (u) Borrowing costs Borrowing costs are expensed in the consolidated income statement for the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. (v) Impairment The carrying amounts of the Group’s assets, other than inventories (note 1(k)) and deferred tax assets (note 1(i)), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses are recognised in the consolidated income statement. 59 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (v) Impairment (continued) (i) Reversals of impairment An impairment loss in respect of the Group’s assets is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed unless the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation and amortisation, if no impairment loss had been recognised. (ii) Calculation of recoverable amount The recoverable amount of the Group’s asset is the greater of their selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. (w) Provisions A provision is recognised in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (x) Dividends Dividends on ordinary shares are recognised as a liability in the period in which they are declared. 60 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 1 Significant accounting policies (continued) (y) Convertible bonds Convertible bonds that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments, net of attributable transaction costs. The equity component of the convertible bonds is calculated as the excess of the issue proceeds over the present value of the future interest and principal payment, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the consolidated income statement is calculated using the effective interest rate method. Transaction costs incurred on issuance of the convertible bonds are allocated to the component parts in proportion to the allocation of proceeds. The discounts on the convertible bonds, being the amount classified as equity as referred to above, are set off against the liability component and are amortised as an interest expense on an effective interest rate method until conversion or maturity. The transaction costs allocated to the liability component are amortised as interest expenses on an effective interest rate method until conversion or maturity. On conversion, the liability component, the accrued interest forfeited together with the relevant portion of the equity component constitute the consideration for the shares being issued. (z) Retirement benefits The Group participates in retirement schemes operated by local authorities and the annual cost of providing retirement benefits is charged to the consolidated income statement according to the contribution determined by the relevant schemes. The Group has no further liability to the retirement schemes operated by the local authorities. (aa) Discontinuing operation A discontinuing operation is a clearly distinguishable component of the Group’s business that is abandoned or terminated pursuant to a single plan, and which represents a separate major line of business or geographical area of operations. 61 The Group’s results for the year ended 31 December 2002 were almost entirely attributable to the property development in the PRC. Accordingly, no segme The revenue, assets and capital expenditure of the Group analysed according to the geographical location of business within the PRC are as follows: The property development division mainly operates in Shenzhen, Tianjin, Beijing, Shanghai, Shenyang and Nanjing. Shenzhen Tianjin Beijing Shanghai Shenyang Nanjing 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB Revenue Property sales 1,013,848,009 1,161,304,598 216,403,662 71,328,862 605,902,755 527,499,235 684,161,707 831,324,515 461,861,624 336,032,135 342,733,475 Property management 91,159,618 81,524,295 12,336,259 10,591,061 11,883,542 5,506,770 16,445,698 19,218,012 7,042,526 4,849,480 - Rental 9,642,181 10,505,376 1,319,297 2,396,141 1,719,636 25,200 1,854,805 1,988,447 82,980 8,150 - Retail - 960,951,967 - - - - - - - - - Total revenue 1,114,649,808 2,214,286,236 230,059,218 84,316,064 619,505,933 533,031,205 702,462,210 852,530,974 468,987,130 340,889,765 342,733,475 =========== =========== =========== ========== =========== =========== =========== =========== ========== ========== ========== ====== Segment assets 3,584,176,028 2,340,085,928 1,026,332,542 794,469,676 1,091,534,410 1,268,757,825 1,236,456,468 1,086,583,276 531,528,126 652,613,912 71,754,286 235,00 =========== =========== =========== ========== =========== =========== =========== =========== ========== ========== ========== ====== Capital expenditure 34,103,843 125,316,552 926,635 23,487,595 3,620,717 8,363,727 36,876,810 38,208,814 10,297,851 11,638,574 5,800,567 3,01 =========== =========== =========== ========== =========== =========== =========== =========== ========== ========== ========== ====== Segment revenue is based on the geographical location of the property development projects. Segment assets and capital expenditures are disclosed by the ge Capital expenditure is the total cost incurred during the year to acquire assets that are expected to be used for more than one year. 62 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 3 Discontinuing operation During the year ended 31 December 2001, the Group disposed of its subsidiary in the Retailing Segment, a separate business segment. The results of the discontinuing operations in 2001 were as follows: Discontinuing operation 2002 2001 RMB RMB Revenue - 960,951,967 Cost of sales - (762,609,687) Gross profit - 198,342,280 Gain on sales of discontinuing operation - 216,568,750 Other operating income - 8,347,694 Distribution costs - (146,567,650) Administrative expenses - (26,391,178) Other operating expenses - (103,557) Profit from operations - 250,196,339 Net financing income - 510,843 Profit before tax - 250,707,182 Taxation - (36,963,223) Profit after tax - 213,743,959 Minority interests - (8,276,171) Net profit for the year - 205,467,788 =========== =========== At 31 August 2001, the Retailing Segment had shared net assets of RMB240,789,650. The Segment was sold for RMB457,358,400 cash and a pre-tax gain of RMB216,568,750 was recorded. The attributable income tax was RMB32,485,313, leaving a gain after tax of RMB184,083,437. 63 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 4 Effect of acquisition and disposal of subsidiaries (a) Acquisition During the year, the Group acquired the remaining 20% interest in Beijing Vanke Haikai Real Estate Development Limited (formerly Beijing Vanke Haikan Real Estate Company Limited) and additional 30% interest in Anshan Vanshan Properties Development Company Limited. The results of these subsidiaries are not material for the year. (b)Cash flow on acquisition of subsidiaries The assets and liabilities acquired, and the cash flows arising, can be analysed as follows: 2002 2001 Acquisition Acquisition Disposal RMB RMB RMB Fixed assets 8,334,347 646,707 (208,077,135) Other investments - - (100,000) Completed properties for sale 48,266,531 - - Properties under 1,496,149 - - development Inventories 102,141 - (245,103,470) Trade and other receivables 8,382,218 3,592,040 (191,942,284) Cash 16,660,131 5,351,437 (21,466,026) Current interest bearing loans and borrowings (300,000) - - Trade and other payables (32,808,753) (133,864) 383,640,355 Taxation (13,492) - (45,887,017) Net identifiable assets and liabilities 50,119,272 9,456,320 (328,935,577) Less: Minority interests (18,070,468) - 88,145,927 Interest in associates (20,548,804) (2,756,320) - Profit on disposals - - (216,568,750) Consideration paid/(received), satisfied in cash 11,500,000 6,700,000 (457,358,400) Cash (acquired)/disposed of (16,660,131) (5,351,437) 21,466,026 Cash (inflow)/outflow (5,160,131) 1,348,563 (435,892,374) ========= ========= ========== (c) Disposal During the year, the Group incurred expenses of RMB442,985 in winding up a subsidiary. This resulted to a loss on disposal of RMB442,985. The results of the subsidiary are not material for the year. 64 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 5 Other operating income 2002 2001 RMB RMB Amortisation of negative goodwill (note 14) 2,224,662 2,729,242 Consultancy fee income 13,442,599 - Commission income 3,247,094 - Forfeited deposits from customers and compensation from customers 2,398,274 10,166,015 Profit on disposal of other investments - 426,000 Profit on disposal of marketable securities - 1,234,001 Gain on disposal of fixed assets - 488,917 Other sundry income 1,742,984 4,804,461 23,055,613 19,848,636 ========= ========= 6 Other operating expenses 2002 2001 RMB RMB Amortisation of goodwill (note 14) 2,491,970 4,845,775 Penalties to government 1,924,449 2,570,295 Compensation to customers 3,777,583 1,437,347 Loss on disposal of a subsidiary (note 4(c)) 442,985 - Loss on disposal of an associate 386,681 - Loss on disposal of fixed assets 608,040 - Other sundry expenses 3,888,604 1,918,265 13,520,312 10,771,682 ========= ========= 7 Personnel expenses 2002 2001 RMB RMB Wages, salaries and other staff costs 261,074,798 230,329,724 ========= ========= Including retirement costs 15,116,867 14,564,035 ========= ========= The average number of employees during 2002 was 6,055 (2001: 5,349). 65 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 8 Net financing income 2002 2001 RMB RMB Interest income 10,821,821 15,130,978 Dividends 1,135,227 420,725 Total financial income 11,957,048 15,551,703 ========== ========== Interest expense and other borrowing costs 102,441,333 78,742,229 Less: Interest capitalised (101,534,936) (70,103,368) 906,397 8,638,861 Foreign exchange losses/(gain) 343,465 (727,031) Total financial expenses 1,249,862 7,911,830 ========== ========== Net financing income 10,707,186 7,639,873 ========== ========== Interest expense and other borrowing costs have been capitalised at a rate of 4.8% (2001: 5.6% - 6.6%) per annum. 9 Taxation (a)Taxation in the consolidated income statement comprises: 2002 2001 RMB RMB PRC income tax for the year 120,042,472 113,083,613 Underprovision in respect of prior years 1,920,352 2,102,720 121,962,824 115,186,333 Change in deferred taxes (note 18) 4,628,273 (250,000) 126,591,097 114,936,333 ========== ========== The provision for PRC income tax is based on the estimated taxable income at the rates applicable to each company in the Group. 66 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 9 Taxation (continued) (a)Taxation in the consolidated income statement comprises: (continued) The Group’s applicable tax rate represents the weighted average of the PRC income tax rates, which range between 15% and 33%. The following is a reconciliation of income taxes calculated at the applicable tax rate with income tax expense: 2002 2001 RMB RMB Accounting profit before tax 524,243,009 499,003,965 ========== ========== Income tax computed by applying tax rate of 15% 78,636,451 74,850,595 Effect of tax rates in various PRC locations 54,789,294 40,289,018 Non-taxable income (750,000) - Non-deductible expenses 3,123,000 864,000 Effect of tax losses utilised (11,128,000) (3,170,000) Underprovision in respect of prior years 1,920,352 2,102,720 Income tax expense 126,591,097 114,936,333 ========== ========== (b)Taxation in the consolidated balance sheet represents: 2002 2001 RMB RMB Balance of PRC income tax relating to prior years 43,704,935 51,064,909 Provision for PRC income tax for the year 120,042,472 113,083,613 PRC income tax paid (129,383,099) (122,363,939) 34,364,308 41,784,583 Provision for PRC business tax and city construction tax 52,308,192 54,732,316 PRC value added tax provision 201,203 107,743 PRC land appreciation tax recoverable (7,233,345) (2,887) Other PRC taxation 912,695 914,936 80,553,053 97,536,691 ========== ========== 67 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 10 Earnings per share (a) Basic earnings per share The calculation of basic earnings per share is based on the net profit for the year attributable to shareholders of RMB382,024,878 (2001: RMB375,799,131) and on the weighted average number of ordinary shares outstanding during the year of 630,971,949 shares (2001: 630,971,941 shares). (b) Diluted earnings per share The calculation of diluted earnings per share based on the net profit for the year attributable to shareholders of RMB382,024,878 (2001: RMB375,799,131) and on the weighted average number of ordinary shares outstanding during the year of 700,537,275 shares (2001: 630,971,941 shares), calculated as follows: The conversion of the remaining convertible bonds will not affect the profit attributable to shareholders as the interest accrued was capitalised as properties under development. Weighted average number of ordinary shares (diluted): 2002 2001 RMB RMB Weighted average number of ordinary shares at 31 December 630,971,949 630,971,941 Effect of conversion of convertible bonds 69,565,326 - Weighted average number of ordinary shares (diluted) at 31 December 700,537,275 630,971,941 ========== ========== (c) Subsequent to the year end, the Board of Directors of the Company proposed to issue additional ordinary shares out of the share premium in the ratio 10:10 to all shareholders. Had the ordinary shares of 630,974,713 been issued, the weighted average number of ordinary shares used in the calculation of the basic and diluted earnings per share would have been adjusted to 1,261,943,898 and 1,401,074,550 respectively. As a result, the basic and diluted earnings per share would have been adjusted to RMB0.30 and RMB0.27 respectively based on the net profit for the year attributable to shareholders of RMB382,024,878. 11 Dividend A dividend of RMB0.2 per share, resulting in a total dividend payment of RMB126,194,388, in respect of the year ended 31 December 2001 was declared and paid during the year ended 31 December 2002 (note 23). A dividend of RMB0.2 per share, resulting in a total dividend payment of RMB126,194,943, in respect of the year ended 31 December 2002 is to be proposed at the Company’s forthcoming annual general meeting. The dividends have not been provided for. 68 Financial statements for the year Furniture, Investment Improvements Plant and fixtures and Motor Buildings properties to premises machinery equipment vehicles RMB RMB RMB RMB RMB RMB Cost: At 1 January 2002 307,319,902 242,236,047 41,217,511 8,042,541 64,549,721 41,944,856 Additions 2,900,000 49,943,860 20,337,535 658,924 10,112,894 6,796,741 Reclassification - Transfer from construction in progress 43,113,933 - - 2,126,250 2,051,650 - - Transfer from completed properties for sale 51,958,976 - - - - - Disposals (32,733,974) (7,384,147) (9,150,171) (1,816,795) (2,982,613) (2,909,696) At 31 December 2002 372,558,837 284,795,760 52,404,875 9,010,920 73,731,652 45,831,901 ----------------- ----------------- ----------------- --------------- ----------------- ----------------- Aggregate depreciation and impairment losses: At 1 January 2002 69,279,533 32,369,415 14,466,359 5,817,399 31,070,588 27,378,108 Charge for the year 19,442,684 13,281,435 16,970,455 546,324 10,826,024 6,111,304 (Write back of provision)/provision for Impairment (6,947,639) 1,000,000 - - - - Reclassification - Transfer from completed properties for sale 3,118,260 - - - - - Write back on disposals (6,875,952) (829,381) (2,761,422) (1,032,657) (2,445,457) (3,813,675) At 31 December 2002 78,016,886 45,821,469 28,675,392 5,331,066 39,451,155 29,675,737 ----------------- ----------------- ----------------- --------------- ----------------- ----------------- Net book value: At 31 December 2002 294,541,951 238,974,291 23,729,483 3,679,854 34,280,497 16,156,164 ========== ========== ========== ========= ========== ========== At 31 December 2001 238,040,369 209,866,632 26,751,152 2,225,142 33,479,133 14,566,748 ========== ========== ========== ========= ========== ========== No buildings of the Group (2001: Nil) are pledged to secure banking facilities (note 24). Investment properties are accounted for as fixed assets. It comprises certain commercial properties that are leased to external parties. The directors valu properties at RMB271,680,000 (2001: RMB231,097,000). The value is determined having regard to recent market transactions for similar properties in the the Group’s investment properties. 13 Const 2002 2001 RMB RMB Balance at 1 January 21,622,103 - Additions 25,669,730 21,622,103 Transfer to fixed assets (note 12) (47,291,833) - Balance at 31 December - 21,622,103 ========== ========== 69 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 14 Intangible assets Negative goodwill Goodwill Total RMB RMB RMB Cost: At 1 January 2002 (23,619,665) 26,071,422 2,451,757 Disposal 4,599,048 (3,404,963) 1,194,085 At 31 December 2002 (19,020,617) 22,666,459 3,645,842 --------------- --------------- --------------- Aggregate amortisation: At 1 January 2002 (19,170,345) 21,555,983 2,385,638 Charge for the year (2,224,662) 2,491,970 267,308 Write back on disposal 4,599,048 (3,404,963) 1,194,085 At 31 December 2002 (16,795,959) 20,642,990 3,847,031 --------------- --------------- --------------- Net book value: At 31 December 2002 (2,224,658) 2,023,469 (201,189) ========= ========= ========= At 31 December 2001 (4,449,320) 4,515,439 66,119 ========= ========= ========= Amortisation charge of negative goodwill and goodwill for the year is included in “other operating income” (note 5) and “other operating expenses” (note 6) respectively. The negative goodwill is being recognised in the consolidated income statement over a five year period. 15 Principal subsidiaries Details of principal subsidiaries at 31 December 2002 are as follows: Percentage of equity held by the Group Principal Name of company 2002 2001 activities Shenzhen Vanke Real Estate 100% 100% Property Company Limited development Shenzhen Vanke Property Company 100% 100% Property Limited (formerly Shenzhen development Poseidon Properties Company Limited) Shenzhen Vanke Financial 100% 100% Investment Consultancy Company Limited trading and consultancy services 70 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 15 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2002 2001 activities Shenzhen Vanke Film and Television 100% 100% Production of Company Limited video and films Tianjin Vanke Shine (Group) 100% 100% Property Company Limited development Tianjin Vanke Property 100% 100% Property Management Company Limited development Beijing Vanke Enterprises 100% 100% Property Shareholding Company Limited development Shanghai Vanke Real Estate 100% 100% Property Company Limited development Shanghai Vanke City Garden Property 100% 100% Property Development Company Limited development Shanghai Vanke Xuhui Property 100% 100% Property Company Limited development Shanghai Vanke Zhongshi Property 50% - Property Company Limited development Shanghai Vanke Huaou Property 100% - Property Company Limited development Shenyang Vanke Real Estate 100% 100% Property Company Limited development Dalian Vanlin Properties 100% 100% Property Development Company Limited development Chengdu Vanke Xingye 100% 100% Property Company Limited development Chang Chun Vanke Real Estate 100% 100% Property Company Limited development Shanghai Vanke Minhang 100% 100% Property Property Company Limited development Shanghai Vanke Pudong 100% 100% Property Property Company Limited development 71 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 15 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2002 2001 activities Shanghai Vanke Baoshan 100% 100% Property Property Company Limited development Beijing Haikai Vanke Real Estate 100% 80% Property Development Company Limited development (formerly Beijing Vanke Haitan Real Estate Development Company Limited) Tianjin Vanke Shine Development 100% 100% Property Company Limited development Shenzhen A-Housing Company 100% 100% E-business Limited Anshan Vanshan Properties 65% 35% Property Development Company development Limited Jiangxi Vanke-Yida Real Estate 50% 50% Property Development Company Limited development Shenyang Vanke Wonderland Company 100% - Property Limited development Shenyang Vanke Metropolitan Company 100% - Property Limited development All the above companies’ country of establishment and operation is the PRC. 16 Investments in associates Details of principal associates at 31 December 2002 are as follows: Percentage of interest held by the Group Principal Name of company 2002 2001 activities Shenzhen Color Splendor - 40% Production of Graphics Limited colour graphic products Shanghai Vansheng Real Estate 50% 50% Property Company Limited development Beihai Vanda Real Estate 40% 40% Property Company Limited development All the above companies’ country of establishment and operation is the PRC. 72 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 17 Other investments 2002 2001 RMB RMB Investments, at cost 54,811,347 46,211,347 ========= ========= Investments represent investments in unquoted shares of various companies during the year. 18 Deferred tax assets/(liabilities) Deferred tax assets and deferrred tax liabilities at 31 December 2002 and 2001 are attributable to the items detailed as follows: 2002 2001 RMB RMB Deferred tax assets: Tax losses 2,936,250 - Provisions for accounting purposes - 7,564,523 Total deferred tax assets 2,936,250 7,564,523 Deferred tax liabilities: Recognition of transaction costs and discount of convertible bonds (note 23) (6,158,939) - Net deferred tax (liabilities)/assets (3,222,689) 7,564,523 ======== ======== Movement in net deferred tax (liabilities)/assets: 2002 2001 RMB RMB Balance at 1 January 7,564,523 7,314,523 Transferred (from)/to consolidated income statement (note 9(a)) (4,628,273) 250,000 Relating to convertible bonds recognised directly in reserves (note 23) (6,158,939) - Balance at 31 December (3,222,689) 7,564,523 ======== ======== 73 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 18 Deferred tax assets/(liabilities) (continued) Deferred tax assets have not been recognised in respect of the following items: 2002 2001 RMB RMB Deductible temporary differences 23,685,000 48,700,000 Tax losses 145,800,000 122,000,000 169,485,000 170,700,000 ========= ========= The tax losses will expire between 2003 to 2007. The deductible temporary differences will not expire under current tax legislation. The above deferred tax assets have not been recognised because it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom. 19 Inventories 2002 2001 RMB RMB Raw materials 3,289,909 861,740 Work in progress - 803,316 Finished goods 3,118,739 3,315,585 6,408,648 4,980,641 ========= ========= Inventories recognised as cost of sales for the year 13,800,063 786,071,439 ========= ========= In respect of finished goods, a general provision of RMB259,687 (2001: RMB259,687) has been made to the financial statements to state the inventories at the lower of cost and net realisable value. 20 Trade and other receivables 2002 2001 RMB RMB Debtors, prepayments and other receivables 581,393,653 533,042,397 Amounts due from associates 7,359,083 18,299,082 Deposit with a security broker firm 1,748 1,744 588,754,484 551,343,223 ========= ========= RMB11 million included in prepayments is not expected to be recovered within one year. 74 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2002 21 Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks. 22 Share capital Registered, issued and fully paid up capital consisted of A and B shares of RMB1 each. The holders of A and B shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Company. A share B share Total 2002 2001 2002 2001 2002 2001 RMB RMB RMB RMB RMB RMB At 1 January 509,216,804 509,216,804 121,755,137 121,755,137 630,971,941 630,971,941 Issued upon conversion of convertible bonds 2,772 - - - 2,772 - At 31 December 509,219,576 509,216,804 121,755,137 121,755,137 630,974,713 630,971,941 ========= ========= ========= ========= ========= ========= During the year, 2,772 (2001: Nil) A shares were issued on the conversion of convertible bonds with total carrying value of RMB32,987 (2001: RMB Nil) made up as follows: 2002 2001 RMB RMB Liability component (note 25) 30,020 - Equity component (note 23) 2,980 - Cash refund to bondholders included in trade and other payables (13) - 32,987 - ========= ========= The balance of RMB30,215 (2001: RMB Nil) was credited to share premium account. 75 Foreign Convertible Share premium exchange reserve Statutory reserves bonds reserves Retained prof RMB RMB RMB RMB RM (Note (a)) (Note (b)) (Note (c)) (Note (d At 1 January 2001 1,411,554,630 10,852,608 797,652,282 - 123,898,67 Profit for the year - - - - 375,799,13 Adjustment on translation of foreign subsidiaries - 17,528 - - Proposed transfer from retained profits - - 224,775,412 - (224,775,41 Dividend paid - 2000 (note 11) - - - - (113,574,94 At 31 December 2001 1,411,554,630 10,870,136 1,022,427,694 - 161,347,44 =========== ========= =========== =========== ======== At 1 January 2002 1,411,554,630 10,870,136 1,022,427,694 - 161,347,44 Profit for the year - - - - 382,024,87 Adjustment on translation of foreign subsidiaries - 420,381 - - Proposed transfer from retained profits - - 248,573,828 - (248,573,82 Convertible bonds issued (note 25) - - - 132,590,802 Share issued upon conversion of convertible bonds (note 22) 30,215 - - (2,980) Share issuing cost (616) - - 62 Deferred tax recognised (note 18) - - - (6,158,939) Dividend paid - 2001 (note 11) - - - - (126,194,38 At 31 December 2002 1,411,584,229 11,290,517 1,271,001,522 126,428,945 168,604,10 =========== ========= =========== =========== ======== Notes: (a) Share premium Subsequent to the year end, the Board of Directors of the Company proposed to issue additional shares out of the share premium in the ratio 10:10 to all of 630,974,713 shares with a par value of RMB1 each will be issued in addition to the total share capital of 630,974,713 shares as at 31 December 2002 will be subject to shareholders’ approval at a general meeting. After the additional issue, the total share capital will be increased to 1,261,949,426 RMB630,974,713 will be expensed to the share premium. If the conversion of convertible bonds increase the total number of shares issued by the Company on the date of registration for shares qualifying dividend, the ratio 10:10 for the additional issue out of the share premium and the dividend per ordinary share will remain unchanged while the shares premium and the total amount for the distribution of dividend will be increased accordingly. (b) Statutory reserves Statutory reserves include the following items: (i) Statutory surplus reserve According to the PRC company law, the Company is required to transfer 10% of its profit after taxation, as determined under PRC Accounting R surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribu shareholders. Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new sh proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after suc 25% of the registered capital. 76 23 Reserves (continued) Notes: (continued) (b) Statutory reserves (continued) (ii) Statutory public welfare fund According to the PRC company law, the Company is required to transfer 5% to 10% of its profit after taxation, as determined under PRC Accounting Regulations, to the statutory public welfare fund. This fund can only be utilised on capital items for the collective benefits of the Company’s employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than in liquidation. The transfer to this reserve must be made before distribution of a dividend to shareholders. The Directors have resolved to transfer 5% of the current year’s profit after taxation to the fund. (iii) Discretionary surplus reserve The transfer to this reserve from the consolidated income statement and its usage are subject to the approval of shareholders at general meetings. (c) Convertible bonds reserves The reserve for convertible bonds comprises the value of option granted to bondholders to convert their convertible bonds into A shares of the Company (refer to note 25). (d) Retained profits According to the PRC company law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IFRS. As of 31 December 2002 the reserve available for distribution was RMB12,269,641 (2001: RMB4,617,138), after taking into account the current year’s proposed final dividend. 24 Interest-bearing bank loans This note provides information about the contractual terms of the Group’s interest-bearing bank loans. For more information about the Group’s exposure to interest rate and foreign exchange risk, please refer to note 32. 2002 2001 RMB RMB Non-current Unsecured bank loans 160,000,000 261,000,000 ========== ========== 77 24 Interest-bearing b At 31 December 2002, the bank loans were repayable as follows: 2002 2001 RMB RMB More than one year, less than two years 160,000,000 101,000,000 More than two year, less than three years - 160,000,000 160,000,000 261,000,000 =========== =========== Current Secured bank loans - - Unsecured bank loans 460,000,000 1,353,000,000 460,000,000 1,353,000,000 =========== =========== No bank loan (2001: Nil) is secured on the Group’s fixed assets. The Group’s total bank loans outstanding at the end of 2001 and 2002 are denominated in RMB. The average nominal interest rate is 5.85% (2001: 5.87%). Type Currency/face value Carrying amount Effective interest rate Fixed/floating 2002 2001 2002 2001 2002 2001 200 Bank loan RMB 460,000,000 423,000,000 5.04% 5.73% Fixed Fixed 1 to 6 mont Bank loan RMB - 930,000,000 - 5.73% Fixed Fixed 7 to 12 mont Bank loan RMB 160,000,000 261,000,000 6.63% 6.63% Fixed Fixed 1 to 2 yea 620,000,000 1,614,000,000 ========== ========== 2002 2001 RMB RMB Proceeds from issue of 15,000,000 convertible bonds of RMB100 each 1,500,000,000 - Transaction costs (31,680,353) - Net proceeds 1,468,319,647 - Amount classified as equity (132,590,802) - Conversion into A shares (30,020) - Transaction costs released to share premium upon conversion 554 - Discount on convertible bonds amortised 15,802,683 - Transaction costs amortised 3,362,284 - Carry value of liability at 31 December 1,354,864,346 - =========== =========== 78 25 Convertible bonds (continued) The amount of the convertible bonds initially recognised in equity is net of attributable transaction costs of RMB2,860,769. On 13 June 2002, the Company issued convertible bonds (the “Bonds”) amounting to RMB1,500,000,000. The Bonds are listed on the Shenzhen Stock Exchange (the “Stock Exchange”) and are guaranteed by the Bank of China Shenzhen branch. Each Bond will, at the option of the holder, be convertible from 13 December 2002 to 13 June 2007 into A shares with a par value of RMB1 each of the Company (“A Shares”) at a conversion price of RMB12.1 per share. The conversion price of the Bonds will be adjusted accordingly if the Company distribute bonus issue, dividends, right issues and increase the share capital (not including the share issue upon conversion of the Bonds) which lead to change in equity of the Company. Since 17 July 2002, the conversion price has been revised to RMB11.9 per share as a result of the distribution of a dividend of RMB0.2 per share. Exercise in full of the conversion rights attaching to the Bonds as at 31 December 2002 would have resulted in the issue of 126,047,647 A shares. The Bonds are interest bearing at a rate of 1.5% per annum payable in arrears on 13 June each year. The Board of Directors of the Company can lower the conversion price of the Bonds by not more than 20% if the closing price of the Company’s A shares on the Stock Exchange is lower than 80% of the conversion price for 20 consecutive dealing days. The Company may redeem in whole or in part the Bonds from 6 months after 13 June 2002 if the closing price of the Company’s A shares on the Stock Exchange is at least 130% of the conversion price for 30 consecutive dealing days. The Bondholders may require the Company to redeem all or part of the Bonds from 6 months after 13 June 2002 if the closing price of the A shares on the Stock Exchange is lower than 70% of the conversion price for 30 consecutive dealing days. 26 Trade and other payables 2002 2001 RMB RMB Accounts payable - trade 847,428,186 489,986,267 Bills payable 9,687,600 - Amounts due to associates 6,005,324 6,005,324 Deposits received in advance 544,317,648 179,250,981 Other payables and accrued expenses 1,030,686,008 806,654,677 2,438,124,766 1,481,897,249 =========== =========== 79 27 Provisions Compensation Claim to customers Total RMB RMB RMB Balance at 1 January 2002 15,351,012 21,850,000 37,201,012 Provisions made during the year - 11,000,000 11,000,000 Provisions used during the - (23,677,340) (23,677,340) year Balance at 31 December 2002 15,351,012 9,172,660 24,523,672 ========= ========= ========= Claim The provision of RMB15,351,012 as at 1 January 2002 related to a claim from two customers (“plaintiffs”). In 1995, the Group sold certain properties in Tianjin Vanke Centre, with a sublease arrangement, to the plaintiffs. The Group also arranged mortgage loan from a bank on behalf of the plaintiffs. When the Group was aware that the bank did not approve the mortgage loan, it offered to repurchase the properties from the plaintiffs. However, the plaintiffs rejected the offer. On 21 April 2001, the plaintiffs sued the Group in Tianjin People’s High Court and requested for a compensation for the income of sublease and the related interest. On 10 July 2002, the Court made a judgement that the Group was required to pay US$1,087,459 and the related interest to the plaintiffs. However, the plaintiffs have appealed to the Court for a further compensation. As the case has not been resolved, the estimated amount of RMB15,351,012 was provided in the financial statements. Compensation to customers The provision of RMB21,850,000 as at 1 January 2002 represented the estimated compensation payable to customers in relation to the quality problems found in properties constructed by the Group in Tianjin. During the year, an additional provision of RMB11,000,000 is made in the financial statements to provide for the estimated compensation, by reference to the actual expenses incurred in the past. 28 Related parties Reference should be made to the following notes regarding related parties: Associates (notes 16, 20, 26) 80 29 Operating leases (a) Leases as lessee Non-cancellable operating leases are payable as follows: 2002 2001 RMB RMB Not later than one year 4,167,136 3,608,579 Between one and five years 4,173,676 4,551,387 Later than five years 1,872,791 - 10,213,603 8,159,966 ========= ========= Total rental expenses for all operating leases were RMB10 million for the year (2001: RMB48 million). The operating leases relate to the rental payments for offices and retail outlets space. (b) Leases as lessor The Group leases out certain properties under non-cancellable operating leases. Rentals are receivable as follows: 2002 2001 RMB RMB Not later than one year 10,627,022 7,008,794 Between one and five years 40,710,031 26,905,263 Later than five years 141,878,216 129,383,781 193,215,269 163,297,838 ========= ========= Total rental income for all operating leases was RMB15 million (2001: RMB15 million) which has been included in revenue and RMB12 million (2001: RMB8 million) expenses were recognised in the consolidated income statement relating to investment properties. During the year, the Group leases certain properties to a former subsidiary which is now a subsidiary of a major shareholder of the Group. The rental income amounted to RMB4.7 million for the year (2001: RMB4.35 million). 81 30 Capital commitments and contingent liabilities (a) Capital commitments Capital commitments outstanding at 31 December 2002 not provided for in the financial statements were as follows: 2002 2001 RMB RMB Contracted for 1,843,270,919 3,005,209,802 Authorised but not contracted 11,425,823 68,264,300 1,854,696,742 3,073,474,102 =========== =========== (b) Contingent liabilities (i) As at 31 December 2002, there were contingent liabilities in respect of guarantees given by the Group to banks to secure the mortgage arrangement of property buyers. As at 31 December 2002, the outstanding guarantees to banks amounted to RMB3,903 million (2001: RMB3,068 million), including guarantees of RMB1,922 million (2001: RMB1,056 million) which will be terminated upon the completion of the transfer procedures with the buyers in respect of the legal title of the properties. (ii) As stated in note 27 on the financial statements, the appeal case from the plaintiffs is pending. No provision for further compensation is provided in the financial statements. (iii) As at 31 December 2002, the Group has received a claim from a contractor for the repayment of construction costs of RMB29.7 million. The Directors of the Group and the legal advisor are of the opinion that the Group has strong ground of winning the case and, accordingly, no provision is made in the financial statements. 82 31 Note to cash flow statement Cash flows from operating activities 2002 2001 RMB RMB RMB RMB Operating profit 525,852,261 499,068,815 Adjustments for: Depreciation 67,178,226 86,376,987 Profit on disposal of marketable securities - (1,234,001) Profit on disposal of other investments - (426,000) Loss/(profit) on disposal of fixed assets 608,040 (488,917) Loss/(profit) on disposal of a subsidiary 442,985 (216,568,750) Loss on disposal of an associate 386,681 - (Decrease)/increase in provision for bad debt and doubtful debts (3,626,871) 513,191 Provision for impairment of fixed assets 1,000,000 18,854,639 Write back of provision for inventory losses and obsolescence - (3,543,439) Provision for completed properties for sale 88,151 17,076,237 Provision/(write back of provision) for properties held for development 10,000,000 (1,933,984) Recognition of negative goodwill (2,224,662) (2,729,242) Amortisation of goodwill 2,491,970 4,845,775 Interest income (10,821,821) (15,130,978) Interest expense 906,397 78,742,229 Dividend income (1,135,227) (420,725) 65,293,869 (36,066,978) Operating profit before working capital changes carried forward 591,146,130 463,001,837 83 31 Note to cash flow statement (continued) Cash flows from operating activities (continued) 2002 2001 RMB RMB RMB RMB Operating profit before working capital changes brought forward 591,146,130 463,001,837 Decrease/(increase) in amount due from associates 9,961,110 (6,810,649) Increase in trade and other receivables (36,342,171) (148,574,372) (Increase)/decrease in inventories (1,325,866) 63,601,378 (Increase)/decrease in properties under development (468,231,716) 577,616,988 Increase in completed properties for sale (152,520,630) (487,031,374) Increase in properties held for development (539,365,472) (1,217,757,535) Increase/(decrease) in trade and other payables 910,601,038 (461,819,140) (Decrease)/increase in provisions (12,677,340) 21,850,000 Increase in amount due to associates - 3,697,251 Decrease in other tax payable included in taxation (9,576,855) (48,518,181) (299,477,902) (1,703,745,634) Cash inflow/(outflow) from operations 291,668,228 (1,240,743,797) Interest paid (70,901,638) (78,742,229) Net income tax paid (129,383,099) (122,363,939) (200,284,737) (201,106,168) Net cash inflow/(outflow) from operating activities 91,383,491 (1,441,849,965) =========== =========== 84 32 Financial instruments Financial assets of the Group include cash, listed and unlisted investments, and trade receivables. Financial liabilities of the Group include bank loans, trade payables and convertible bonds. (a) Interest rate risk The interest rates and terms of repayment of bank loans of the Group are disclosed in note 24 to the financial statements. The interest rate and terms of the convertible bonds are disclosed in note 25 to the financial statements. (b) Credit risk Credit risk represents the accounting loss that would be recognised at the reporting date if counter-parties failed completely to perform as contracted. At balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. (c) Foreign exchange risk Foreign exchange risk is defined as transaction risk, i.e. the risk of the Group’s commercial cash flows being adversely affected by a change in exchange rates for foreign currencies against RMB, and balance sheet risk, i.e. the risk of net monetary assets in foreign currencies acquiring a lower value when translated into RMB as a result of currency movements. Substantially all the Group’s cash flows are denominated in RMB. The Group has no material balance sheet exposure in respect of the subsidiaries’ net monetary assets denominated in foreign currencies. (d) Fair value The fair values of cash, trade receivables, trade payables and bank loans are not materially different from their carrying amounts. The fair value convertible bonds is estimated at RMB1,424,819,000 by reference to the market value. 85 (Expressed in Renminbi Yuan) Net Impact of IFRS Adjustments on the Results and Net Assets for the year ended 31 December 2002 Net profit for the year ended Net assets as at 31 December 31 December 2002 2002 RMB RMB As determined pursuant to PRC accounting regulations 382,421,274 3,380,769,043 Adjustments to align with IFRS: Recognition and amortisation of negative goodwill 1,445,978 3,090,293 Recognition and amortisation of goodwill 2,785,899 (2,389,315) Dividend declared after year end - 126,194,943 Deferred tax assets (4,628,273) 2,936,250 Deferred tax liabilities - (6,158,939) Difference in revaluation of asset - (17,146,128) Amortisation of discount on convertible bonds - 15,802,683 Discount on convertible bonds - 116,785,201 As restated in conformity with IFRS 382,024,878 3,619,884,031 ========== =========== 86 13 Directory of the Articles Reviewed 1. The Accounts Report with stamp and signatures of the Company’s legal person representative, financial controller and finance manager. 2. Original Auditors’ Report with the stamp of the accounting firm, stamp and signature of the Certified Public Accountants. 3. Original announcements and documents of the Company disclosed during the period in newspapers designated by the China Securities Regulatory Commission. 4. Annual report in PRC Accounting Standards. The Company’s Annual Report is edited in Chinese and English, should there be any differences in understanding between the two versions(except the differences due to the discrepancy between PRC accounting regulations and IAS), please refer to the Chinese one. 87