晨鸣纸业(000488)晨鸣Ｂ2003年年度报告（英文版）

山东晨鸣纸业集团股份有限公司 SHANDONG CHENMING PAPER HOLDINGS LIMITED Annual Report 2003 1 Important Declaration The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. This Report is written both in English and Chinese. In case there exists discrepancy in understanding between the two versions, the Chinese version shall prevail. Mr. Chen Hongguo, the Chairman, Mr. Yu Shiyong,the CFO, and Mr.Liu Junwu the Financial Principal hereby declares that: The financial statements carried in this annual report are of verity and complete. 2 Contents I. Company Profile......................................................................................................................................4 II. Highlights of Accounting and Business Data.......................................................................................5 III. Change in Share Capital and Shareholders.......................................................................................8 IV. Particulars About the Directors, Supervisors, Senior Managements, and Employees ................11 V. Managerial Structure ..........................................................................................................................14 VI. Particulars about the Shareholders’ General Meeting ...................................................................16 VII. Report of the Board of Directors.....................................................................................................18 VIII. Report of the Supervisory Committee ...........................................................................................28 IX. Significant Events ...............................................................................................................................30 X. Financial Reports .................................................................................................................................32 XI. Documents for Reference...................................................................................错误 未定义书签 3 I. Company Profile 1. Statutory Name in Chinese: 山东晨鸣纸业集团股份有限公司 Statutory Name in English: SHANDONG CHENMING PAPER HOLDINGS LIMITED English short form: SCPH 2. Legal Representative: Chen Hongguo 3.Secretary of the Board of Directors: Hao Jun Security Affairs Representative: Wang Wei Address: Securities Department, No. 595 Shencheng Rd., Shouguang City, Shandong Province Tel.: 0536 5280011 Fax: 0536 5228900 E-mail:cmzqb@chenming.com.cn 4. Registered Address and Office Address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Post Code: 262700 Internet Website: http://www.chenmingpaper.com 5. Newspapers for Disclosing the Information: China Securities Journal, Hong Kong Commercial Daily Internet Website Designated by China Securities Regulatory Commission for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Semi-Annual Report is Prepared and Placed: Securities Department of the Company 6.Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stocks: Chenming Paper, Chenming B Stock Code: 000488 200488 7. Misc. Information: Business registration changed at: September 15, 2003. Registered address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Business license No. : Qi-gu-lu-zong-zi No. 000003 Tax registration: No. 370783613588986 Certified Public Accountants invited by the Company: Tianjian Certified Public Accountant Co., Ltd. Address: 17th floor, Block A, Investment Plaza, No.27 Financial Street, Xicheng District, Beijing PricewaterhouseCoopers CPA Prince's Building, 22nd Floor, Hong Kong 4 II. Highlights of Accounting and Business Data (I) Major accounting data (in RMB) Items 2003 Gross profit 847,587,681.32 Net profit 628,111,635.21 Net profit, less non-recurring losses/gains 588,117,031.53 Major business profit 1,624,729,186.82 Other business profit 4,504,158.75 Operation profit 783,456,083.07 Investment income 18,625,979.97 Allowance income 45,124,535.32 Non-business income/outgoing, net 381,082.96 Cash flow generated by business operation, 616,688,666.62 net Increase/decrease of cash and cash 244,375,893.43 equivalents, net Details of non-recurring losses/gains (in RMB) Items Amount Non-business income 3,971,688.68 Non-business outgoing -4,145,928.11 Tax refund and allowance income 30,066,931.29 Inventory depreciation provision returned 693,247.69 Gain/loss of entrusted investment 7,828,000.00 Gain from disposal of share equities 1,580,664.13 Total 39,994,603.68 The accounting statements were audited by both of the domestic and overseas CPA upon China Accounting Standard and International Accounting Standard respectively. The result of net profit of the domestic auditing (consolidated) is RMB628,111,600, while the result of net profit of the overseas auditing (consolidated) is RMB653,061,800 which is RMB24,950,200 higher than that of the domestic auditing. This was caused by: In accordance with the International Accounting Standard, (1) Adjustment of booking value of re-evaluation of trademarks and relative amortizing, which increased the profit by RMB1,450,000; (2) Adjustment of booking value of re-evaluation of fixed assets and relative depreciations, which increased the profit by RMB1,749,300; (3) Balance of bad debt provisions of previous years, which increased the profit by RMB13,862,500; (4) Adjustment of booking value of credit balance of equity investment and relative amortizings, which decreased the profit by RMB3,753,600; (5) Transferring of the governmental financed fixed asset construction from capital reserves into deferred incomes, which increased the profit by RMB17,560,600; (6) Transferring of the other governmental allowances from capital reserves into other business incomes, which increased the profit by RMB10,975,000; (7) Balance of clearing of enterprise income tax for year 2002, which decreased the profit by RMB16,893,600. 5 Notes: Discrepancy of domestic and overseas auditing results Items Amount (RMB 10 thousand) Net profit result audited by domestic CPA 62,811.16 Adjustment of booking value of re-evaluation of trademarks and relative amortizing 145.00 Adjustment of booking value of re-evaluation of fixed assets and relative depreciations 174.93 Balance of bad debt provisions of previous years 1,386.25 Adjustment of booking value of credit balance of equity investment and relative amortizing -375.36 Transferring of the governmental financed fixed asset construction from capital reserves into deferred 1,756.06 incomes Transferring of the other governmental allowances from capital reserves into other business incomes 1,097.50 Balance of clearing of enterprise income tax for year 2002 -1,689.36 Net profit result audited by overseas CPA 65,306.18 (II) Major accounting data and financial indices of the past 3 years at the end of the report period. 2002 Indices 2003 2001 Adjusted Not adjusted Major business revenue (RMB) 5,819,073,195.58 4,454,775,147.87 4,454,775,147.87 2,405,533,667.40 Net profit (RMB) 628,111,635.21 363,767,078.67 380,660,696.72 141,999,714.53 Total asset (RMB) 10,230,861,065.03 8,689,918,637.96 8,689,918,637.96 7,392,134,448.98 Shareholders’ equity (RMB) (minority 4,375,920,134.78 3,543,330,736.52 3,535,287,468.37 3,176,669,565.23 shareholders’ equity excluded) Gains per share (RMB/share) 0.70 0.7294 0.7632 0.2847 Gains per share (weighted) (RMB/share) 0.70 0.7294 0.7632 0.2847 Gains per share (diluted) (non-recurring 0.66 0.6475 0.6793 0.2652 gain/loss deducted) Gains per share (weighted) (non-recurring 0.66 0.6475 0.6793 0.2652 gain/loss deducted) Net capital per share (RMB/share) 4.87 7.1046 7.0885 6.3694 Adjusted net capital per share (RMB/share) 4.80 4.6256 6.9209 6.3074 Net cash flow per share generated by 0.69 2.0741 2.0741 0.2917 business operation Net gain/capital ratio (%) (diluted) 14.35 10.27 10.77 4.47 Net gain/capital ratio (%) (weighted) 15.96 10.82 11.31 4.70 Net gain/capital ratio and net gain per share calculated in accordance with article No. 9 of “The Regulations of Information Disclosing for Public Companies” issued by China Securities Supervisory Committee: 2003 Net gain/capital ratio (%) Gain per share (RMB) Profit of the report term Full Weighted Full Weighted diluted average diluted average 37.13% 41.29% 1.8098 1.8098 Major business profit Operation profit 17.90% 19.91% 0.8727 0.8727 Net profit 14.35% 15.96% 0.6997 0.6997 13.44% 14.95% 0.6551 0.6551 Net profit with non-recurring gain/loss deducted 6 (III) Change of shareholders’ equity and causations in the report term Subjects Share capital Capital reserves Surplus Statutory public Un-distributed Total of reserves welfare profit shareholders’ equity Initial 498,737,724 2,002,676,325.37 179,632,346.99 128,424,716.39 733,859,623.77 3,543,330,736.52 Increased 398,990,179 229,414,649.25 58,618,764.75 58,501,720.77 628,111,635.21 1,373,636,948.98 this term Decreased 299,242,634.00 117,043.98 241,687,872.74 541,047,550.72 this term At the end 897,727,903 1,932,848,340.62 238,251,111.74 186,809,393.18 1,120,283,386.24 4,375,920,134.78 of term Causation Capitalizing Increasing of Drawn from Drawn from Profit realized for of capital national bonds profit of current profit of current year reserves allowance year current year 7 III. Change in Share Capital and Shareholders (I) Change in Share Capital (in Shares) Before Changed currently After Issue of new from public Transferred Allotting Subtotal reserves Others Bonus shares (I) Non-current shares 1 Promoter’s shares 161,144,754 32,228,951 96,686,852 128,915,803 290,060,557 Including: State-owned shares 156,608,584 31,321,717 93,965,150 125,286,867 281,895,451 Domestic legal person shares 4,536,170 907,234 2,721,702 3,628,936 8,165,106 Overseas legal person holding shares Others 2 Legal person shares invited 3 Employees’ shares 54,112,420 10,822,484 32,467,452 -97,402,356 -54,112,420 4 Preference shares or others Total of non-current shares 215,257,174 43,051,435 129,154,304 -97,402,356 74,803,383 290,060,557 (II) Current shares 1 RMB common shares listed domestically 77,000,000 15,400,000 46,200,000 97,402,356 159,002,356 236,002,356 2 Foreign capital shares listed domestically 206,480,550 41,296,110 123,888,330 165,184,440 371,664,990 3 Foreign capital shares listed abroad 4 Others Total of current shares 283,480,550 56,696,110 170,088,330 97,402,356 324,186,796 607,667,346 (III) Total shares 498,737,724 99,747,545 299,242,634 398,990,179 897,727,903 (II) Issuing and listing of stocks 1. The profit distribution plan of year 2002 was examined and passed by the Shareholders’ General Meeting 2002 held on April 29, 2003. Basing on the total capital share of 498,737,724 at the end of 2002, 2 bonus shares were distributed to each 10 shares to all of the shareholders. 6 shares were supplemented to each 10 shares by the capital reserves. Therefore the total capital shares were increased up to 897,727,903 shares. 2. In March 1993, the company placed 18,591,500 employees’ shares at RMB1.2 per share. With several times of allotting through the years, it was increased to 97,402,356 shares at end of November 20, 2003. At November 21, 2003, the 97,402,356 of employee’s shares were placed in the market, therefore the common RMB shares (A shares) of the Company were increased up to 236,002,356 shares. Among them, 402,789 shares held by the directors, supervisors and senior managements were frozen by Shenzhen Stock Exchange. (III) Particulars about the shareholders 1. There are totally 49,558 shareholders at the end of the report term. 8 2. Share-holding status of top-10 shareholders Changed Share Shares held at Share Mortgaged Rank Shareholders’ name during portion the end of term categories or frozen the year % SHOUGUANG STATE- 281,895,451 31.40 State-owned None 1 OWNED ASSET +125,286,867 shares ADMINISTRATION (promoter) Fenghe Value Security Investment 20,790,200 2.31 Unknown 2 +10,386,600 A shares Foundation 3 Minsheng Securities Co., Ltd. 10,634,768 Unknown 1.18 A shares Unknown KWONG WAH INVESTMENT 9,415,562 1.05 Unknown 4 +3,225,562 B shares (SHOUGUANG) LIMITED BERMUDA TRUST(FAR 7,935,124 Unknown 0.88 Unknown 5 EAST)LTD-VALUE PARTNERS A B shares FD BTFE-BOBL/MANULIFE GLOBAL 7,621,831 Unknown 0.85 Unknown 6 B shares FUND-CHINA VALUE BTFE-VALUE PARTNERS 6,511,834 Unknown 0.73 Unknown 7 B shares INTELLIGHT FD-CHINA B SHS FD Shanghai Hong Kong Wanguo 5,690,639 Unknown 0.63 Unknown 8 B shares Securities NIKKOCITI TB S/A RE:JF CHINA 4,999,871 Unknown 0.56 Unknown 9 B shares MOTHER FD(716000) 10 Hao Yunfeng 4,455,837 +1,962,372 0.50 A shares Unknown The shareholder holding over 5% of the total shares of the Company was Shouguang State- owned Asset Administration. Its legal representative is Mr. Mao Derong, and its business range is managing and administrating of national owned assets and their accounting and asset representation. It takes 281,895,451 shares at the end of the term, which increased by 125,286,867 shares. No shares were mortgaged or frozen. No altering of controlling shareholder was occurred during the report term. 9 3. Particulars about the top-10 holders of current shares in shares Number of current shares Categories (A, B, H or Shareholders’ full name held at the end of term others) Fenghe Value Security Investment Foundation 20,790,200 A shares Minsheng Securities Co., Ltd. 10,634,768 A shares KWONG WAH INVESTMENT (SHOUGUANG) LIMITED 9,415,562 B shares BERMUDA TRUST(FAR EAST)LTD-VALUE PARTNERS A 7,935,124 B shares FD BTFE-BOBL/MANULIFE GLOBAL FUND-CHINA VALUE 7,621,831 B shares BTFE-VALUE PARTNERS INTELLIGHT FD-CHINA B SHS 6,511,834 B shares FD Shanghai Hong Kong Wanguo Securities 5,690,639 B shares NIKKOCITI TB S/A RE:JF CHINA MOTHER FD(716000) 4,999,871 B shares Hao Yunfeng 4,455,837 A shares Taihe Securities Investment Foundation 4,120,358 A shares Fenghe Value Security Investment Foundation and Taihe Securities Investment Foundation are both Particulars about the relations among the top-10 current share under the administrating of Jiashi Foundations holders. Management Co., Ltd. Relations among the other 8 shareholders are not to the knowledge of the company. 10 IV. Particulars About the Directors, Supervisors, Senior Managements, and Employees (I) Basic information Shares held Shares held at at the Change Names Position Sex Age Job Term the end (share) beginning of term of term (Share) (Share) Chen Hongguo Chairman Male 39 2001.9- +23,285 29,106 52,391 2004.9 Yin Tongyuan Vice Chairman, GM Male 46 2001.9- +26,777 33,471 60,248 2004.9 Li Mingren Director Male 44 2001.9- 0 0 0 2004.9 Hu Wenhe Director Male 58 2001.9- +4,657 5,821 10,478 2004.9 Guo Xiucheng Director, Vice GM Male 38 2001.9- 0 0 0 2004.9 Wang Zhijun Director Male 43 2001.9- +10,478 13,097 23,575 2004.9 Xia Youliang Director Male 40 2001.9- +6,985 8,731 15,716 2004.9 Hu Changqing Director, Vice GM Male 38 2001.9- +9,313 11,642 20,955 2004.9 Dong Jianwen Director, Vice GM Male 41 2003.4- +2,055 2,569 4,624 2004.9 Zhou Shaohua Director Male 42 2003.4- 0 0 0 2004.9 Zhao Jinghua Independent Director Male 42 2002.4- 0 0 0 2004.9 Liu Xueyan Independent Director Male 65 2002.4- 0 0 0 2004.9 Diao Yuntao Independent Director Male 39 2003.4- 0 0 0 2004.9 Independent Director Male 2003.4- 0 Wang Zhihua 45 0 0 2004.9 Zhou Chengjuan Independent Director Female 40 2003.4- 0 0 0 2004.9 Hao Yun Secretary of the Board Male 41 2001.9- +13,970 17,463 31,433 2004.9 Sun Qiang Chairman of the Male 34 2001.9- +13,970 Supervisory 2004.9 17,463 31,433 Committee Zhen Liyong Vice Chairman of the Male 38 2001.9- +9,314 Supervisory 2004.9 11,642 20,956 Committee Gao Junjie Supervisor Male 33 2001.9- +9,313 11,642 20,955 2004.9 Sun Dianming Supervisor Male 33 2003.4- 0 0 0 2004.9 Wang Zaiguo Supervisor Male 38 2003.4- +2,328 2,910 5,238 2004.9 Li Xueqin Vice GM Female 41 2003.3- +2,328 2,910 5,238 2004.9 Fang Lijun Vice GM Male 34 2001.9- +6,985 8,731 15,716 2004.9 Zhang Yanjun Vice GM Male 38 2001.9- +9,313 11,642 20,955 2004.9 Hou Huancai Vice GM Male 42 2001.9- +13,970 17,463 31,433 2004.9 Wang Fuzeng Vice GM Male 43 2001.9- +9,313 11,642 20,955 2004.9 Meng Feng Vice GM Male 32 2002.4- 0 0 0 2004.9 Yu Shiyong CFO Male 41 2003.1- 0 0 0 11 2004.9 Shao Xuejun Chief Engineer Male 38 2002.4- +4,657 5,821 10,478 2004.9 Note: (1) The changes of shareholding status of the directors, supervisors, and senior managements were due to the implementing of profit distribution plan of year 2002, which is, 2 bonus shares were distributed to each 10 shares to all of the shareholders. 6 shares were supplemented to each 10 shares by the capital reserves. (2) The resigning of Li Mingren, Xia Youliang, and Wang Zhijun from their positions of directors was approved by the 15th meeting of the 3rd term Board of Directors held on December 31, 2003, whereas this event is subject to the decision of the Shareholders’ General Meeting. (3) None of the directors or the supervisors takes position in any shareholding parties. (II) Annual payroll 1.With the approval of the 2002 Shareholders’ General Meeting, the salaries for directors and senior managements are fixed in the range of RMB200 thousand to RMB1.5 million annually. For those supervisors who take managerial jobs in the Company, their annual salaries will be decided by the council of General Manager in accordance with their actual positions. For those supervisors who don’t take any managerial jobs in the Company, their annual salaries will be ranged between RMB100 thousand and RMB200 thousand, and on the supervisory committee’s decision. 2.The annual payrolls of current directors, supervisors and senior managements are totalled to RMB9.28 million. Among them, the highest 3 directors are totalled to RMB3.88 million, while the highest 3 managements are totalled to RMB3.38 million. 3.With the approval of the 2002 Shareholders’ General Meeting, the Company pays RMB40 thousand (tax included) to each independent director annually. The transportation and accommodation expenses of independent directors to attend the board meeting or Shareholders’ General Meeting, as well as the reasonable expenses will be covered by the Company in accordance the relative rules of The Article of Association of the company. 4.Distributions of the annual payrolls of the directors, supervisors and senior managements are as: RMB1 million – 1.5 million 4 people RMB0.5 million – 1 million 3 people RMB0.2 million – 0.5 million 5 people RMB0.05 million – 0.2 million 12 people (III) Change of directors, supervisors and senior management (1) On the 9th meeting of the 3rd term Board of Directors held on Jan 11th, 2003, Mr. Dong Jianwen was approved to be engaged as the vice general manager of the Company, Mr. Yu Shiyong was engaged as the chief financial director. Mr. Guo Xicheng was removed from the position of chief accountant, Mr. Han Wenjian resgined from the position of vice Chairman of the board, Mr. Xu Xiangdong resigned from the position of vice general manager. (2) On the 10th meeting of the 3rd term Board of Directors held on March, 16, 2003, Ms. Li Xueqin was approved to be engaged as the vice general manager of the Company; Mr. Sun Ping was approved to resign from his position of vice general manager. 12 (3) On the 2002 Shareholders’ General Meeting held on April 29th, 2003, Mr. Dong Jianwen and Mr. Zhou Shaohua were elected the directors of the 3rd term Board of Directors till the due of the 3rd term Board. While Wang Zhihuan, Diao Yuntao, Zhou Chengjuan were elected the independent directors of the 3rd term Board of Directors till the due of its term. Han Wenjian, Xu Xiangdong and Li Ruohe were approved to assign from their positions of directors. (4) On the 2002 Shareholders’ General Meeting held on April 29th, Mr. Wang Zaiguo and Sun Dianming was elected the supervisors of the 3rd term supervisory committee till its due of term. Whereas Li Xueqin and Zhang Jun were approved to assign from the positions of the 3rd term supervisory committee. (5) On the 15th meeting of the 3rd term Board of Directors held on December 31, 2003, Li Mingren, Xia Youliang and Wang Zhijun were approved to resign from their positions of directors. Therefore the board nominated Liu Chengzhen, Hou Huancai, and Wu Bingyu as the new directors of the 3rd term Board of Directors till due of its term. This is subject to the approval of the Shareholders’ General Meeting. (IV) The employees There are totally 16292 employees in the company. Among the them, 10552 are production workers, 584 are sales clerks, 2443 are technicians, 208 are accounting clerks, 1263 are executives, and 1242 other personnel. In education levels, 504 are bachelor degree holders or above, 1969 are college diploma holders, 3713 are intermediate vocational diploma holders, 10106 are technical school or high school graduates or below. There isn’t any retired employee that the company need to pay pensions. Employees of the controlling subsidiaries are included in the above amounts. 13 V. Managerial Structure (I) Management of the Company Under the requirement of the Company Law, Security Law and Public Company Management Regulations, the company kept optimizing the management structure and operate the company in a standardized mean to ensure its healthy development. During the report term, the “Article of Association” was revised, “The Rules of Management” was formulated, 3 independent directors was engaged which made the number of independent directors reached 1/3 of the total directors. There is not obvious different between the practical situation of the Company and the regulatory documents issued by the Regulatory Council about the management of listed companies. (II) Independent directors’ fulfilling of responsibility In the report term, 5 of the independent directors that engaged by the company were doing their jobs responsibly. They presented the board meetings and exercised their judgments independently on the decision-making processes of personnel changing, related transactions, devalue provisions, salaries of directors and senior managements, motivating policies, chairman motivation foundation, correcting of accounting errors, and outgoing guarantees. Thus protecting the legal benefit of the whole company and middle-small shareholders as well. (III) Particulars about the separation of businesses, personnel, assets, organizations, and accounting from the controlling shareholder Shandong Shouguang State-owned Assets Administration is the first shareholder of the company. The company is completely separated in businesses, personnel, assets, organizations, and accounting from the controlling shareholder. 1. In the aspect of business: the company has its independent and complete business operation capability. The controlling shareholder is the administrator of state-owned assets, therefore no competition exist between two of the entities by running same or similar businesses. 2. In personnel: None of the managers, vice managers, accountants and senior managements takes job in the shareholding party. The labor management, personnel and salary management are operated independently. 3. In assets: The company owns the assets completely and runs its production, supplying and sales system independently. The trademarks, patent rights and non-patent technologies are completely separated from the controlling shareholder. 4. In organization: The company has a mature and independent organization structure, which completely separated from the controlling shareholder. Collaborated business operation or office activities never happened. 5. In accounting: The company has its own independent accounting division, accounting system, bank account, and exercise its liability of taxation independently. (IV) Assessment and motivating mechanism of the senior management 1. Share equity motivating foundation for senior management In accordance with the proposal on share equity motivating foundation for senior management approved by the 2001 Shareholders’ General Meeting, the Company has drawn RMB27.2254 million for awarding of the directors and senior managements. Practical distribution of the found was basing on the job terms, positions, workloads, company scale and economical efficiency of the company. 2. Chairman motivating foundation 14 In accordance with the proposal on Chairman motivating foundation approved by the 2002 Shareholders’ General Meeting, the Company has drawn RMB13.2043 million for awarding of the directors, GM, vice GM and other senior managements, as well as the chairman and GMs of subsidiary companies. Practical distribution of the found was basing on the job terms, positions, workloads, company scale and economical efficiency of the company. 15 VI. Particulars about the Shareholders’ General Meeting (I) The 2002 Shareholders’ General Meeting and the 1st Provisional Shareholders’ General Meeting of 2003 were held during the report term. 1. The public notice on holding of 2002 Shareholders’ General Meeting was issued on the March 18, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. The meeting was held on April 29, 2003 in the Company. 37 shareholders (or their representatives) presented the meeting, including 36 domestic shareholders (or their representatives) and 1 foreign shareholder. The shareholders attended the meeting were representing totally 159,583,899 shares, which takes 31.9976% of the total valid voting shares of the company. Among which, 159,440,899 were domestic shares takes 99.91% of the total shares presented the meeting, and 143,000 were foreign shares takes 0.09% of the total shares presented the meeting. The holding of the meeting was according with the relative rules of the Company Law, the Article of Association and The Opinions on Standardization of Shareholders’ General Meeting for Listed Companies. The meeting was observed by Mr. Zhang Yukai, the lawyer assigned by Beijing Haotian Law Firm and The Lawyers’ Statement was issued. The following proposals were passed through open ballot. (1) The Report of the Board of Directors 2002; (2) The Report of the Supervisory Committee 2002; (3) The Financial Settlement 2002; (4) The profit distribution plan for year 2002 and the profit distribution policy for year 2003; (5) The proposal of revising the Article of Association of the Company; (6) The proposal of changing of directors; (7) The proposal of electing independent directors and their payment policies; (8) The proposal of changing of supervisors; (9) The proposal of continue to employ the auditing firms; (10)The proposal of payment policies for directors and senior managements; (11)The proposal of payment policies for supervisors; (12)The proposal on investment on the major technical reforming projects; (13)The proposal of the national-bond funded technical reforming projects conducted by the controlled subsidiary – Jiangxi Chenming Paper Co., Ltd. (14)The proposal of the national-bond funded technical reforming projects conducted by the controlled subsidiary – Shanghai Chenming Paper Machinery Co., Ltd. The resolutions of the shareholder’s general meeting were published on the April 30th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. 2. The public notice on holding of the 1st provisional Shareholders’ General Meeting of 2003 was issued on the June 28, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. The meeting was held on July 29, 2003 in the Company. 14 shareholders (or their representatives) presented the meeting, including 10 domestic shareholders (or their representatives) and 4 foreign shareholders. The shareholders attended the meeting were representing totally 300,933,161 shares, which takes 33.52% of the total valid voting shares of the company. Among which, 282,141,066 were domestic shares takes 93.76% of the total shares presented the meeting, and 18,792,095 were foreign shares takes 6.24% of the total shares presented the meeting. The holding of the meeting was according with the relative rules of the Company Law, the Article of Association and The Opinions on Standardization of Shareholders’ General Meeting for Listed Companies. The meeting was observed by Mr. Wang Xiaoming, the lawyer assigned by Beijing Haotian Law Firm and The Lawyers’ Statement was issued. The following proposals were passed through open ballot. 16 (1) The proposal of the Company was qualified to issue transferable company bonds; (2) The proposal of issuing transferable company bonds; (3) The proposal of the feasibility of the projects that the raised fund will be put in. (4) The proposal of statement on the utilizing of the previous fund raising. (5) The proposal of revising the Article of Association of the Company. The resolutions of the shareholder’s general meeting were published on the July 30th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (II) Electing and changing of directors and supervisors (1) On the 2002 Shareholders’ General Meeting held on April 29th, 2003, Mr. Dong Jianwen and Mr. Zhou Shaohua were elected the directors of the 3rd term Board of Directors till the due of the 3rd term Board. While Wang Zhihuan, Diao Yuntao, Zhou Chengjuan were elected the independent directors of the 3rd term Board of Directors till the due of its term. Han Wenjian, Xu Xiangdong and Li Ruohe were approved to assign from their positions of directors. (2) On the 2002 Shareholders’ General Meeting held on April 29th, Mr. Wang Zaiguo and Sun Dianming was elected the supervisors of the 3rd term supervisory committee till its due of term. Whereas Li Xueqin and Zhang Jun were approved to assign from the positions of the 3rd term supervisory committee. 17 VII. Report of the Board of Directors (I) Analysing of principal events of the report term In the year 2003, the Company has being in a steady growing situation. The production scale and economical efficiency increased significantly. The Company has been the top player of the industry in the country for successively 9 years. The Company kept under the scheme of development, undertook multiple measures to enforce the overall controlling. Projects of 300K ton art paper, 150K ton press paper, 180K ton A-class paper board were put into operation and realized good economical efficiency. For the year 2004, the Company will stress on the construction of new projects to ensure the company developing continuously. The 300K ton coated white board project of Shandong Shouguang Chenming, the 200K ton low-ration coated paper project, 187K ton bleaching chemical hot milling machinery pulp technical reforming project, and “substitution of imported large-scale paper project” of Shanghai Chenming Paper Machinery Co., Ltd. will be guaranteed to be on schedule. (II) Business overview The company is in the paper manufacturing industry, which is a light-industry. The Company is mainly engaged in production and sales of machine-make paper and paperboard, papermaking raw materials, papermaking machinery, power and heat supply. For the report term, the output of machine-made paper was 1.3856 million ton, which was 32.81% over the corresponding period of previous year. The sales volume was RMB5,819,073,200, which increased by 30.63%. The net profit was RMB847,587,700 which increased by 36.44%. 1. Distribution of major business income and profit (1) Distribution on business categories: For the report term, the company realized major business income by RMB5,819,073,200. Including RMB5,519,136,600 of machine-made papers, takes 94.85% of the total, electricity and heating power supplying RMB37,910,000, takes 0.65% of the total, construction materials RMB205,560,000 takes 3.53% of the total, paper making machines RMB43,813,100 takes 0.75% of the total, others RMB12,653,500 takes 0.22% of the total. Major business profit at RMB1,624,729,200, including RMB1,572,500,500 from machine-made papers, takes 96.79%; RMB9,189,100 from electricity and heating power supplying, takes 0.57%; RMB35,783,300 from construction materials, takes 2.20%; RMB7,065,500 from paper making machines, takes 0.43%; RMB190,800 from others, takes 0.01%. (2) Distribution on products: For the report term, major business income of RMB572,369,500 was realized from one of the major product – light coated paper (takes 9.83%); while RMB984,827,800 from double plastic paper (takes 16.93%); RMB501,274,300 from ordinary paper (takes 8.61%); RMB1,447,969,100 from art paper (takes 24.88%); RMB620,682,500 from press paper (takes 10.67%); RMB612,465,600 from paperboard (takes 10.52%). For the report term, major business profit of RMB168,565,600 (takes 10.37%) was from light coated paper; RMB324,896,500 was from double plastic paper (takes 20.00%); RMB151,635,300 was from ordinary paper (takes 9.33%); RMB403,384,600 was from art paper (takes 24.83%); RMB190,264,100 was from press paper (takes 11.71%); RMB108,008,800 was from paperboard (takes 6.65%). 18 (3) Distribution on territories: (in RMB 10 thousand) Territory Business Portion of total Business Portion of total income business income profit business profit Shandong 384,642.91 66.10% 105,194.28 63.91% Hubei 159,963.71 27.49% 49,477.78 30.06% North-east China 32,919.39 5.66% 9,208.83 5.59% Others 4,381.31 0.75% 715.78 0.44% 2. Sales income, sales cost and gross profit ratio (in RMB 10 thousand) Category Sales income Sales cost Gross profit ratio Light coated paper 57,236.95 40,380.93 29.45 Double plastic paper 98,482.78 65,993.13 32.99 Ordinary paper 50,127.43 34,963.90 30.25 Art paper 144,796.91 104,458.45 27.86 Press paper 62,068.25 43,041.84 30.65 Paperboard 61,246.56 50,445.68 17.64 (III) Business overview of major share-controlled subsidiaries 1. Controlled subsidiary – Wuhan Chenming Hanyang Paper Holdings Co., Ltd. Registered capital RMB211,367,000 Shareholding portion: 50.93% Major products: ordinary paper, press paper Gross asset at the end of report term: RMB2,289,411,200 Output of machine made paper in 2003: 305K ton Sales income: RMB1,345,976,700 Net profit: RMB73,110,000 2. Controlled subsidiary – Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. Registered capital RMB376,200,000 Shareholding portion: 99.9468% Major products: paperboard Gross asset at the end of report term: RMB1,026,468,600 Output of paperboard and corrugated paperboard in 2003: 329K ton Sales income: RMB832,567,900 Net profit: RMB65,870,400 3. Controlled subsidiary –Shandong Chenming Power Supply Holdings Co., Ltd. Registered capital RMB99,553,100 Shareholding portion: 51% Major products: electricity and heat power supply Gross asset at the end of report term: RMB540,109,800 Sales income: RMB348,228,700 Net profit: RMB15,683,000 4. Controlled subsidiary –Chibi Chenming Paper Co., Ltd. Registered capital RMB177,419,400 Shareholding portion: 35.7883% 19 Major products: Double plastic coated paper Gross asset at the end of report term: RMB417,416,300 Output volume: 67.8K ton Sales income: RMB308,864,100 Net profit: RMB50,019,000 5. Controlled subsidiary – Hailaer Chenming Paper Co., Ltd. Registered capital RMB16,000,000 Shareholding portion: 75% Major products: Bleached reed board Gross asset at the end of report term: RMB95,714,600 Output volume: 31.9K ton Sales income: RMB93,256,200 Net profit: RMB9,998,500 6. Controlled subsidiary – Jilin Chenming Paper Co., Ltd. Registered capital RMB81,633,000 Shareholding portion: 51% Major products: Wood pulp, machine-made paper Gross asset at the end of report term: RMB301,441,500 Output volume: 88K ton Sales income: RMB256,047,800 Net profit: RMB22,114,700 20 (IV) Particulars about the major vendors and buyers in the report term (1) The purchases of the company from the top 5 vendors took 8.79% of the total purchases of the year. (2) The sales of the company to the top 5 buyers took 5.89% of the total sales of the year. (V) Problems and difficulties encountered and solutions Following with the adjustment of tariff policies, cancelling of export tax refunding policy, increasing of raw material price and the invading of international players, the competition in the market becomes more severe. Facing with the difficulties encountered in the operation, the Company undertook the following measures while enhancing of project constructions: (1) Speed up technical innovation, fully develop the potential of current equipments, increase the level of automatic controlling. Upgrade overall operation quality of the Company through technical reforming on the equipments (2) Strengthen interior management, enforced the instruction, coordinating and supervising on the subsidiaries, promote the subsidiaries to operate normally. (3) Keep optimising the market-oriented sales network, reform the management system, and enlarge the marketplace through multiple measures. (VI) Investments in the report term The accumulated investment been made till the end of report term was RMB654,912,900, which decreased by 57.46%. 1. No situation of investment made by raised fund occurred in the report term. The accumulated investment on the 153k ton art paper project has been reached RMB1,897.86 million. Among which RMB1,424.30 million was from raised fund. The production line realized RMB1,406.59 million of turnover and RMB221.11 million of net profit. 2. Particulars about investment made by non-raised fund in the report term (1) The 300K ton coated white paperboard project has been approved by National Economic & Trading Committee through Guo-jing-mao-tou-zi [2003]86, and was regarded as one of the 3rd session of national key technical reforming projects. The investment is totalled to RMB870 million. RMB97,789,900 has been made during the report term. The fund was from bank loans. (2) The 200K ton low-ration coated paper project of Jiangxi Chenming Paper Co., Ltd. has been approved by National Economic & Trading Committee through Guo-jing-mao-tou-zi [2003]100. The investment is totalled to RMB1,360 million. RMB241,468,000 has been made during the report term. The fund was from bank loans. (3) 150T/D chemical-mechanical pulp system and its accessory systems was approved by Shandong Provincial Economic & Trading Committee through Lu-jing-mao-tou-zi-bei No. 0200647, No. 0200656, and No. 0300126. The investment is totalled to RMB95 million. RMB94.09 million has been made during the report term. The fund was from bank loans. The project has been put into production in November 2003. (VII) Financial status and operation results 1. Movement of accounting indices (in RMB) 21 Items 2003 2002 +/- (%) Gross asset 10,230,861,065.03 8,689,918,637.96 17.73 Shareholders’ equity 4,375,920,134.78 3,543,330,736.52 23.50 Major business profit 1,624,729,186.82 1,248,045,998.34 30.18 Net profit 628,111,635.21 363,767,078.67 72.67 Net increase of cash and cash equivalents 244,375,893.43 -728,548,507.75 1) Increasing of total asset was caused by increasing of loans raised for new projects and increasing of net profit. 2) Decreasing of long-term liabilities was caused by returning of part of the bank loans. 3) Increasing of shareholders’ equity was caused by increasing of net profit during the report term and increasing of capital reserves from increasing of national debit allowance. 4) Increasing of major business income was caused by completion and running of new production lines and increasing of sales volume. 5) Increasing of major business profit was caused by the enlarging of business scale and increasing of production and sales volume during the report term. 6) Increasing of net profit was caused by the completion and running of new production lines of the company and its subsidiaries and increasing of production and sales volume, as well as the income from management of entrusted cash assets. 7) Increasing of cash and cash equivalents was caused by collecting of sales balances and increasing of loans. 2. Influence of alteration of accounting policies, accounting estimations, and correcting of accounting errors. (1) Alteration of accounting policies in the report term: The cash dividend carried in the profit distribution plan, which was produced between the date of the annual Balance Sheet and the date when the financial statements were approved, was booked as “dividend payable” as the adjustment of post-term event, but now it is not subject to the accounting treatment according to current accounting standard. It is only presented in the notes of the financial statements of the report term. This alteration of accounting policy has been adopted backward to the adjustment of initial retains and relative initial figures. The “previous term” figures carried in the Income Statement are adjusted. The impacts are accumulated to RMB24,936,886.20. The “dividend payable” at the end of 2002 was decreased by RMB23,625,762.00, and “tax payable” was decreased by RMB1,311,124.20 due to the alteration of accounting policy. Whereas the “initial retained profit” of year 2003 was increased by RMB24,936,886.20, including the “profit not distributed” increased by RMB24,936,886.20. In accordance with the document issued by the Ministry of Finance titled “Q&As of implementing ‘Enterprise Accounting Standard’ and relative accounting regulations”, since March 17, 2003, the credit balance of share equity occurred hereinafter will be booked directly into capital reserves but not been amortised into gain/loss account upon not less than 10 years. For those credit balance of share equity occurred before March 17, 2003, no adjustment will be made and will adopt original accounting policy till it was completely amortized. This alteration of accounting policy conducts no impact on the Financial Statements of year 2003. 22 (2) Correcting of accounting errors for previous fiscal years At the clearing of the enterprise income tax for year 2002, the Company cleared the shorted income tax of previous years amounted to RMB6,327,185.16. This has been amended into relative accounts of the Financial Statement of 2002 as accounting errors. At the clearing of the enterprise income tax for year 2002, the subsidiaries of the Company cleared the shorted income tax of previous years amounted to RMB6,327,185.16. This has been amended into relative accounts of the Financial Statement of 2002 as accounting errors. The Company adjusted the corresponding items of the consolidated Financial Statement of 2002 upon the shareholding ratio. The followings are the details: Name of the subsidiaries Amount corrected Reasons Making up the shorted tax of Chibi Chenming Paper Co., LTd. -11,627,887.74 previous years Wuhan Chenming Hanyang Paper Making up the shorted tax of Holdings Co., Ltd. -12,576,103.55 previous years Total -24,203,991.29 Due to the correcting of above accounting errors, the Balance Sheet and Income Statement ended 2002 were modified correspondingly. For the Income Statement, the Income Tax was increased by RMB30,531,176.55, gain/loss of minority shareholders was decreased by RMB13,637,558.40; For the Balance Sheet, the tax payable was increased by RMB30,531,176.55, gain/loss of minority shareholders was decreased by RMB13,637,558.40, profit not distributed was decreased by RMB13,514,894.45, surplus reserves was decreased by RMB3,378,723.60. Therefore the retained profit at the beginning of year 2003 was decreased by RMB16,893,618.05, among which, profit not distributed decreased by RMB13,514,894.45, and surplus reserves decreased by RMB3,378,723.60. (VIII) Changing of business environment, macro policies, laws and regulations impact on the business operation of the company On July 1st, 2003, The Ministry of Commerce issued the 28th announcement of year 2003 to undertake final investigation on the anti-dumping processes against the press paper products origin in Canada, Korea, and US. The final investigation will be terminated before June 30th, 2004. On August 6th, 2003, the Ministry of Commerce issued the 35th announcement of year 2003. It announced the final arbitrating that 4% - 71% of anti-dumping duties would be charged against the art paper products originated in Korea and Japan for 5 years. As the major manufacturer of art paper and press paper, the above anti-dumping process investigation and final arbitrating brings the Company a very good opportunity for developing. (IX) Business plan for the coming year For the year 2004, the Company will focus on the improvement of economical efficiency, fully implement the strategy of globalisation, keep enlarge the investment on constructions, optimising the structure and managing system, deepen the management efficiency activities, push the Company up to a new stage. Key points and measures: 1. Enforce employee training and education activities to increase the quality of the employees, and provide the enterprise an ever-lasting productivity. 2. Enforce the construction projects and fully promote technical progress, adopt preferable 23 policies for the construction projects in financing, technologies, and personnel. Practice manager responsibility to ensure the constructions are on schedule. 3. Speedup international cooperation, strengthen capital operation, actively search for powerful international co-operators. 4. Speedup the forest-paper integrating process, enforce the construction of fast-growing forest and pulp bases. (X) Daily works of the Board of Directors 1. The Board of Directors held 7 meetings during the report term. (1) The 3rd term board of directors of Shandong Chenming Paper Holdings Co., Ltd. (known as “the company” hereinafter) held its 9th meeting on Jan 11, 2003 in the meeting room of Chenming Hotel. 13 directors shall attend but 11 directors attended the meeting. The supervisors and relative management observed the meeting. The holding of the meeting are regarding as corresponding with relative law and regulations and the article of association of the company. The directors who attended the meeting examined and passed the following resolutions. 1) The proposal of replacing some of the senior management of the company. 2) The proposal of applying for RMB1.6 billion credit from 8 banks in form of guarantee- free consolidated credit (incl. China Industry and Commercial Bank Shouguang Branch) 3) The proposal of providing guarantee to some of the subsidiaries of the company (incl. Wuhan Chenming Hanyang Paper Holdings Co., Ltd.) for their applying of consolidated credits. The resolutions were published on the Jan 14th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (2) The 3rd term Board of Directors held its 10th meeting on March 16, 2003 in Chenming Hotel. 10 of the 13 directors presented the meeting. 3 supervisors observed the meeting. The following proposals were examined and adopted as resolutions: 1) The Annual Report 2002 and its summary version; 2) The Report of the Board of Directors 2002; 3) The Financial Settlement 2002; 4) The profit distribution plan for year 2002 and the profit distribution policy for year 2003; 5) The proposal of revising the Article of Association of the Company; 6) The proposal of changing of directors and vice general managers; 7) The proposal of electing independent directors and their payment policies; 8) The proposal of continue to employ the auditing firms; 9) The proposal of payment policies for directors and senior managements; 10) The proposal on investment on the major technical reforming projects; 11) The proposal on investment on the 150T/D chemical-mechanical pulp project; 12) The proposal of the national-bond funded technical reforming projects conducted by the controlled subsidiary – Jiangxi Chenming Paper Co., Ltd. 13) The proposal of the national-bond funded technical reforming projects conducted by the controlled subsidiary – Shanghai Chenming Paper Machinery Co., Ltd. 14) The proposal of altering the operator of leased “Shandong Huanghe Paperboard Factory”; 24 15) The proposal of offering loan guarantees to the controlling subsidiaries for construction projects; 16) The proposal of holding the 2002 Shareholders’ General Meeting. The resolutions were published on the Mar. 18th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (3) The 3rd term Board of Directors held its 11th meeting on April 14th, 2003 in Chenming Hotel. 9 of the 13 directors presented the meeting. The following proposals were examined and adopted as resolutions: 1) The 1st Quarterly Report of 2003; 2) The proposal of applying for USD0.3 billion of credit from Bank of China Shouguang Branch in form of integrated credits (including issuing of Letter of Credit and foreign currency loans), for term of one year. The resolutions were published on the April 15th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (4) The 3rd term Board of Directors held its 12th meeting on June 26th, 2003 in the head office of Chenming Group. All of the 15 directors presented the meeting. 3 supervisors and relative senior management observed the meeting. The following proposals were examined and adopted as resolutions: 1) The proposal of the Company was qualified to issue transferable company bonds; 2) The proposal of issuing transferable company bonds; 3) The proposal of the feasibility of the projects that the raised fund will be put in. 4) The proposal of statement on the utilizing of the previous fund raising. 5) The proposal of revising the Article of Association of the Company. 6) The proposal of holding the 1st provisional shareholders’ general meeting of 2003. The resolutions were published on the June 28th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (5) The 3rd term Board of Directors held its 13th meeting on July 30th, 2003 in Chenming Hotel. All of the 15 directors presented the meeting. The following proposals were examined and adopted as resolutions: 1) The Semi Annual Report of 2003 and the summary version; 2) The semi annual profit distribution plan of 2003. The resolutions were published on the July 31st, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (6) The 3rd term Board of Directors held its 14th meeting on October 19th, 2003 in Chenming Hotel. All of the 15 directors presented the meeting. The 3rd Quarterly report was examined and adopted. (7) The 3rd term Board of Directors held its 15th meeting on December 31st, 2003 in Chenming Hotel. 12 of the 15 directors presented the meeting. The following proposals were examined and adopted as resolutions: 25 1) The Proposal on Establishing the Administrative Office of Investors’ Relations. 2) The Proposal for the Work Criteria and the Rules of Procedures for Administration of Investors’ Relations. 3) The Proposal for Expansion of Share Capital of Shandong Chenming Qihe Paperboard Co., Ltd. (Chenming Qihe); 4) The Proposal for Changing Engagement of the Certified Public Accountants; 5) The Company’s application to Industrial and Commercial Bank of China Shouguang Sub-branch for working capital loan with credit line amounting to RMB 1.8 billion with valid term of one year; 6) The Proposal on Change of Directors; 7) The Proposal on Distribution of 2002 Equity Motivating Fund The resolutions were published on the Jan 6th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. 2. Executing of the resolutions of the Shareholders’ General Meeting (1) The profit distribution plan for year 2002 was passed by the 2002 shareholders’ general meeting held on April 29, 2003. Basing on the total capital shares of 498,737,724 shares, 2 bonus shares and RMB0.50 of cash dividend (tax included) are to be distributed to each 10 shares, in the meantime 6 shares are supplemented to each 10 shares basing on the capital reserves. This plan has been successfully implemented in May 2003. (2) Approved by the 1st provisional shareholders’ general meeting of 2003, the company is planning to issue RMB2 billion of transferable company bond. This project is in the processing of government assessment. (XI) Profit distribution plan and capitalizing of reserves for the current year 1. According to the auditing result of Tianjian CPA, the company realized net profit of 628,111,635.21 in year 2003. According to the rules of the Article of Association, 10% of it is about to be drawn as statutory reserves amounted to RMB58,501,720.77; another 10% is about to be drawn as statutory public welfare amounted to RMB58,501,720.77; thus the profit distributable realized in year 2003 is RMB511,108,193.67, plus the profit distributable at the beginning of year amounted to RMB733,859,623.77, and deduct of the amount distributed for the distribution plan of year 2002 amounted to RMB124,684,431.20, the distributable profit for current term is RMB1,120,283,386.24. 2. Profit distribution plan of the year 2003 Basing on the total capital share of 897,727,903 shares, and the distributable profit for current term of RMB1,120,283,386.24, RMB1.00 of cash dividend will be distributed to each 10 shares (tax included) for all of the shareholders of the Company. Totally RMB89,772,790.30 will be distributed. The retained profit of RMB1,030,510,595.94 will be kept over to the coming years. This plan is subject to the examination of the Shareholders’ General Meeting of 2003. (XII) Misc. issues 1. Fund interchange with the related parties and external guarantee issues In accordance with the “Notification of standardizing the fund interchange between the listed companies and related parties and external guarantee issues” (Zheng-jian-fa [2003]No.56) (known as “the Notification” hereinafter), Tianjian CPA Co., Ltd., the auditor of the Company issued “The special statement on the fund adopting issues of the controlling shareholders and other related parties of Shandong Chenming Paper Holdings Co., Ltd. (Tianjian [2004]Te-shen-zi 26 No.022). According to the special statement, at the end of December 31, 2003, no situation of fund adopting was found in connecting with the controlling shareholder or other related parties. The balance of account receivable of RMB1,012,600 due to Shouguang Liben Paper Co., Ltd. (the Company takes 26.4% of its capital share) were the rents and charges for water and power supply, it was regarded as normal business transactions. The independent directors of the Company take for: till December 31, 2003, there was no external guarantee issue exist in the Company. According to document Zheng-jian-fa [2003]No.56, the company is planning to modify the Article of Association. The examine procedures of external guarantees and the objects will be revised. The Company was exercising the obligation of information disclosing about external guarantee issues in accordance with the Rules of Listing, and the Article of Association. The details of guarantee issues were completely open to the CPA. 2. The official information disclosing presses are China Securities Journal and Hong Kong Commercial Daily. 27 VIII. Report of the Supervisory Committee For the report term, with the legal benefits of the Company and the shareholders at the first consideration, the Supervisory Committee of the Company was taking their responsibilities seriously on the inspection of the board meetings, accounting processes, and the legality of the operations of the directors and managements. (I) The Committee held 3 meetings during the report term 1. The 6th meeting of the 3rd term Supervisory Committee was held on March 16th, 2003 in Chenming Hotel. 3 of the 5 supervisors presented the meeting. The following proposals were examined and passed as resolutions: 1) The Annual Report 2002 and its summary version; 2) The Report of the Supervisory Committee 2002; 3) The Financial Settlement 2002; 4) The proposal of changing of supervisor; 5) The proposal of payment policies for supervisors; The resolutions were published on the Mar. 18th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. 2. The 7th meeting of the 3rd term Supervisory Committee was held on April 14th, 2003 in Chenming Hotel. 3 of the 5 supervisors presented the meeting. The 1st Quarterly Report for year 2003 were examined and passed as resolutions The resolutions were published on the April 15th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. 3. The 8th meeting of the 3rd term Supervisory Committee was held on July 30th, 2003 in Chenming Hotel. All of the 5 supervisors presented the meeting. The Semi-annual Report 2003 and its summary version were examined and passed. The resolutions were published on the July 31st, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. (II) The independent opinions of the Supervisory Committee 1. The decision-making procedures of the company are valid. The internal controlling system is mature and properly operated. No behaviors that violate the laws or the Article of Association or harming the benefit of the company were found. 2. The committee undertook inspections on the financial status of the company. The committee takes for the auditors’ reports issued by both of Tianjian Certified Public Accountants and PriceWaterHouseCoopers as reflecting the financial status and business results of the company frankly, objectively, and justly. 3. The company issued new A shares in November 2000 and invested into the project of 153 thousand ton / year art paper production line, which was according with that described in the Stock Inviting Prospectus. The entire fund raised from the share issuing has been put into investment. The production line has been completed and put into production in August 2002 and achieved good profitability. 28 4. Property acquisitions occurred during the report term was on reasonable price and neither harmed the interests of the shareholders nor causing losing of company assets. 5. Related transactions occurred during the report term was on a fair and reasonable base, harmed no benefit of the company. 29 IX. Significant Events (I) There is no significant lawsuit or arbitration events occurred in the report term. (II) There is no acquisition or selling of assets, nor taking over events occurred in the report term. (III) Principal related transactions 1. Related parties Name Location Reg. Capital Major Relationship Share Business Legal Business with the equity category representative company Shouguang Weifang USD8,924,000 Manufacturing Affiliation 26.4% Sino- Zhongchun Liben Paper Shouguang and selling of foreign Yazhi Co., Ltd. papers Joint venture Qingzhou Qingzhou 3,000,000 Processing of Affiliation 30% Limited Zhou Zhihai Chenming City Amylum liability Denaturation Amylum Co., Ltd. 2. Related transactions Items Year 2003 Year 2002 Electricity fee collected from Liben Paper Co., Ltd. 6,089,223.49 8,093,809.03 Steam and water fee collected from Liben Paper Co., Ltd. 3,791,463.27 4,081,021.60 Employees’ residence electricity and water supply from Liben Paper Co., Ltd. 76,467.47 - Sewage treating fee collected from Liben Paper Co., Ltd. 458,990.45 486,687.08 Annual rents collected from Liben Paper Co., Ltd. 112,499.94 150,000.00 Virescence fee from Liben Paper Co., Ltd. 7,499.98 - Material payment from Liben Paper Co., Ltd. 52,500.00 - Compensation from Liben Paper Co., Ltd. 48,764.44 - Hospital service fee from Liben Paper Co., Ltd. 217,182.70 - Purchasing of amylum from Qingzhou Chenming Denaturation Amylum Co., Ltd. 17,124,757.09 17,780,940.30 Total 27,979,348.83 30,592,458.01 The above associated transactions are on regular price acceptable in the local market. 3. Balance of the related transactions December 31, 2003 December 31, 2002 Other account receivable 1,012,594.75 987,528.92 – Shouguang Liben Paper Co., Ltd. Account payable 4,584,240.51 3,930,218.08 – Qingzhou Chenming Denaturation Amylum Co., Ltd. (IV) Principal contracts and their implementing 1. On Jan 12, 2002, the Company entered the “Guarantee Exchange Agreement” agreement with Shandong Shouguang United Chemistry Group Co., Ltd. Till June 30, 2003, the 30 guarantees provided to Shandong Shouguang United Chemistry Group Co., Ltd. have been cleared and not further guarantee exists. On September 28, 2003, the Company entered the termination agreement with the group about the “Guarantee Exchange Agreement”. Both of the parties agree that no further guarantee will be offered to each other in any form. 2. On December 20, 1999, the Company entered the “Guarantee Exchange Agreement” with Weifang Yaxing Group Co., Ltd. Till September 30, 2003, the Company provided guarantee to Weifang Yaxing Group Co., Ltd. for its loans of RMB168.87 million from China Industry & Commercial Bank Weifang Branch. On October 23, 2003, the Company entered the termination agreement with China Industry & Commercial Bank Weifang Branch about the “Guarantee Agreement”. The Company will no longer provide guarantee to Weifang Yaxing Group Co., Ltd., and takes no obligations for the loans. 3. Ended at December 31, 2003, the Company has provided the controlling subsidiaries guarantees amounted to RMB532.97 million. (V) In the report term, the Company employed Tianjian Certified Public Accountant Co., Ltd. as the domestic auditor of the Company for one year; while PriceWaterHouseCoopers CPA as the overseas auditor for successive 5 years. Accountant Auditing fee for year 2003 Tianjian Certified Public Accountant Co., Ltd. RMB600 thousand PriceWaterHouseCoopers HKD1.15 million The Company also takes the transportation and accommodation expenses when doing jobs for the Company. (VI) None of the company, the Board or the Director received any penalty form China Securities Supervisory Committee or any condemn from the Stock Exchange. (VII) Deducting of enterprise income tax through purchasing of domestic equipments In accordance with the “Regulations for foreign invested enterprises’ deducting of enterprise income tax through purchasing of domestic equipments” (Guo-shui-fa [2000]90) issued by National Bureau of Tax, approved by Shandong Provincial Tax Bureau with documents No.[2003]35 and No.[2003]36 on June 30th, 2003, the income tax payable of the Company was deducted by RMB53.11 million. This issue has been disclosed on the July 8th, 2003 issues of China Securities Journal and Hong Kong Commercial Daily. Approved by Shandong Provincial Tax Bureau on December 31, 2003, the income tax of the Company for year 2003 was deducted by RMB29.27 million. (VIII) National key technical reforming project funding scheme Jiangxi Chenming Paper Co., Ltd., the controlled subsidiary of the Company, is running the 200k ton / year low-ration coated paper project, which is one of the key project funded by national bond. For the report term, the Company received RMB226.08 million from Jiangxi Provincial Finance Bureau as national allowance. Shanghai Chenming Paper Machinery Co., Ltd., the controlled subsidiary of the Company, is running the “large-scale paper machine localizing project”, which is one of the key project funded by national bond. For the report term, the Company received RMB25.92 million of national allowance. 31 X. Financial Reports (I) Auditors’ report TO THE SHAREHOLDERS OF SHANDONG CHENMING PAPER HOLDINGS LIMITED (incorporated as a joint stock limited company in the People’s Republic of China) We have audited the accompanying consolidated balance sheet of Shandong Chenming Paper Holdings Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related consolidated income and cash flow statements for the year then ended. These consolidated financial statements set out on pages 2 to 35 are the responsibility of the Company’s management. 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. 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 management, 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 present fairly in all material respects the consolidated financial position of the Group as of 31 December 2003 and the consolidated results of its operations and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 14 March 2004 (II) Financial Statements (enclosed) (III) Notes to financial statements (enclosed) 32 SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 Notes 2003 2002 RMB’000 RMB’000 Sales 4 5,797,836 4,439,260 Cost of sales (4,152,181) (3,179,052) Gross profit 1,645,655 1,260,208 Other operating income 4 70,129 32,424 Distribution costs (345,354) (250,782) Administrative expenses (327,895) (327,342) Profit on sale of trading investments - 41,949 Operating profit 5 1,042,535 756,457 Finance costs, net 7 (150,616) (130,335) Gain on disposal of equity interest in a subsidiary 9 4,769 - Share of results before tax of an associate 15 (572) 1,589 Profit before tax 896,116 627,711 Income tax expense 8 (171,008) (145,147) Profit after tax 725,108 482,564 Minority interests 26 (72,047) (95,401) Net profit 653,061 387,163 Earnings per share – basic 10 RMB0.73 RMB0.43 The accompanying notes form an integral part of these consolidated financial statements. -2- SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003 Notes 2003 2002 ASSETS RMB’000 RMB’000 Non-current assets Property, plant and equipment 12 5,420,021 5,107,072 Leasehold land 13 173,066 157,134 Construction in progress 14 706,392 285,348 Investments in associates 15 19,107 42,911 Available-for-sale investments 16 6,592 6,592 Prepayments 17 18,000 - 6,343,178 5,599,057 Current assets Inventories 18 1,045,831 527,595 Receivables and prepayments 19 1,785,596 1,692,459 Pledged bank deposits - 106,900 Cash and cash equivalents 1,052,935 743,344 3,884,362 3,070,298 Total assets 10,227,540 8,669,355 EQUITY AND LIABILITIES Capital and reserves Share capital 24 897,728 498,738 Capital reserves 25 1,571,580 1,853,261 Statutory common reserve fund 28 205,098 148,285 Statutory public welfare fund 28 184,995 128,299 Discretionary common reserve fund 28 117 - Retained earnings 29 1,155,393 758,204 4,014,911 3,386,787 Minority interests 26 866,042 762,797 Non-current liabilities Borrowings 21 687,386 1,368,772 Deferred income 22 414,181 181,358 1,101,567 1,550,130 Current liabilities Trade and other payables 20 1,209,697 1,229,040 Borrowings 21 2,963,757 1,689,318 Current tax liabilities 71,438 51,283 Dividend payable 128 - 4,245,020 2,969,641 Total liabilities 5,346,587 4,519,771 Total equity and liabilities 10,227,540 8,669,355 The accompanying notes form an integral part of these consolidated financial statements. On 14 March 2004, the Company’s Board of Directors authorised these consolidated financial statements for issue. -3- SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 Statutory Statutory Discretionary common public common Share Capital reserve welfare reserve Retained Notes capital reserves fund fund fund earnings Total (note 24) (note 25) (note 28) (note 28) (note 28) RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1 January 2002 498,738 1,842,849 113,346 93,360 - 451,331 2,999,624 Net profit - - - - - 387,163 387,163 Transfer from retained earnings to capital reserves 22 - 10,412 - - - (10,412) - Transfer from retained earnings to statutory reserve funds 28 - - 34,939 34,939 - (69,878) - Balance at 31 December 2002 498,738 1,853,261 148,285 128,299 - 758,204 3,386,787 Balance at 1 January 2003 498,738 1,853,261 148,285 128,299 - 758,204 3,386,787 Adjustment arising from restatement of retained earnings of statutory book 8 (h) - - (1,689) (1,689) - 3,378 - Restated balance at 1 January 2003 498,738 1,853,261 146,596 126,610 - 761,582 3,386,787 Net profit - - - - - 653,061 653,061 Bonus issues 24 398,990 (299,242) - - - (99,748) - Dividend related to 2002 11 - - - - - (24,937) (24,937) Transfer from retained earnings to capital reserves 22 - 17,561 - - - (17,561) - Transfer from retained earnings to statutory reserve funds 28 - - 58,502 58,502 - (117,004) - Transfer to discretionary common reserve fund 28 - - - (117) 117 - - Balance at 31 December 2003 897,728 1,571,580 205,098 184,995 117 1,155,393 4,014,911 The accompanying notes form an integral part of these consolidated financial statements. -4- SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 Notes 2003 2002 RMB’000 RMB’000 Cash flows from operating activities Cash generated from operations 27 705,410 857,411 Interest paid (166,926) (187,402) Tax paid (150,853) (86,135) Net cash from operating activities 387,631 583,874 Cash flows from investing activities Purchase of property, plant and equipment (205,814) (247,407) Payment for leasehold land (20,919) (7,447) Payment for construction costs, excluding interest capitalised (915,821) (1,455,796) Proceeds from disposal of property, plant and equipment 1,235 8,611 Receipt of loan receivable - 150,000 Proceeds from sale of trading investments 10,300 314,000 Acquisition of subsidiaries 22,500 - Proceeds from disposal of equity interest in a subsidiary 9 10,140 - Investment in an associate - (22,500) Purchase of available-for-sale investments - (2,000) Interest received 16,652 27,243 Dividend received 732 - Government grants received 22 252,000 5,410 Government subsidies received 4 51,602 18,864 Net cash used in investing activities (777,393) (1,211,022) Cash flows from financing activities Increase in borrowings 593,053 303,830 Dividends paid to group shareholders (24,809) - Dividends paid to minority shareholders by subsidiaries (32,595) (63,868) Capital contribution from minority shareholders 56,804 20,613 Bank deposits withdrawn/(pledged) 106,900 (23,801) Net cash from financing activities 699,353 236,774 Net increase/(decrease) in cash and cash equivalents 309,591 (390,374) Cash and cash equivalents at beginning of year 743,344 1,133,718 Cash and cash equivalents at end of year 1,052,935 743,344 The accompanying notes form an integral part of these consolidated financial statements. -5- 1 General information The Company was incorporated in the People’s Republic of China (the “PRC”) as a joint stock limited liability company in May 1993. The Group is principally engaged in paper making. Its main products include double-faced offset printing paper, light coated paper, high grade color offset printing paper, coated art paper, writing paper, paperboard and paper pulp. The Group has an 153 thousand ton/year high-class art paper and coated art paper production line, an 150 thousand ton/year high-class light coated paper production line, an 150 thousand ton/year high-class press paper production line, an 100 thousand ton/year A- class paperboard production line and another 15 paper production lines. The Company’s B shares and A shares were listed on the Shenzhen Stock Exchange in 1997 and 2000, respectively. The address of the Company’s registered office is: No. 595 Shengcheng Street Shouguang City Shandong Province, PRC 2 Accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: A Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements have been prepared under the historical cost convention. This basis of accounting differs from that used in the statutory financial statements of the Company and its main subsidiaries which were prepared in accordance with generally accepted accounting principles and relevant financial regulations applicable to enterprises in the PRC (“PRC GAAP”). The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. 2. Accounting policies (Continued) B Group accounting (1) Subsidiaries Subsidiaries, which are those entities (including special purpose entities) in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Details of the Group’s principal subsidiaries are shown in note 31. (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Group’s share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group’s investment in associates includes goodwill (net of accumulated amortisation) on acquisition. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. Details of the Group’s associates are shown in note 15. 2. Accounting policies (Continued) C Foreign currency translation (1) Measurement currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the “measurement currency”). The consolidated financial statements are presented in Renminbi (“RMB”), which is the measurement currency of the Group. (2) Transactions and balances Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange gains and losses. Translation differences on non- monetary items are reported as part of the fair value gain or loss. D Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets; for the purpose of these financial statements short-term is defined as three months. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets; during the year the Group did not hold any investments in this category. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the expressed intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. 2. Accounting policies (Continued) D Investments (Continued) Trading and available-for-sale investments are subsequently carried at fair value. Held-to- maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments and of available-for-sale investment are included in the income statement in the period in which they arise. The fair value of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. E Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. F Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation and impairment, if any. Depreciation is calculated on the straight-line method to write off the cost of each asset to its residual values, which is 10% of cost, over its estimated useful lives as follows: Buildings 20-40 years Plant and machinery and equipment 5-10 years Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. 2. Accounting policies (Continued) F Property, plant and equipment (Continued) Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. G Leasehold land Leasehold land are up-front payments to acquire a long term interest in land. These payments are stated at cost and amortised over the period of lease on a straight-line basis. H Construction in progress Construction in progress represents properties under construction and plant and equipment under installation or testing. Construction in progress is stated at cost which includes all expenditure and other direct costs, prepayments and deposits attributable to the construction and interest charges arising from borrowings used to finance the construction during the construction period. Depreciation is not provided on construction in progress until the related asset is completed for intended use and transferred to property, plant and equipment. I Impairment of long lived assets Property, plant and equipment and other non-current assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. J Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 2. Accounting policies (Continued) K Accounts receivable Accounts receivable are carried at original invoice amount less provision made for impairment of these receivables. Such provision for impairment of accounts receivable is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. L Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand and deposits held at call with banks, other short-term highly liquid investments and overdraft with original maturities of three months or less. M Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings. N Employee benefits (1) Pension scheme The Group participates in several defined contribution retirement schemes organised by the respective municipal governments where the Group operates. These plans are generally funded by payments from the relevant group companies at a total of 20% to 25% of permanent staff basic salary. The Group’s contributions to the defined contribution retirement schemes are charged to the income statement as and when incurred. 2. Accounting policies (Continued) N Employee benefits (Continued) (2) Bonus plans A liability for employee benefits in the form of bonus plans is recognised in other payables when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: - there is a formal plan and the amounts to be paid are determined before the time of issuing the consolidated financial statements; or - past practice has created a valid expectation by employees that they will receive a bonus and the amount can be determined before the time of issuing the consolidated financial statements. Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. O Government grants relating to construction of property, plant and equipment Government grants relating to the construction of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on the straight-line basis over the expected useful lives of the related assets. P Income taxes The charge for PRC income tax is based on the result for the year as adjusted for items which are non-taxable or non-deductible and is provided at the rates applicable to the Company and its subsidiaries. Deferred income tax is provided, using the liability method, for temporary timing differences arising between the tax bases of assets and liabilities and their carrying values in the consolidated financial statements. Currently enacted tax rates at the balance sheet date are used to determine deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 2. Accounting policies (Continued) Q Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. R Revenue recognition Revenue comprises the invoiced value for the sale of goods net of value-added tax, rebates and discounts, and after eliminating sale within the Group. Revenue from the sale of goods is recognised on the transfer of ownership, which generally coincides with the time when delivery is made. Revenue from the sale of electricity is recognised when electricity is transmitted to the power grid operated by the local electric power company. Interest income is recognised on an accrual basis, taking into account the principals outstanding and the interest rates applicable. Government subsidy is recognised when there is reasonable certainty that it can be received and is included as other operating income. S Dividends Dividends are deducted from equity in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. T Segment reportings Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. U Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 2. Accounting policies (Continued) V Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade receivables, other receivables, available-for-sale investments, payables and borrowings. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies. 3 Financial risk management A Credit risk The carrying amount of cash and cash equivalents, trade receivables and other current assets represented the Group’s maximum exposure to credit risk in relation of financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits made by the Group during the year was 1.15%. Majority of the Group’s accounts receivable relate to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectation. No other financial assets carry a significant exposure to credit risk. B Currency risk Most of the transactions of the Group were settled in RMB and US dollar. RMB is not freely convertible into foreign currencies. In the opinion of the directors, the Group does not have significant foreign currency risk exposure. C Interest rate risk The interest rates of short-term borrowings of the Group are disclosed in note 21. The directors of the Company and its subsidiaries believe that the exposure to interest rate risk of financial assets and liabilities as of 31 December 2003 was minimum since their deviation from their respective fair values was not significant. 3. Financial risk management (Continued) D Fair value In assessing the fair value of non-traded derivatives and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for the specific or similar instruments are used for long-term debt. Other techniques, such as option pricing models and estimated discounted value of future cash flows, are used to determine fair value for the remaining financial instruments. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. 4 Sales and other operating income Notes 2003 2002 RMB’000 RMB’000 Analysis of sales (a) Sale of paper products 5,497,899 4,385,194 Sale of construction materials 205,560 12,993 Sale of paper making machinery 43,813 - Sale of electricity 37,910 37,530 Others 12,654 3,543 5,797,836 4,439,260 Analysis of other operating income Government subsidies - expansion subsidy (b) 37,429 17,962 - value-added tax and other taxes refund (c) 10,695 902 - others 3,478 - 51,602 18,864 Others (d) 18,527 13,560 70,129 32,424 5,867,965 4,471,684 (a) The Group operates only in the PRC. Business segment information is not shown because the sale of paper products accounted for more than 90% (2002: more than 90%) of the consolidated revenue and results of the Group. 4. Sales and other operating income (Continued) (b) Wuhan Chenming Hanyang Paper Company Limited, a subsidiary company, received an expansion subsidy of RMB3,500,000 (2002: RMB11,280,000) from the Administration of Wuhan Economic and Technology Development Zone. Chibi Chenming Paper Company Limited, a subsidiary company, received an expansion subsidy of RMB10,550,000 (2002: nil) from the Chibi municipal government. Hailaer Chenming Paper Company Limited, a subsidiary company, received an expansion subsidy of RMB3,776,000 (2002: nil) from the Hailaer municipal government. Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited, a subsidiary company, received an expansion subsidy of RMB19,603,000 (2002: nil) from the Qihe municipal government. (c) Pursuant to various circulars issued by the State Administration of Taxation and local government authorities, the Group received various types of refund on value- added tax and other local taxes. (d) Of the amount, RMB10,300,000 represented supplementary profit on trusted investments sold in the prior year. (e) Interest income is disclosed in note 7. 5 Operating profit The following items have been included in arriving at operating profit: 2003 2002 RMB’000 RMB’000 Cost of inventories recognised as expense (included in cost of sales) 4,152,181 3,179,052 Depreciation of property, plant and equipment 486,756 317,153 Amortisation of leasehold land 4,987 7,849 Provision for bad and doubtful debts 19,948 47,191 Repairs and maintenance expenditure on property, plant and equipment 102,286 38,120 Loss on disposal of property, plant and equipment 2,527 20,948 Operating lease rentals on property, plant and equipment 37,730 20,200 Research and development expenditure 9,525 5,289 Provision of unrealised loss on available-for-sale investments - 1,200 Provision of performance bonus fund (note 20(a)) 22,435 17,995 Staff costs (note 6) 295,010 250,359 6 Staff costs 2003 2002 RMB’000 RMB’000 Wages and salaries 245,613 190,575 Staff welfare 21,171 34,973 Retirement schemes - defined contributions 28,226 24,811 295,010 250,359 Average number of full time employees of the Group during the year 14,676 14,033 The Company and its subsidiaries participate in certain defined contribution retirement schemes organised by the respective municipal governments where the Group operates, covering all permanent staff of the Group. The Group has no obligation beyond the contributions which are calculated based on 20% to 25% (2002: 20% to 25%) of permanent staff basic salaries. 7 Finance costs, net 2003 2002 RMB’000 RMB’000 Interest expense on bank borrowings (158,633) (184,787) Interest expense on other loans (4,989) (2,615) Less: interest capitalised in construction in progress - 34,687 Net interest expense (163,622) (152,715) Interest income 16,652 27,243 Net foreign exchange gain/(loss) 188 (903) Other finance charges (3,834) (3,960) (150,616) (130,335) 8 Income tax expense 2003 2002 RMB’000 RMB’000 Current - PRC income tax 171,008 145,147 (a) PRC income tax of the Group mainly comprises income tax of the Company and certain of its subsidiaries which are calculated at rates applicable to the relevant companies ranging from 15% to 33% (2002: 15% to 33%). (b) Pursuant to the approval of the Shouguang State Tax Bureau, Shandong Chenming Xinli Co-generation Company Limited, a subsidiary company, being a foreign investment enterprise, is exempted from paying PRC income tax for two years starting from the first year with assessable income followed by a 50% reduction in income tax rate in the following three years. 2003 is the fourth profit-making year of the subsidiary and accordingly, income tax has been provided at 7.5%. (c) Pursuant to the approval of the Hailaer government and according to relative regulations issued by PRC Ministry of Foreign Trade and Economic Cooperation, Hailaer Chenming Paper Company Limited, a subsidiary company, is exempted from paying PRC income tax for three years starting from the first year with assessable income followed by a 50% reduction in income tax rate in the following two years. The current year is the fourth profit-making year of the subsidiary and accordingly, income tax has been provided at 16.5%. (d) According to relative regulations issued by PRC Ministry of Foreign Trade and Economic Cooperation, Shouguang Liben Paper Making Company Limited, the Company’s associate, being a foreign investment enterprise, is exempted from paying PRC income tax for two years starting from the first year with assessable income followed by a 50% reduction in income tax rate in the following three years. The current year is the second profit-making year of the associate and accordingly, no income tax has been provided. (e) Pursuant to the approval of the local government and according to regulations issued by State of Council, the income tax rate of Jilin Chenming Paper Company Limited, a subsidiary company, is 15%. (f) According to regulations issued by the State Administration of Taxation, the Company and Wuhan Chenming Hanyang Paper Company Limited obtained incentives for purchase of equipment manufactured domestically with an amount of RMB91,921,000 (2002: RMB7,657,000) and RMB21,504,000 (2002: RMB14,417,000) respectively from local tax authorities during the year. (g) As a result of deferred income taxes arising on temporary differences to 31 December 2003 being insignificant, no deferred income tax has been recognised. 8. Income tax expense (Continued) (h) According to the regulations issued by the PRC Ministry of Finance and State Administration of Taxation in 2003, difference between tax filing and actual income tax expense arising from tax filing subsequent to the financial statements reporting date, if any, should be adjusted to the reporting period. Pursuant to the regulations, the tax filing differences of the Group for the year ended 2002 amounted to RMB30,531,000 and should be adjusted to prior year statutory financial statements. The adjustments have the effects of a increase in income tax expense by approximately RMB30,531,000 and a decrease in retained earnings, statutory common reserve fund, statutory public welfare fund and minority interests by RMB13,515,000, RMB1,689,000, RMB1,689,000 and RMB13,638,000 respectively in statutory financial statements as of 31 December 2002. However, such income tax filing differences were accounted for as current year income tax expenses according to IFRS. (i) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the basic tax rates applicable to the Group as follows: 2003 2002 RMB’000 RMB’000 Profit before tax 896,116 627,711 Tax calculated at tax rates of 15%-33% (2002: 15%-33%) 216,534 157,764 Effect of tax incentives (note (f)) (119,484) (38,558) Income not subject to tax (16,570) (16,257) Expenses not deductible for tax purposes 47,126 26,411 Tax filing differences for the year ended 2002 (note (h)) 30,531 - Provisions not deductible for tax purposes 12,871 15,787 Tax charge 171,008 145,147 9 Gain on disposal of equity interest in a subsidiary During 2003, the Group disposed of its 49% equity interest in Shandong Chenming Panels Company Limited, a subsidiary, to a PRC third party for a consideration of RMB10,140,000 and resulting in a gain of RMB4,769,000. 10 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. 2003 2002 Net profit attributable to shareholders (RMB) 653,061,000 387,163,000 Weighted average number of ordinary shares in issue 897,728,000 897,728,000 Basic earnings per share (RMB per share) 0.73 0.43 The weighted average number of shares in issue in 2002 has been adjusted to take into account the bonus issues made during the year. The diluted earnings per share is equivalent to the basic earnings per share as there were no potential ordinary shares outstanding during the year ended 31 December 2003 and 2002. 11 Dividend per share During the year, the Company paid dividend related to 2002 of RMB0.05 (2002: nil) per ordinary share totaling RMB24,937,000 (2002: nil). By a resolution passed on 14 March 2004, the Directors recommended to pay a dividend of RMB0.10 (2002: RMB0.05) per ordinary share totaling RMB89,772,800 (2002: RMB24,937,000). The decision is subject to approval by the shareholders of the Company in the next annual general meeting. 12 Property, plant and equipment Buildings Plant and equipment Total (note(a)) Non- Non- Production production Production production RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Opening net book amount 779,822 174,672 4,082,028 70,550 5,107,072 Transfer from construction in progress 67,090 26,754 508,680 8,282 610,806 Additions 22,183 16,172 117,939 49,520 205,814 Disposals (2,867) (2,744) (3,775) (7,529) (16,915) Depreciation charge (41,909) (10,541) (417,227) (17,079) (486,756) Closing net book amount 824,319 204,313 4,287,645 103,744 5,420,021 At 31 December 2003 Cost 952,492 239,106 5,292,423 150,239 6,634,260 Accumulated depreciation (128,173) (34,793) (1,004,778) (46,495) (1,214,239) Net book amount 824,319 204,313 4,287,645 103,744 5,420,021 At 31 December 2002 Cost 866,920 200,921 4,674,014 104,053 5,845,908 Accumulated depreciation (87,098) (26,249) (591,986) (33,503) (738,836) Net book amount 779,822 174,672 4,082,028 70,550 5,107,072 12 Property, plant and equipment (Continued) (a) Included in plant and equipment was RMB22,969,000 (2002: RMB16,272,000) which represented net book value of the costs incurred in respect of the upgrading of certain production facilities pursuant to an agreement entered into between the Group and an unrelated third party (the “lessor”) dated in 1996 under which the Group had agreed to lease the factory premises and production facilities located in Qihe County of Shandong Province from the lessor for a period of ten years commencing from 1 July 1996. The Group had also committed to, at its own cost, upgrade such production facilities for the lessor. Such production facilities will revert to the lessor at the expiry of the lease. The costs incurred in relation to the upgrading of the production facilities were capitalised and amortised on a straight line basis over the unexpired period of the lease. In addition, the Group is required to pay an annual rental of RMB5,556,000 during the lease period. The relevant lease commitments are included in note 23. RMB14,519,000 (2002: RMB20,024,000) included in plant and equipment represented net book value of the costs incurred in respect of the upgrading of certain production facilities pursuant to an agreement entered into between the Group and Hanyang Paper Making Factory (the “lessor”), a minority shareholder of Wuhan Chenming Hanyang Paper Company Limited, a subsidiary, dated in 1997 under which the Group had agreed to lease the production facilities located in Wuhan of Hubei Province from the lessor for a period from 4 December 1997 to 3 October 2010. The costs incurred in relation to the upgrading of the production facilities were capitalised and amortised on a straight line basis over the unexpired period of the lease. In addition, the Group is required to pay an annual rental of RMB6,000,000 during the lease period. The relevant lease commitments are included in note 23. 13 Leasehold land RMB’000 Opening net book amount 157,134 Additions 20,919 Amortisation (4,987) Closing net book amount 173,066 At 31 December 2003 Cost 198,308 Accumulated amortisation (25,242) Net book amount 173,066 At 31 December 2002 Cost 177,389 Accumulated amortisation (20,255) Net book amount 157,134 At 31 December 2003, the ownership certificates of buildings with cost totaling RMB22,069,000 (2002: RMB22,545,000) are still in progress of being obtained. 14 Construction in progress 2003 2002 RMB’000 RMB’000 At beginning of year 285,348 1,982,264 Additions 1,031,850 1,455,796 Capitalised borrowing costs - 34,687 Transferred to property, plant and equipment (610,806) (3,187,399) At end of year 706,392 285,348 15 Investments in associates 2003 2002 RMB’000 RMB’000 Opening net book amount (note (a) ) 42,911 18,822 Reclassification (note (b) ) (22,500) - Addition - 22,500 Dividend appropriation (732) - Share of results before tax (572) 1,589 Closing net book amount 19,107 42,911 (a) Shouguang Liben Paper Making Company Limited (“Shouguang Liben”), an associate, is an unlisted entity in which the Company holds 26.4% of the equity interest. Shouguang Liben is incorporated and operates in the PRC, with its principal activities being manufacture of paper. There was no change in the percentage of ownership interest in Shouguang Liben during the two years ended 31 December 2003 and 2002. (b) In 2002, the Company invested RMB22,500,000 in Beijing Tianbaojialin Real Estate Company Limited (“Tianbaojialin”), an unlisted entity incorporated in 2002, in which the Company holds 45% of the equity interest. Pursuant to the resolution of Tianbaojialin’s board of directors in 2003, the Company acquired 60% voting rights in Tianbaojialin. Management concluded that Tianbaojialin was a subsidiary and should be consolidated from the date of acquisition of substantive control. 16 Available-for-sale investments 2003 2002 RMB’000 RMB’000 Opening balance 7,792 5,792 Additions - 2,000 7,792 7,792 Provision (1,200) (1,200) Closing net book amount 6,592 6,592 Available-for-sale investments comprise unlisted investments in the companies incorporated in the PRC in which the Group holds not more than 20% of their paid-up capital or the associates over which the Group cannot exercise significant influence. At 31 December 2003, available-for-sale investments of the Group have neither a quoted market price in an active market nor a fixed maturity, and are measured at cost less provision for impairment, if any. The Directors of the Group are of the opinion that the carrying value of the available-for-sale investment approximated the recoverable amount of the available-for-sale investments as of year end. 17 Prepayments Non-current prepayments represented prepaid rental for production facilities leased from Hanyang Paper Making Factory, a minority shareholder of Wuhan Chenming Hanyang Paper Company Limited. The details of the lease agreement have been described in note 12(b). The current portion of prepayments is shown in note 19. All non-current prepayments are due within 5 years from the balance sheet date. The carrying amounts of non-current prepayments approximate their fair values. The fair values are based on discounted cash flows using a discount rate based upon the borrowing rates which the Directors expect would be available to the Group at the balance sheet date. 18 Inventories 2003 2002 RMB’000 RMB’000 Raw materials 496,948 359,216 Work in progress 52,284 30,959 Finished goods 426,699 138,613 Property under construction 70,123 - 1,046,054 528,788 Less: Provision for obsolescence (223) (1,193) 1,045,831 527,595 As at 31 December 2003, finished goods of RMB12,216,000 (2002: RMB16,098,000) were stated at net realisable value. 19 Receivables and prepayments 2003 2002 RMB’000 RMB’000 Trade and bills receivables 1,371,340 1,353,509 Other receivables 204,644 122,613 Deposits and prepayments 209,612 216,337 1,785,596 1,692,459 20 Trade and other payables 2003 2002 RMB’000 RMB’000 Trade and bills payables 638,110 725,970 Advances from customers and other payables 513,368 413,309 Accrued expenses 5,230 27,035 Value-added tax and other taxes payable / (5,519) 30,869 (recoverable) Performance bonus fund (note (a)) 40,430 17,995 Employee bonus provision (note (b)) 18,078 13,862 1,209,697 1,229,040 (a) Movements of performance bonus fund: Chairman of the Board of Directors Stock performance bonus bonus fund fund Total RMB’000 RMB’000 RMB’000 At 1 January 2003 17,995 - 17,995 Charge for the year 9,230 13,205 22,435 At 31 December 2003 27,225 13,205 40,430 As approved in the 2001 annual general meeting, the stock bonus fund for senior management of the Company was established and provided based on the return on net assets of the Group in the current year. By resolutions of the Board of Directors, the Directors recommended to provide stock bonus of the above balances and planned to buy “A” shares of the Company as bonus to the senior management. As approved in the 2002 annual general meeting, the Chairman of the Board of Directors performance bonus fund for senior management was established and provided based on the return on net assets of the Group in the prior year. By a resolution of the Board of Directors in 2003, the Directors recommended to provide the Chairman of the Board of Directors performance bonus of the above balance. (b) Employee bonus was provided based on Directors’ recommendations and expected to be settled in full within twelve months from the balance sheet date. 21 Borrowings 2003 2002 RMB’000 RMB’000 Borrowings from banks and other financial institutions Guaranteed borrowings (note (a)) - Current 600,000 493,555 - Non-current 320,000 1,050,000 920,000 1,543,555 Secured borrowings - current - Current - 180,000 - Non-current - - - 180,000 Unsecured borrowings - Current 2,336,704 1,004,763 - Non-current 339,908 285,792 2,676,612 1,290,555 3,596,612 3,014,110 Other borrowings (note (b)) - Current 27,054 11,000 - Non-current 27,477 32,980 54,531 43,980 Total borrowings 3,651,143 3,058,090 Total borrowings - at fixed rates (note (c)) 3,612,670 2,943,417 - at floating rates (note (d)) 38,473 114,673 3,651,143 3,058,090 (a) The amounts were guaranteed by two unrelated PRC enterprises. (b) Of the amounts, RMB38,473,000 (2002: RMB43,980,000) represented an unsecured loan obtained from Hong Kong Daybreak Holdings Limited, a minority shareholder of a subsidiary company, Shandong Chenming Xinli Co-generation Company Limited. Interest is charged at a rate of 5.94% per annum. The borrowing is being repaid in ten equal installments commenced from 31 December 2000, with the final payment due on 31 December 2009. 21 Borrowings (Continued) (c) Fixed interest rate borrowings are charged at the rates ranging from 0% to 6.9%. The effective weighted average annual rate for the year ended 31 December 2003 was 4.93% (2002: 5.46%). (d) Interest on borrowings at floating rates are calculated based on the borrowing rates offered by the People’s Bank of China (2002: 1.0% to 1.5% over the London Inter- bank Borrowing Rates). The carrying amounts of borrowings approximate their fair values. The fair values are based on discounted cash flows using a discount rate based upon the borrowing rates which the Directors expect would be available to the Group at the balance sheet date. Maturity of borrowings: 2003 2002 RMB’000 RMB’000 Current portion 2,963,757 1,689,318 Between 1 and 2 years 49,900 666,514 Between 2 and 5 years 513,105 612,166 Over 5 years 124,381 90,092 687,386 1,368,772 Total borrowings 3,651,143 3,058,090 22 Deferred income 2003 2002 RMB’000 RMB’000 At beginning of year 181,358 186,360 Additions (note (a)) 252,000 5,410 Transfer to income statement (note (b)) (17,561) (10,412) Share by a minority shareholder (1,616) - At end of year 414,181 181,358 (a) During the year, Jiangxi Chenming Paper Company Limited and Shanghai Chenming Paper Machinery Company Limited, subsidiary companies, obtained government grants in relation to the construction of property, plant and equipment amounting to RMB226,080,000 and RMB25,920,000 respectively from local municipal governments. (b) The grants were recorded as deferred income in the balance sheet and to be credited to the income statement on a straight-line basis over the expected useful lives of the related assets. In accordance with the terms of the grants, the same amount was transferred from retained earnings to capital reserves. 23 Commitments Capital commitments Capital expenditure under intention agreements at the balance sheet date but not recognised in the consolidated financial statements is as follows: 2003 2002 RMB’000 RMB’000 Purchase of plant and equipment 1,446,585 14,000 23 Commitments (Continued) Operating lease commitments At 31 December 2003, the future minimum lease payments under non-cancellable operating leases in respect of buildings, plant and equipment are as follows: 2003 2002 RMB’000 RMB’000 Not later than 1 year 26,703 14,227 Later than 1 year and not later than 5 years 84,862 47,923 Later than 5 years 60,268 43,936 171,833 106,086 24 Share capital Number of State-owned PRC legal Employees shares shares person shares shares B shares A shares Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 31 December 2002 498,737,724 156,609 4,536 54,112 206,481 77,000 498,738 Bonus issues (note (c)) 398,990,179 125,287 3,629 43,290 165,184 61,600 398,990 Transfer to A shares (note (d)) - - - (97,402) - 97,402 - At 31 December 2003 897,727,903 281,896 8,165 - 371,665 236,002 897,728 (a) All issued shares are authorised, issued and fully paid with a par value of RMB1 each. The state-owned shares, the PRC legal person shares, A and B shares carry equal voting rights. (b) State-owned shares and PRC legal person shares are not allowed to be traded unless approvals are obtained from the relevant authorities. (c) During 2003, with the approval by the shareholders of the Company in the 2002 annual general meeting, a bonus issue of 398,990,179 shares in the proportion of 2 shares for every 10 shares from retained earnings and 6 shares for every 10 shares from capital reserves be distributed to the shareholders of the Company. Consequently, as at 31 December 2003, the total registered number of ordinary shares of the Company was increased to 897,727,903 shares (2002: 498,737,724 shares). (d) With the approval from the relevant authorities, employees shares were allowed to be traded as A shares from November 2003 onwards. 25 Capital reserves Capital reserves mainly comprise the following: (a) surplus between the appraised value of the net assets and the value of shares issued when the Company was converted from a state-owned enterprise to a joint stock limited company; (b) the placing of 115,000,000 B shares at a premium of RMB3.75 per share; (c) the placing of 70,000,000 A shares at a premium of RMB19.80 per share; (d) contributed surplus arising from injection of capital from minority shareholders ; and (e) transfers from retained earnings (note 22). Contributed surplus represents the Group’s share of the excess amount of the fair value of assets over the amount of capital required to be injected by the minority shareholders in the establishment of subsidiaries. 26 Minority interests 2003 2002 RMB’000 RMB’000 At beginning of year 762,797 710,651 Capital contributions from minority shareholders 64,886 20,613 Share of results of subsidiaries 72,047 95,401 Share of capital reserve of a subsidiary (note (22)) 1,616 - Dividends paid to minority shareholders by subsidiaries (35,304) (63,868) At end of year 866,042 762,797 27 Cash generated from operations Reconciliation of net profit to cash generated from operations: 2003 2002 RMB’000 RMB’000 Net profit 653,061 387,163 Minority interests 72,047 95,401 Income tax expense 171,008 145,147 Government subsidies (51,602) (18,864) Depreciation of property, plant and equipment 486,756 317,153 Amortisation of leasehold land 4,987 7,849 Amortisation of government grants received (17,561) (10,412) Loss on disposal of property, plant and equipment 2,527 20,948 Interest income (16,652) (27,243) Interest expense 163,622 152,715 Investment income (10,300) - Share of results of associates 572 (1,589) Gain on disposal of equity interest in a subsidiary (4,769) - Profit on sales of trading investments - (41,949) Unrealised loss on available-for-sale investments - 1,200 Provision on inventories (970) 1,193 Provision for bad and doubtful debts 19,948 47,191 Changes in working capital: - receivables and prepayments (113,084) (648,036) - inventories (517,266) (63,951) - non-current prepayments (18,000) - - trade and other payables (118,914) 493,495 Cash generated from operations 705,410 857,411 28 PRC statutory reserve funds In accordance with relevant PRC regulations applicable to joint stock limited companies and the Company’s Articles of Association, the Group is required to allocate its profit after tax to the following reserves: (a) Statutory common reserve fund Each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory common reserve fund until the balance reaches 50% of the paid- up share capital. This reserve can be used to make up prior years’ losses or to increase share capital. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital. 28 PRC statutory reserve funds (Continued) (b) Statutory public welfare fund Each year to transfer between 5% to 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory public welfare fund which is restricted to finance capital expenditure for staff welfare facilities which are owned by the Group. The statutory public welfare fund is not available for distribution to shareholders (except in liquidation). Once the capital expenditure on staff welfare facilities has been made, an equivalent amount will be transferred from the statutory public welfare fund to the discretionary common reserve fund. (c) Discretionary common reserve fund The discretionary common reserve fund can be set up by means of appropriation from the retained profits or transfer from the statutory public welfare fund. Subject to the approval of shareholders in general meeting, the reserve can be used to make up any losses, to increase share capital or to pay dividends. During the year, capital expenditure on staff welfare facilities of RMB117,000 has been made and an equivalent amount was transferred from the statutory public welfare fund to the discretionary common reserve fund accordingly. 29 Distributable profits Pursuant to PRC regulations and the Company’s Articles of Association, the profit available for distribution as dividends is determined based on the lower of the distributable profits as reported in the PRC statutory financial statements and the distributable profit adjusted according to IFRS. 30 Related party transactions (a) The following significant transaction was carried out at cost with its associated company, Shouguang Liben Paper Making Company Limited: 2003 2002 RMB’000 RMB’000 Sale of electricity 5,226 6,918 (b) Directors’ remuneration In 2003, the total remuneration of the Directors amounted to approximately RMB6,790,000 (2002: RMB4,400,000). 31 Principal subsidiary companies Place of incorporation Principal Attributable and operation activities equity interest Directly held by the Company Shandong Chenming Electric Power PRC Investment holding 51.00% Generation Holdings Company Limited Wuhan Chenming Hanyang Paper Company Limited PRC Manufacturing of paper 50.93% Hailaer Chenming Paper Company Limited PRC Manufacturing of paper 75.00% Shandong Chenming Paper Group Qihe Linerboard Paper PRC Manufacturing of paper 99.57% Company Limited Yasong Chenming Paper Company PRC Manufacturing of paper pulp 51.00% Limited Shouguang Chenming Tianyuan Arboriculture Company Limited PRC Arboriculture of tree 68.00% Jiangxi Chenming Paper Company Limited PRC Manufacturing of paper 90.00% Beijing Tianbaojialin Real Estate Company Limited * PRC Development and sale of properties 45 .00% Shanghai Chenming Paper Machinery Company Limited PRC Manufacturing of paper machinery 61.00% Indirectly held by the Company Xiangfan Chenming Copperplate Paper PRC Manufacturing of paper 35.79% Company Limited * Chibi Chenming Paper Company Limited * PRC Manufacturing of paper 35.79% Shandong Chenming Xinli Co-generation Company Limited * PRC Generation of electricity 26.01% Wuhan Chenming Qianneng Electric Power PRC Generation of electricity 25.97% Generation Company Limited * Shandong Chenming Panels Company Limited * PRC Manufacturing of decoration 26.01% materials Shouguan Chenming Cements Company Limited * PRC Manufacturing of cements 45.90% Shouguang Xinyuan Coal Company Limited PRC Sale of coal 50.49% Wuhan Chenjian New-style Wall Materials Company Limted * PRC Manufacturing of construction 25.97% materials * The Group holds over 50% of the voting rights of these companies and consequently, they have been consolidated. 31 Principal subsidiary companies (Continued) All holdings are in the form of paid-up capital in the companies concerned except for Tianbaojialin in which the Company holds 60% voting rights. Shanghai Chenming Paper Machinery Company Limited was newly established during the year. Manzhouli Kelin Paper Development Company Limited and 24.48% attributable equity interest in Shandong Chenming Panels Company Limited were disposed of during the year. Holdings in the remaining companies did not change significantly from 2002. XI. Documents for Reference (I) Financial statements carrying the signatures of the legal representative, chief accountant and principal of the accounting department. (II) Auditors’ Report carrying the stamps of the accountant firm and signature of the certified accountants (III) Original text of all documents and announcements that published on the statutory press medias assigned by China Securities Supervisory Committee. The Board of Directors of Shandong Chenming Paper Holdings Ltd. March 14, 2004