东沣B退(200160)帝贤Ｂ2003年年度报告（英文版）

CHENGDE DIXIAN TEXTILE CO. LTD. 2003 ANNUAL REPORT Mar. 8, 2004 Chengde · PRC Contents Section 1. Important Notes--------------------------------------------------------------------- Section 2. Company Profile-------------------------------------------------------------------- Section 3. Summary of Accounting Highlights and Business Highlights------------- Section 4. Changes in Share Capital and Particulars about Shareholders----------- Section 5. Particulars about Directors, Supervisors, Senior Executives and Employees------------------------------------------------------------------------------------------ Section 6. Administrative Structure --------------------------------------------------------- Section 7. Particulars about Shareholders’ General Meeting--------------------------- Section 8. Report of the Board of Directors------------------------------------------------- Section 9. Report of the Supervisory Committee------------------------------------------ Section 10. Significant Events------------------------------------------------------------------ Section 11. Financial Report------------------------------------------------------------------- Section 12. Documents for Reference -------------------------------------------------------- 1 Section 1. Important Notes Important Note: The Board of Directors of Chengde Dixian Textile Co., Ltd. (hereinafter referred to as the Company) and its directors individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions or errors which would render any statement misleading. Mr. Wang Shuxian, Chairman of the Board of the Company, Mr. Zhang Jing, Chief Financial Supervisor, and Sun Li, Person in Charge of Accounting Organ hereby confirm that the Financial Report of the Annual Report is true and complete. PricewaterhouseCoopers Co., Ltd. audited the Company’s Financial Report and issued a standard unqualified Auditors’ Report for the Company. Section 2. Company Profile 1. Legal Name of the Company In Chinese: 承德帝贤针纺股份有限公司 In English: CHENGDE DIXIAN TEXTILE CO., LTD. 2. Legal Representative: Wang Shuxian 3. Secretary of Board of Directors: Chen Zhiguo Authorized Representative in Charge of Securities Affairs: Du Qingfeng Contact Address: Xiaban Town, Chengde County, Hebei Tel: (86) 314-3115049、3115048 Fax: (86) 314-3182013 E-mail: dxgs-9@heinfo.net 4. Registered Address: Xiaban Town, Chengde County, Hebei Office Address: Xiaban Town, Chengde County, Hebei Post Code: 067400 Company’s Internet Web Site: http://www.dxtex.com E-mail: dxgs-9@heinfo.net 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (domestic) and Ta Kung Pao (overseas) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Contact Tel: (86) 314-3115049 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: DIXIAN B Stock Code: 200160 7. Other Relevant Information of the Company Initial registered date: Nov. 3, 1999 Registered date after change: Jul. 4, 2002 2 Registered address: Industry and Commerce Administration Bureau of Hebei Province (No. 316, Tiyu South Street, Shijiazhuang, Hebei) Registered number for business license of the Company: 1300001001372 1/1 Registered number of taxation of the Company: 130821106576876 International Accountant: PricewaterhouseCoopers (China) Co., Ltd. Office address: No. 333, Huaihai Middle Road, Shanghai Chinese Accountant: PricewaterhouseCoopers Zhongtian Certified Public Accountant & Co. Ltd. Office address: No. 333, Huaihai Middle Road, Shanghai Custodian agent of the non-circulating shares of the Company: Shenzhen Branch of China Securities Registration and Cleaning Co., Ltd. Name of lawyer firm engaged by the Company: Beijing Jin Cheng Lawyer Firm Office address: 17/F, East Sea Center, No. J24, Jian Guo Men Wai Ave., Chaoyao District, Beijing Section 3. Summary of Accounting Highlights and Business Highlights I. Summary of accounting highlight as of the year 2003 Unit: RMB Items Year 2003 Total profit 184,182,801 Net profit 143,046,587 Net profit after deducting non-recurring gains and losses 140,043,395 Profit form main operations 225,116,053 Other operating profit 3,517,096 Operating profit 183,817,519 Investment income 142,777 Subsidy income 0 Net non-operating income/expenses 222,505 Net cash flows arising from operating activities 124,500,520 Net increase/decrease in cash and cash equivalents 31,085,813 Note: In accordance with No. 1 of Question & Answer on the Information Disclosure Standards of Companies Publicly Issuing Stock — Non-recurring Gains and Losses (Revision in 2004), items of deducting non-recurring gains and losses and the involved amounts are as following: Unit: RMB Items Amounts Non-operating income 511,028 Non-operating expenses 288,523 Reversal of reserve for falling price of inventories 2,780,687 Total 3,003,192 II. Explanation on the difference in net profit as audited by domestic and international certified public accountants respectively In the year 2003, as audited by PricewaterhouseCoopers Zhongtian Certified Public Accountant & Co. Ltd. according to Chinese Accounting Standards, the Company’s net profit was RMB 143,046,587; as audited by PricewaterhouseCoopers (China) Co., Ltd. 3 according to International Accounting Standards, net profit was RMB 143,046,587. There is no difference in net profit. III. Major accounting data and financial ratios over past three years ended the end of the report period 2001 Items Unit 2003 2002 Before After adjustment adjustment Income from main operations RMB 523,600,121 463,087,869 290,282,998 290,282,998 Net Profit RMB 143,046,587 115,303,505 66,095,520 66,534,520 Total assets RMB 2,311,111,177 1,839,661,136 1,173,490,339 1,173,490,339 Shareholders’ equity （excluding RMB 696,775,076 553,728,489 441,936,984 449,819,984 minority interests） Earnings per share RMB/share 0.33 0.32 0.31 0.31 Earnings per share after RMB/share 0.32 0.32 0.31 0.31 deducting non-recurring gains and losses Net assets per share RMB/share 1.59 1.52 2.06 2.09 Net assets per share after RMB/share 1.58 1.51 2.04 2.06 adjustment Net cash flows per share arising RMB/share 0.28 0.44 0.29 0.29 from operating activities Return on equity % 20.5 21 15 15 Weighted average earnings per RMB/share 0.36 0.35 0.31 0.31 share IV. In accordance with Reporting Regulations on the Information Disclosure of Companies Publicly Issuing Stock (No. 9) promulgated by China Securities Regulatory Commission, in the year 2003, the Company’s return on equity and earnings per share as calculated based on calculating method of fully diluted and weighted average: Return on equity Earnings per share (RMB) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 32.31% 38.94% 0.5133 0.5774 Operating profit 26.38% 31.80% 0.4191 0.4920 Net profit 20.53% 24.74% 0.3261 0.3829 Net profit after deducting non-recurring 20.10% 25.29% 0.3193 0.3592 gains and losses V. Changes in shareholders’ equity in the report period (Unit: RMB） Statutory Capital Surplus Total public Retained Items Share capital public public shareholders’ welfare profit reserve reserve equity fund Amount at the 365,500,000 45,756,833 41,498,270 13,832,757 100,973,386 553,728,489 period-begin Increase in the 73,100,000 21,456,989 7,152,330 143,046,587 237,603,576 4 report period Decrease in the 94,556,989 94,556,989 report period Amount at the 438,600,000 45,756,833 62,955,259 20,985,087 149,462,984 696,775,076 period-end Reason of Bonus shares Withdrawal Withdrawal Realization Realization of changes in this in this of profit; Profit; period period distribution distribution of of profit as dividends of this year Section 4. Changes in Share Capital and Particulars about Shareholders I. Changes in Share Capital (1) Statement of changes in share Unit: Share Increase/decrease of this time (+, - ) Before the After the Items change Bonus Allotment Capitalization of Additional change Others Subtotal shares of share public reserve issuance I. Unlisted Shares 1. Sponsors’ shares 170,000,000 34,000,000 204,000,000 Including: State-owned share Domestic legal person’s shares 16,074,520 3,214,904 19,289,424 Foreign legal person’s shares Others 153,925,480 30,785,096 184,710,576 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others Total unlisted shares 170,000,000 34,000,000 204,000,000 II. Listed Shares 1. RMB ordinary shares 2.Domestically listed foreign 195,500,000 39,100,000 234,600,000 shares 3. Overseas listed foreign shares 4. Others Total listed shares 195,500,000 39,100,000 234,600,000 III. Total shares 365,500,000 73,100,000 438,600,000 (2) Issuance and Listing 1. Over the past three years ended Dec. 31, 2003, the Company did not issue any securities. 2. In the report period, the Company implemented 2002 Profit Distribution Plan (bonus shares at the rate of 2 bonus shares for every 10 shares), so as to the total shares of the company was changed (for detail, please refer to statement of changes in share). 3. There existed no inner employees’ shares in the Company. II. About shareholders 5 (1) Ended Dec. 31, 2003, the Company had totally 12453 shareholders, including 5 ones of sponsors’ shares and 12448 ones of domestically listed foreign shares. (2) Particulars about change of shares held by the top ten shareholders as follows: (Ended Dec. 31, 2003) Increase/ Holding Number of Nature of shareholder Type of shares decrease shares at the Proportion share (State-owned Name of shareholders (full name) (circulating/non- during this year-end (%) pledged or shareholder / foreign circulating) year (share) frozen shareholder) WANG SHU XIAN 28,934,000 173,604,000 39.58 Non-circulating No Natural person CHENGDE NORTH 2,571,896 15,431,376 3.52 Non-circulating No Domestic legal INDUSTRIAL CORPORATION person’s share WANG ZHENG SONG 1,851,096 11,106,576 2.53 Non-circulating No Natural person RIPPERTON ASSETS LIMITED 4, 952,818 7,084,388 1.62 Circulating Unknown Foreign shares (B- share in circulating) CSSC INTL LTD 1,084,900 6,530,000 1.49 Circulating Unknown Foreign shares (B- share in circulating) WANG WEN SHENG 6,048,339 6,048,339 1.38 Circulating Unknown Foreign shares (B- share in circulating) CHINA MIDDLING & SMALL 862,450 5,880,000 1.34 Circulating Unknown Foreign shares (B- ENTERPRISE DEVELOPMENT share in circulating) FUND CO., LTD. PERFECT SPACE 4,542,989 4,542,989 1.04 Circulating Unknown Foreign shares (B- INVESTMENTS share in circulating) GRANDLOYAL INVESTMENT 267,200 4,200,000 0.96 Circulating Unknown Foreign shares (B- LTD share in circulating) MAIN FORCES ASSETS -212,430 4,046,700 0.92 Circulating Unknown Foreign shares (B- LIMITED share in circulating) Notes: WANG SHU XIAN is main sponsor and holding shareholder of the Company, who holds natural person’s shares (non-circulating shares); Chengde North Industrial Corporation is one of the sponsors of the Company, who holds domestic legal person’s shares (non-circulating shares); WANG ZHENG SONG is one of the sponsors of the Company, who holds natural person’s shares (non-circulating shares); other shareholders hold B shares in circulating. Among the top ten shareholders, the Company is unknown whether there exists associated relationship or belongs to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company among the other shareholders except that WANG SHU XIAN and WANG ZHENG SONG are the relationship of father and son. (3) About the holding shareholder The holding shareholder of the Company is Wang Shuxian (the first largest shareholder of the Company), who is also actual controller of the Company. His information is as follows: Mr. Wang Shuxian, 50, Chinese nationality, who has not enjoy the residence power in the other country or area. He is one of the sponsors of the Company and holds 173,604,000 shares of the Company at present. Mr. Wang Shuxian is founder of the Company. In the year 1986, Xiaban County Knitting Factory was founded in Xiaban town of Chengde, Hebei. Over ten years, the Company has developed into the largest base of manufacture and exporter of textile in North China from small to large. In 1994, he has established Hebei Dixian Textile Group Co., and it has been changed into joint- stock company on Nov. 3, 1999. As approved by CSRC, DIXIAN B successfully listed 6 with Shenzhen Stock Exchange for trade on Sep. 29, 2000. The Company has become the first B-share listed company controlled by person. Now, Mr. Wang Shuxian is Chairman of the Board of the Company. (4) Particulars about the top ten shareholders of circulating share as follows: Serial Holding circulating number Name of shareholders (full name) shares at the year-end Type (share) 1 RIPPERTON ASSETS LIMITED 7,084,388 B-share in circulating 2 CSSC INTL LTD 6,530,000 B-share in circulating 3 WANG WEN SHENG 6,048,339 B-share in circulating 4 CHINA MIDDLING & SMALL ENTERPRISE 5,880,000 B-share in circulating DEVELOPMENT FUND CO., LTD. 5 PERFECT SPACE INVESTMENTS 4,542,989 B-share in circulating 6 GRANDLOYAL INVESTMENT LTD 4,200,000 B-share in circulating 7 MAIN FORCES ASSETS LIMITED 4,046,700 B-share in circulating 8 GOOD CAPTURE INVESTMENTS 3,934,819 B-share in circulating 9 CHINA SOUTHERN CORPORATE 3,790,000 B-share in circulating FINANCE LIMITED 10 CSS（HK）L A/C ULTRAMATIC 3,690,330 B-share in circulating HOLDINGS LIMITED Explanation on associated relationship The Company is unknown whether there among the top ten shareholders of circulating exists associated relationship share Section 5. Particulars about the Directors, Supervisors and Senior Executives and Employees I. Particulars about directors, supervisors and senior executives (1) Basic information Table 1 Holding share Holding share Reason of Name Title Gender Age Office term at the year- at the year- change begin end Chairman of the Oct. 29, 2002- Wang Shuxian Board Male 50 Oct. 29, 2005 144,670,000 173,604,000 Bonus share Director, Oct. 29, 2002- Shi Bainian General Manager Male 32 Oct. 29, 2005 0 0 Oct. 29, 2002- Song Yushan Director Male 63 Oct. 29, 2005 0 0 Director, Deputy Oct. 29, 2002- Wang Huilai General Manager Male 49 Oct. 29, 2005 0 0 Oct. 29, 2002- Du Qingfeng Director Male 42 Oct. 29, 2005 0 0 Director, Deputy Oct. 29, 2002- Lan Wenzhi General Manager Female 45 Oct. 29, 2005 0 0 Independent Oct. 29, 2002- Wang Enyuan director Male 62 Oct. 29, 2005 0 0 Independent Oct. 29, 2002- Li Wei director Male 33 Oct. 29, 2005 0 0 Independent Oct. 29, 2002- Wang Yaguang director Male 51 Oct. 29, 2005 0 0 7 Wang Deputy General Oct. 29, 2002- Zhengsong Manager Male 27 Oct. 29, 2005 9,255,480 11,106,576 Bonus share Oct. 29, 2002- Song Kuiwu Supervisor Male 63 Oct. 29, 2005 0 0 Oct. 29, 2002- Li Xianfu Supervisor Male 58 Oct. 29, 2005 0 0 Oct. 29, 2002- Sun Zhenyu Supervisor Male 41 Oct. 29, 2005 0 0 Oct. 29, 2002- Yao Fenglan Supervisor Female 38 Oct. 29, 2005 0 0 Oct. 29, 2002- Xu Huafeng Supervisor Male 31 Oct. 29, 2005 0 0 Chief Financial Oct. 29, 2002- Zhang Jing Supervisor Male 33 Oct. 29, 2005 0 0 Secretary of Oct. 29, 2002- Chen Zhiguo Board of Directors Male 31 Oct. 29, 2005 0 0 Notes: Chairman of the Board Mr. Wang Shuxian is main sponsor of the Company, who holds 144,670,000 non-circulating shares of the Company at the year-begin, but 173,604,000 non-circulating shares at the year-end; deputy general manager Mr. Wang Zhengsong is one of the sponsors of the Company, who holds 9,255,480 non-circulating shares of the Company at the year-begin, but 11,106,576 non-circulating shares at the year-end. The change in shares held by them is because the Company implemented the 2002 Profit Distribution Plan (bonus shares at the rate of 2 bonus shares for every 10 shares) in the report period. The other directors, supervisors and senior executives of the Company have not hold shares of the Company. (2) Particulars about the post held by directors, supervisors and senior executives in Shareholding Company Drawing the payment Name of Shareholding Title in Shareholding Name Office term from the Shareholding Company Company Company (Yes / No) Chengde North Industrial Song Yushan Legal Representative From 1999 to now No Corporation Chengde Dragon and Phoenix Song Yushan Legal Representative From Oct. 2002 to now No Dressing Co. Chengde Xiaban Town Song Yushan Legal Representative From 1999 to now No Hongxing Plastic Factory (3) Particulars about the annual remuneration received by directors, supervisors and senior executives Annual remuneration drew by directors, supervisors and senior executives in current office was determined by the Proposal on Remuneration of the Company’s Directors (Independent Directors), Supervisors and Senior Executives adopted by the 2002 shareholders’ general meeting. The total annual remuneration drew by directors, supervisors and senior executives from the Company is RMB 548,160. Total annual payment of the top three directors drawing the highest remuneration is RMB 191,040; total annual payment of the top three senior executives drawing the highest payment is RMB 138,240. Allowance and subsidy of Wang Enyuan, Li Wei and Wang Yaguang, the independent directors of the Company, amounted to RMB 20,000 per year respectively. The 8 Company reimbursed the reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. There are 17 directors, supervisors and senior executives in office at present. Three independent directors draw allowance and subsidy of RMB 20,000 respectively per year; the other 14 draw payment from the Company. Of them, 2 persons enjoy over RMB 50,000 per year, 5 persons enjoy between RMB 40,000 to RMB 50,000 per year respectively, 10 persons enjoys between RMB 10,000 to RMB 30,000. (4) Leaving and reason of directors, supervisors and senior executives in the report period During the report period, the Company’s directors, supervisors and senior executives remained unchanged. To the situation on directors, supervisors and senior executives, please refer to Table 1 of Section 5. II. Particulars about employees At the end of 2003, there were 9728in-service employees, including 9299 production and piecework personnel, 85sales personnel, 192 technicians, 45 financial personnel and 107 administrative personnel; of which 761 persons got the college and technical secondary school’s degree or above, taking 7.82% of the total number of employees. The Company implemented the employees labor insurance and welfare system stipulated by the relevant laws and regulations of local areas and the nation. Section 6. Administrative Structure I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies and other relevant laws and regulations, the Company continuously improved the legal person administration structure of the Company, established modern enterprise system and standardized the operation of the Company. There is no significant difference between the actual administration of the Company and the normative documents on administration of listed companies released by China Securities Regulatory Commission. The major representation is as follows: (I) Shareholders and the Shareholders’ General Meeting: The Company set up Rules of Procedure of Shareholders’ General Meeting and was able to convene and hold the Shareholders’ General Meeting strictly according to the requirement of normative opinions of the Shareholders’ General Meeting and the procedure of the meeting was legal. The Company ensures that all shareholders share the actual information of the Company equally and guarantee the legal rights of medium and small shareholders. (II) Relation of the controlling shareholder and the listed company: In order to truly safeguard the whole interest of the Company, the Company has set up Behavior Criterion of Controlling Shareholder. The Company is completely independent from the controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organization can operate independently. 9 (III) Directors and the Board of Directors: The Company elected directors strictly according to the procedure stated in the Articles of Association and engaged independent directors according to relevant requirements. All directors can take the responsibilities in a diligent attitude on behalf of the maximum interests of the Company and the shareholders. The Board of Directors established Rules of procedure of the Board of Directors, implemented patiently the regulations of the laws, regulations and the Articles of Association of the Company, treated all shareholders fairly and concentrated on the interest of relevant beneficial parties. (IV) Supervisors and the Supervisory Committee: The Supervisory Committee established Rules of procedure of the Supervisory Committee. The supervisors can take their duties and supervise over the Company’s finance and the compliance with laws and regulations of the implementation of the, directors, managers and other senior executives’ duties in an attitude responsible for all shareholders and thus protect the legal right and interest of the Company and the shareholders. (V) Performance evaluation and encouragement and binding mechanism: The Company improved actively a fair and transparent performance evaluation criteria and encouragement mechanism for directors, supervisors and senior executives. Engagement of senior executives is open, transparent and is in line with stipulations of laws and regulations. (VI) For relevant beneficial parties: The Company is able to fully respect and safeguard the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests. While protecting the Company’s sustainable development and realizing the maximum of the shareholders’ interests, the Company pays special attention to social welfare, environmental protection and commonweal cause in the area. (VII) Information disclosure and transparency: The Company authorized the secretary of the Board of Directors to be responsible for information disclosure, reception of the shareholders’ interviewing and consultation. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to provisions of laws, regulations and the Articles of Association so as to ensure equal chances for all shareholders to obtain information. II. Performance of Independent Directors The Company engaged 3 independent directors, taking one third of the directors of the Company according to Rules on Administration of Listed Companies and Guidance Opinions on Establishing Independent Directors System in Listed Companies. The independent directors played a full role in the Board of Directors and expressed their opinions for some significant issues of the Company and performed an active function on the scientific decision-making and normative operation of the Company and preserved the interest of the Company and all shareholders in a diligent and responsible attitude. III. Separation in businesses, personnel, assets, organization and finance of the Company and control shareholders (I) In respect of personnel: the labor, personnel and wage management of the Company is completely independent and the manager, deputy manager and other senior executives received salaries in the Company. 10 (II) In respect of assets: The Company as an independent legal person has full property right of legal person and has independent production system, accessorial production system and auxiliary equipment. Industrial property right, trademark, non-patent technology and other intangible assets all belong to the listed company. The Company has independent purchase and sales system. (III) In respect of finance: The Company has independent financial department, whole, independent and normatively operated business accounting system and financial administration system and independent bank account. (IV)In respect of organization independence: The Company’s organizations are wholly independent and the offices of the Company are wholly separated from the controlling shareholder. (V) In respect of business: The Company is independent from the controlling shareholder in terms of businesses and has independent and whole business and operating ability. IV. Evaluation and encouragement mechanism of performance of senior executives The Company established Detailed Rules of General Manager and other specific work regulations to normalize the work of the senior executives. Meanwhile, adopting the method of testing and evaluation, the Company confirmed the performance of senior executives according to respective indexes and implementation of work and added float reward on the basis of basic annual salary to mobilize the activeness of senior executives. The above persons were evaluated through testing by the Board of Directors and supervised by the Supervisory Committee. Section 7. Particulars about Shareholders’ General Meeting I. Holding of Shareholders’ General Meeting in the report period In the report period, the Company held one Annual Shareholders’ General Meeting and one Provisional Shareholders’ General Meeting. (I) The Company published the public notice on holding 2002 Annual Shareholders’ General Meeting on Securities Times and Hong Kong Ta Kung Pao dated Jun.17, 2003. The Annual Shareholders’ General Meeting was held in the meeting room on the 3rd floor of the Company at 9:00 am on Jun.22, 2003(Xiabancheng Town of Chengde County). 8 shareholders and shareholders proxies attended the meeting, representing 226,555,132 shares of the Company, taking 61.98% of the total share capital (170,000,000 domestic RMB shares, taking 46.51% of the total share capital, and 56,555,132 foreign shares, taking 15.47% of the total share capital). The directors, supervisors and senior executives attended the meeting as non-voting delegates, which was presided by Mr. Wang Shuxian, the Chairman of the Board, in accordance with relevant provisions in Company Law and Articles of Association of the Company. The meeting examined and approved the following proposals by signed voting: 1. Examined and approved 2002 Work Report of the Board of Directors; 2. Examined and approved 2002 Financial Auditor’s Report; 3. Examined and approved 2002 Annual Report and 2002 Annual Report Summary; 4. Examined and approved 2002 Profit Distribution Proposal; 5. Examined and approved the Proposal on Amendment of Article of Association; 6. Examined and approved the proposal on reengaging PricewaterhouseCoopers (China) Co., Ltd and PricewaterhouseCoopers Zhongtian CPAs Co., Ltd. as the international and domestic auditors respectively of the Company in 2002. 11 7. Examined and approved the reward of the directors (independent directors), supervisors and senior executives of the Company. 8. Examined and approved the proposal on the Company’s complying with the condition of reissuing share. 9. Examined item by item and approved the proposal on applying for reissuing B-share no more than 200,000,000. 1) Type of share: domestically listed foreign shares (B Share) 2) Par value per share: RMB 1.00 3) Number of issuance: no more than 200 million shares 4) Objects of issuance: social investors and institutional investors opening stock account of domestically listed foreign shares (B Share) in Shenzhen Stock Exchange (Except for those who are prohibited by State laws and regulations) or strategic investors, foreign investment funds, specific investors and other investors in compliance with requirements of CSRC Being changed into: foreign institutional investors and other investors in compliance with relevant provisions of CSRC 5) Listing address: Shenzhen Stock Exchange 6) Way of issuance: pricing and issuing shares through network to social investors and institutional investors opening stock account of domestically listed foreign shares (B Share) in Shenzhen Stock Exchange (Except for those who are prohibited by State laws and regulations). The original shareholders of B Share can subscribe the said shares at priority with a certain percentage. Or the Company can directionally distribute and sell the said shares to strategic investors, foreign investment funds and specific investors. Being changed into: directional distribution and sales; or other ways in compliance with relevant provisions of CSRC 7) Way of pricing: Converting at a certain percentage based on the close price in secondary market during 10 trading days before the equity registration date. To be based on the principle of protecting the equity of current shareholders, i.e., the price of additional issuance is not less than net assets per share, or principle of negotiating with the objects of issuance. Being changed into: market based pricing; the price of additional issuance is not less than net assets per share based on the principle of protecting the interests and rights of current shareholders 8) Way of consignment-in: underwriting the rest amount on a sole agency basis 10. Examined item by item and approved the proposal on applying for reissuing A-share no more than 100,000,000. 1) Type of issued shares: RMB ordinary shares (A Share) 2) Par value per share: RMB 1.00 3) Number of issuance: no more than 100 million shares 4) Objects of issuance: Investors in secondary market holding listed and circulated A Shares in Shanghai or Shenzhen with market value amounting to no less than RMB10,000 (Except for those buyers who are prohibited by State laws and regulations). 5) Listing address: Shenzhen Stock Exchange 6) Way of issuance: All distributing and selling to investors in secondary markets at pricing 7) Way of pricing: According to the principle of market pricing and comprehensively considering such factors as the Company’s representation in secondary market of B Share, representation 12 of stock price of listed companies of A Share in the same industry and average price- earnings ratio multiple for new shares issuance under the recent approval system, in compliance with relevant provisions in Securities Laws of the P.R.C., the detailed way of pricing in this additional issuance is requested for Shareholders’ General Meeting to authorize the Board of Directors to consider the market situation while issuing, is negotiated and confirmed by the lead underwriter and the Company and is reported to China Securities Regulatory Commission for approval. 8) Way of consignment-in: underwriting the rest amount on a sole agency basis 11. Examined and approved applying for the Shareholders’ General Meeting to authorize the Board of Directors to conduct the relevant matters of the reissuing. 12. Examined and approved the proposal on the duration of the resolutions of the reissuing. 13. Examined and approved the proposal on feasibility of the planned investment project of the raised capital from the reissuing. 14. Examined and approved the proposal on disposal of undistributed profit. 15. Examined and approved the explanation of the Board of Directors on the use of the last raised capital. 16. Examined and approved the proposal on using bank loan to construct the papermaking project before the raised capital from the reissuing is collected and repaying bank loan with the raised capital after the successful reissuing. 17. In the Annual Shareholders’ General Meeting, the Supervisory Committee put forward requirement to exam the provisional proposal on 2002 Work Report of Supervisory Committee, which was confirmed by the Board of Directors and was thought in the authority range of the Shareholders’ General Meeting according to the legislations, regulation and Articles of Association of Company and was referred to the Shareholders’ General Meeting for discussion. 2002 Supervisory Committee Work Report was examined and approved. Lawyer Mr. Lu Xin of Beijing Jincheng Lawyer Office testified the Annual Shareholders’ General Meeting and provide legal opinion report in which the convening and holding procedure of the Annual Shareholders’ General Meeting was legal and valid, in accordance with the regulations of Company Law, Criteria Opinion of the Shareholders’ General Meeting of Listed Company and Articles of Association of the Company. The qualification of persons attending the Meeting and the voting procedure was legal and valid. The public notice on the resolutions of the Shareholders’ General Meeting was published on Securities Times and Hong Kong Ta Kung Pao dated July.23, 2003. (II) The Company published the public notice on holding the first provisional Shareholders’ General Meeting in 2003 on Securities Times and Hong Kong Ta Kung Pao dated Sep.30, 2003. The Provisional Shareholders’ General Meeting was held in the meeting room on the 3rd floor of the Company at 9:00 am on Nov.5, 2003(Xiabancheng Town of Chengde County). 5 shareholders and shareholders proxies attended the meeting, representing 271,168,198 shares of the Company, taking 61.83% of the total share capital (204,000,000 domestic RMB shares, taking 46.51% of the total share capital, 67,168,198 foreign shares, taking 15.31% of the total share capital). The directors, supervisors and senior executives attended the meeting as nonvoting delegates, which was presided by Mr. Wang Shuxian, the Chairman of the Board, in accordance with 13 Company Law of the P.R.C. and Articles of Association of the Company. The meeting examined and approved the following proposals by signed voting: 1. Examined and approved the proposal on applying for relevant competent department to change the Company into a foreign investment company limited. 2. Examined and approved the proposal on amending Articles of Association of the Company. Lawyer Mr. Lu Xin of Beijing Jincheng Lawyer Office testified the Provisional Shareholders’ General Meeting and provide legal opinion report in which the convening and holding procedure of the Annual Shareholders’ General Meeting was legal and valid, in accordance with the regulations of Company Law, Criteria Opinion on the Shareholders’ General Meeting of Listed Company and Articles of Association of the Company. The qualification of persons attending the Meeting and the voting procedure was legal and valid. The public notice on the resolutions of the Provisional Shareholders’ General Meeting was published on Securities Times and Hong Kong Ta Kung Pao dated Nov.6, 2003. II. Election and changing of the directors and supervisors of the Company In the report period, there is no change on the members of directors, supervisors and senior executives. Section 8. Report of the Board of Directors I. Discussion and analysis to the whole operation in the report period In the report period, the Company’s production and operation was normal. Moreover, the Company kept a good development trend and saw a steady increase in the achievements. In 2003, the income from main operations was RMB 523,600,121, an increase of 13% compared with the corresponding period of the previous year. The profit from main operations was RMB 225,116,053, an increase of 24.5% than that of the corresponding period of the previous year and the net profit realized was RMB 143,046,587, and increase of 24% compared with the corresponding period of the previous year. The main reasons were: (1) In the report period, the Company reinforced interior management and cost control, mined the interior potential and got benefits through strengthening the management, which has gained obvious achievements. (2) Another part of spinning and synthetic silk equipments of the Company were put into production and operation with growing output and stable quality, thus the sales income and profit increased somewhat than those in the same period of last year. (3) In the report period, the Company’s output in papermaking equipments increased obviously. The papermaking project realized sales income and net profit amounting to RMB 87,678,955 and RMB 22,617,028 respectively in 2003. In the report period, in order not to give up the scarce investment chance and in order to realize the Company’s long-term development and ensure the long-term interests of the shareholders, the Management of the Company decided to overcome provisional difficulties and conducted the construction of papermaking projects. The Company caught the development opportunity, invested large quantities of capital and conducted the construction of papermaking projects, which resulted that the Company’s working capital took on negative temporarily. The practice testified that the decision of the Management was right. The Board of Directors of the Company thought that along with the gradual input into production and operation of the investment projects of the Company, the fast increase in main operations will bring large funds to the Company and the Company shall positively carry through the direct and indirect financing, try hard to improve the liability structure of the Company and arrange the plan of 14 production and operation in a reasonable and effective way, thus the status in working capital shall be improved gradually. After the papermaking projects being put into production and operation completely and formally, it will impact relatively large influence on the Company’s financial status and productive and operative results. II. The operation in the report year (I) Scope of main operations and its operating status 1. Scope of main operations The main operations of the Company are the production and sales of various knit wear, yarns, chemical fiber synthetic silks and various kinds of papers and their products. 2. Business operation (1) Classified according to industries and products Classified according to Income from Cost of Gross Increase/decrease Increase/decreas Increase/decrease industries or products main profit in income from e in cost of main in gross profit ratio operations main ratio (%) main operations operations over over the last year (RMB) operations over the last year the last year (%) (%) (%) (RMB) Garments 246,322,694 111,388,091 54.78 -0.2 -2.2 0.9 manufacturing Cotton textile 189,949,602 124,130,031 34.65 9.5 -8.2 12.6 Papermaking 87,327,825 62,965,946 27.90 104.1 89.5 5.5 Including: related 40,550,000 20,120,000 50.38 - - - transactions Knit wears 246,322,694 111,388,091 54.78 -0.2 -2.2 0.9 Spinning and synthetic 189,949,602 124,130,031 34.65 9.5 -8.2 12.6 silks Paper 87,327,825 62,965,946 27.90 104.1 89.5 5.5 Including: related 40,550,000 20,120,000 50.38 - - - transactions Pricing rules for related Pricing according to the market price of product in the same kind transactions Necessity and durative Yufa Comopany, its main related party, is an important trade partner of the Company before becoming the of related transactions Company’s related party. (2) Main operations in various areas Areas Income from main operations Increase/decrease in income from (RMB) main operations over the last year (%) Foreign sales Asia 274,699,680 0.1 Domestic sales North China 152,650,475 405.9 South China 86,050,356 -13.9 East China 7,130,759 -85.6 Northeast 3,068,851 -65.8 (II) Business operation and achievement of the Company’s main holding subsidiaries and share-holding companies Hebei Xiabancheng Knit Wears Co., Ltd. is the Company’s wholly owned subsidiary, with a registered capital of USD4 million. Its main product is knit wears and it has an assets scale of RMB 408,776,470. In the report year, it completed a sales income of RMB 245,219,481 with a total profit of RMB 109,109,584 and net profit of RMB 92,685,745. 15 Chengde Dixian Fashion Co., Ltd. is a Sino-foreign joint venture company, which was jointly invested by Japanese Guoyufa Company and the Company. It has a registered capital of USD24 million. The Company holds 75% equity of this company, whose main products are yarns and synthetic silks. The asset of this company is RMB 476,780,833. In the report year, this joint venture company realized a sales income of RMB 189,949,604 with a net profit of RMB 44,770,950. Chengde Industrial Papermaking Co., Ltd. was a papermaking company jointly established by Hong Kong Zhanxi International Co., Ltd. and the Company, with a registered capital of USD100 million. The Company holds 75% equity of this company whose main products are varied kinds of papers. The projects of this joint venture are still in construction and partial equipments have already been put into production and trial production. In the report period, the papermaking company realized a sales income of RMB 87,678,955 and a net profit of RMB 22,617,028. Chengde North Japan Textile Co., Ltd. is a Sino-foreign manufacturing joint stock enterprise jointly set up by the Company, North Japan Textile Co., Ltd. of Japan and Y’S Corporation Co. Ltd. (hereinafter referred to as “ Yufa Company”), which got the business license of enterprise’s legal person on Dec. 13, 2002 with a registered capital of RMB USD1 million. The Company holds 50% of its equity while North Japan Textile and Yufa Company holds 40% and 10% of its equity respectively. Ended Dec. 31, 2003, this company was still not under normal production and operation. Jinfu Investment is the wholly owned overseas subsidiary of the Company, registered to establish in British Virgin Islands with the authorized capital of USD50,000 and the issuance capital of USD1. At present, except of owning 25% equity of Xiabancheng Knit wears, Jinfu Investment is mainly engaged in the collection of the relevant materials of European and American markets for the Company and the market expansion. (III) Major suppliers and customers The total purchase amount from the top five suppliers amounting to RMB 142,135,521 accounts for 38% of the Company’s total purchase amount. The total sales amount to the top five customers amounting to RMB 215,799,000 accounts for 41% of the Company’s total sales amount. (IV) Problems, difficulties and solutions occurred during the Company’s operation In 2003, the Company gained relatively good operating results in the production and operation after untiring efforts of all senior staffs and staffs. However, the Company also had certain problems and difficulties in the production and operation with details as follows: 1. Since the Company developed in a relatively fast way, especially when the proceeds raised through additional issuance in the plan were not implemented, in order to catch the opportunity and occupy the market, the Company invested large quantities of capital in the prophase into importing equipments and investing the construction of papermaking company, which resulted that the Company’s working capital took on negative temporarily. 2. The papermaking industry is a newly involved industry for the Company, with huge investment scale and high requirements for arts and crafts and technology, which is a capital-intensive and labor-intensive industry. The Company is still not so mature in the aspects of technology and management. There is still a shortage of skilful technicians and experienced managers, which will restrict the normal operation of the papermaking industry of the Company within a certain period and influence on the maximization of the Company’s profit to a certain extent. 16 Aiming at the Company’s problems and shortages, the Board of Directors and the Management of the Company conducted deep analysis and set up solutions. 1. The Company shall actively push the course of additional issuance and financing and strive for success in additional issuance as soon as possible in order to establish solid foundation for the Company’s rapid development. At the same time, indirect financing is to be conducted continuously. Since the Company has relatively good credit standing, the Company has set up good business relationships with several financial institutions and its liability structure shall be improved. The Company has set up workable plan on capital usage in order to reasonable arrange the capital usage and ensure the normal operation of productive capital. 2. The Company shall continue to adopt many measures and try its best to enhance the productive, operating and managerial level in papermaking. The Company has employed several professionals in papermaking at home and abroad and assigned them to each production loop. At the same time, the Company shall reinforce the professional training to staffs in papermaking and enhance the whole quality of the papermaking team. In addition, the Company will also send some technical personnel to the famous domestic and foreign papermaking producers to learn their advantages and then serve the production and business management of Dixian Company to ensure the realization of papermaking industry as a new point of economic increase. III. Investment (I) Investment with raised proceeds In the report period, the Company did not raise proceeds or use the proceeds raised through shares offering before the report period. (II) Investment with the proceeds not raised through shares offering: 1. In the report period, the Company continued to increase the investment to Papermaking Company, newly investing RMB 221,047,206. At present, the project of joint-stock company is under construction seriously and partial production lines have been put into production and trial production. In 2003, Papermaking Company accrued sales income amounting to RMB 87,678,955 and realized net profit amounting to RMB 22,617,028. 2. In the report period, the Company continued to conduct the construction of spinning projects with total of newly increased investment amounting to RMB 75,454, 044. 3. In the report period, the Company newly increased input amounting to RMB 9,715,757 into the 2nd engineering of thermoelectricity plant. IV. Financial position At the end of At the end of Increase/decrease in Increase/decrease ratio 2003 2002 the amount at the end (%) of the year over end of last year Total assets 2,311,111,177 1,839,661,136 471,450,041 25.6% Including: fixed assets 1,617,066,280 1,527,906,421 89,159,859 5.8% Current assets 466,295,214 297,309,911 168,985,303 56.8% Other assets 2,421,088 2,475,804 -54,716 -2.2% Total liabilities 1,336,996,131 1,025,539,673 311,456,458 30.3% Including: long-term 304,904,800 247,887,000 57,017,800 23% liabilities Current liabilities 1,029,457,331 774,579,673 254,877,658 32.9% Shareholders’ equity 696,775,076 553,728,489 143,046,587 25.8% Profit from main operations 225,116,053 180,729,740 44,386,313 24.5% Net profit 143,046,587 115,303,505 27,743,082 24% 17 Net increase in cash and 31,085,813 3,373,884 27,711,928 821.3% cash equivalents Main reasons for changes: Total assets: The Company conducted technical reform and expansion of construction, thus the productive scale has been enlarged and fixed assets and current assets has increased by large margin. Liabilities: Bank loans and other liabilities have increased due to the technical reform and expansion of production of the Company and enlargement of its productive scale. Shareholders’ equity: Its increase is due to the profit from the year. Profit from main operations: The output of all products has increased and there is newly increased production and sales of synthetic silks and paper. Net profit: It is due to the increase of income from main operations. V. In the report period, the productive and operating environment, macro policies and laws and regulations did not change greatly and affected no material influence on the Company’s financial position and operating results. VI. PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. and PricewaterhouseCoopers Co., Ltd. has produced unqualified domestic and oversea auditor’s report for the Company respectively. VII. Business plan for the next year: 1. In 2004, the Company shall continue to reinforce interior management and cost control, dig interior potential and enhance the efficiency through improving the management in order to better return to the investors. 2. The Company shall try its best to increase the product export to Korea and Hong Kong while keeping and enlarging the product sales in Japan. The Company also shall actively expand the domestic market, establish sales network for national products, increase sale in domestic market and ensure the productive and sales connection of the Company’s products. 3. The Company shall continue to speed up the construction of joint papermaking project, try its best to make papermaking equipments be under normal production and operation and enhance its output and quality in order to create more economic benefits for the Company. VIII. Routine work of the Board of Directors (I) In the report period, the meetings and resolutions of the Board of Directors: In 2003, the Board of Directors of the Company totally held 11 meetings: 1. The 2nd Meeting of the 2nd Board of Directors of the Company was held on the morning of Jan. 9th, 2003 and the Meeting has considered and passed the following resolutions: 1) Proposal on Jointly Establishing Chengde North Japan Textile Co., Ltd. 2) Rectification Report of Chengde Dixian Textile Co., Ltd. on Tour Inspection The resolutions of this Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Jan. 10th, 2003. 18 2. The 3rd Meeting of the 2nd Board of Directors of the Company was held on the morning of Mar. 31st, 2003 and the Meeting has considered and passed the following resolutions: 1) Proposal on Providing Guarantee for the Company’s Holding Subsidiary Chengde Industrial Papermaking Co., Ltd. to Get Loan Credit of RMB 120 million from China Construction Bank Chengde Sub-branch The public notice of resolution of the Meeting was published on Securities Times and Hong Kong Ta Kung Pao dated April 2nd, 2003. 3. The 4th Meeting of the 2nd Board of Directors of the Company was held on the morning of April 7th, 2003 and the Meeting has considered and passed the following resolutions: 1) Work Report of the Board of Directors for 2002 2) Auditor’s Report for 2002 3) Annual Report and its Summary for 2002 4) Preplan on Profit Distribution for 2002 5) Proposal on Amending Articles of Association 6) Proposal on Renewal of PricewaterhouseCoopers Co., Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. as International and Domestic Auditor of the Company Respectively 7) Proposal on Remuneration of Directors (Supervisors) and Senior Executives The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated April 9th, 2003. 4. The 5th Meeting of the 2nd Board of Directors of the Company was held on April 22nd, 2003 and the Meeting has considered and passed the following resolutions: 1) The First Quarterly Report for 2003 The resolution was published on Securities Times and Hong Kong Ta Kung Pao dated April 23rd, 2003. 5. The 6th Meeting of the 2nd Board of Directors of the Company was held in Conference Room, 3/F, Dixian Building on the morning of June 16, 2003 and the Meeting has considered and passed the following resolutions: 1) Proposal on the Company’s in Compliance with the Conditions for Additional Issuance 2) Proposal on Applying for Additionally Issuing no more than 200 million Domestically Listed Foreign Shares (B Share) or no more than 100 milllion RMB Ordinary Shares (A Share) ① Applying for additionally issuing no more than 200 million domestically listed foreign shares (B Share) a. Type of share: domestically listed foreign shares (B Share) b. Par value per share: RMB 1.00 c. Number of issuance: no more than 200 million shares d. Objects of issuance: social investors and institutional investors opening stock account of domestically listed foreign shares (B Share) in Shenzhen Stock Exchange (Except for those who are prohibited by State laws and regulations) or strategic investors, foreign investment funds, specific investors and other investors in compliance with requirements of CSRC 19 e. Listing address: Shenzhen Stock Exchange f. Way of issuance: pricing and issuing shares through network to social investors and institutional investors opening stock account of domestically listed foreign shares (B Share) in Shenzhen Stock Exchange (Except for those who are prohibited by State laws and regulations). The original shareholders of B Share can subscribe the said shares at priority with a certain percentage. Or the Company can directionally distribute and sell the said shares to strategic investors, foreign investment funds and specific investors. g. Way of pricing: Converting at a certain percentage based on the close price in secondary market during 10 trading days before the equity registration date. To be based on the principle of protecting the equity of current shareholders, i.e., the price of additional issuance is not less than net assets per share, or principle of negotiating with the objects of issuance. h. Way of consignment-in: underwriting the rest amount on a sole agency basis ② Applying for additionally issuing no more than 100 million RMB ordinary shares (A Share) a. Type of issued shares: RMB ordinary shares (A Share) b. Par value per share: RMB 1.00 c. Number of issuance: no more than 100 million shares d. Objects of issuance: Investors in secondary market holding listed and circulated A Shares in Shanghai or Shenzhen with market value amounting to no less than RMB10,000 (Except for those buyers who are prohibited by State laws and regulations). e. Listing address: Shenzhen Stock Exchange f. Way of issuance: All distributing and selling to investors in secondary markets at pricing g. Way of pricing: According to the principle of market pricing and comprehensively considering such factors as the Company’s representation in secondary market of B Share, representation of stock price of listed companies of A Share in the same industry and average price- earnings ratio multiple for new shares issuance under the recent approval system, in compliance with relevant provisions in Securities Laws of the P.R.C., the detailed way of pricing in this additional issuance is requested for Shareholders’ General Meeting to authorize the Board of Directors to consider the market situation while issuing, is negotiated and confirmed by the lead underwriter and the Company and is reported to China Securities Regulatory Commission for approval. h. Way of consignment-in: underwriting the rest amount on a sole agency basis 3) Proposal on Requesting Shareholders’ General Meeting to Authorize the Board of Directors to Deal with the Relevant Issues in this Additional Issuance 4) Proposal on Period of Validity of Relevant Resolutions in this Additional Issuance Requesting Shareholders’ General Meeting to agree that the period of validity of relevant resolutions in this additional issuance is valid within one year from the date when this proposal is approved by Shareholders’ General Meeting. 5) Proposal on Feasibility Project of Planned Projects Invested with the Proceeds Raised Through Shares Offering in this Additional Issuance 6) Proposal on Proposal Project of Retained Earnings 7) Explanation of the Board of Directors on Use of the Proceeds Raised Through Previous Shares Offering 8) Proposal on Using Bank Loans to Conduct Construction of Papermaking Project in Advance Before the Raised Proceeds from this Additional Issuance Not Fully Funded 20 and Using Raised Proceeds to Recover Bank Loans After Success of this Additional Issuance The above proposals related to the additional issuance should be reported to China Securities Regulatory Commission for approval after being considered and approved by Shareholders’ General Meeting of the Company. 9) Proposal on Holding of Shareholders’ General Meeting for 2002 The resolutions of this Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated June 17th, 2003. 6. The 7th Meeting of the 2nd Board of Directors of the Company was held on the morning of July 7th, 2003 and the following resolutions have been considered and passed in the Meeting: 1) Proposal on Providing Guarantees for Wholly Owned Subsidiary Hebei Xiabancheng Knitwear Co., Ltd. and Holding Subsidiary Chengde Dixian Fashion Co., Ltd. to Get Loan Amounting to RMB 40 Million from Guangdong Development Bank Dalian Branch The resolution of this Meeting was published on Securities Times and Hong Kong Ta Kung Pao dated July 9th, 2003. 7. The 8th Meeting of the 2nd Board of Directors of the Company was held on the morning of July 17th, 2003 and the following resolutions have been considered and passed in the Meeting: 1) Semi-annual Report and its Summary for 2003 2) Semi-annual Financial Report for 2003 3) Semi-annual Profit Distribution Preplan for 2003 The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated July 19th, 2003. 8. The 9th Meeting of the 2nd Board of Directors of the Company was held on the morning of Sept. 19th, 2003 and the following resolutions have been considered and passed in the Meeting: 1) Proposal on the Company’s Providing Irrevocable Credit Guarantee for Guangdong Rieys Company Ltd. to Apply for Credit Limit Amounting to RMB 30 million with Term of One Year from Citic Industrial Bank Guangzhou Branch 2) Proposal on the Company’s Providing Irrevocable Credit Guarantee for Guangdong Rieys Company Ltd. to Apply for Credit Limit Amounting to RMB 30 million with Term of One Year from Shanghai Pudong Development Bank Guangzhou Branch The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Sept. 20th, 2003. 9. The 10th Meeting of the 2nd Board of Directors of the Company was held on Sept. 29th, 2003 and the following resolutions have been considered and passed in the Meeting: 1) Proposal on Applying for Changing Quality of the Enterprise into Foreign Investment Company Limited to Relevant Competent Departments 2) Proposal on Amending Articles of Association of the Company 3) Proposal on Holding the 1st Extraordinary Shareholders’ General Meeting for 2003 The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Sept. 30th, 2003. 21 10. The 11th Meeting of the 2nd Board of Directors of the Company was held on Oct. 21st, 2003 and the following resolutions have been considered and passed in the Meeting: 1) The Third Quarterly Report for 2003 The resolution of the Meeting was published on Securities Times and Hong Kong Ta Kung Pao dated Oct. 22nd, 2003. 11. The 12th Meeting of the 2nd Board of Directors of the Company was held on Dec. 24th, 2003 and the following resolutions have been considered and passed in the Meeting: 1) Proposal on Changing the Original Plan of Increasing Investment to Construct Papermaking Project Amounting to 620,000 Tons with Hong Kong Zhanxi International Group Co., Ltd. into Joint Construction with Japan Papermaking Co., Ltd. 2) Proposal on Jointly Investing and Constructing Various High-class Printing Paper, Culture-used Paper and Copperplate Paper with Annual Output of 620,000 Tons in Chengde, Hebei with Japan Papermaking Co., Ltd. 3) Proposal on Amending Articles of Association of the Company 4) Proposal on Holding of the 1st Extraordinary Shareholders’ General Meeting for 2004 The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Dec. 25th, 2003. (II) Implementation of the Board of Directors about resolutions of Shareholders’ General Meeting: In the report period, according to requirements in Company Law of the P.R.C., Securities Laws of the P.R.C., Articles of Association of the Company and other laws and regulations, the Board of Directors of the Company seriously implemented all resolutions passed by the Shareholders’ General Meeting, strictly in compliance with resolutions and authorizations of the Shareholders’ General Meeting, with details as follows: 1. Implementation of profit distribution for 2002: On July 22nd, 2003, the Company held Shareholders’ General Meeting for 2002, in which project on profit distribution and converting into share capital fro 2002 was considered and passed: to allot bonuses of 2 shares for every 10 shares to all shareholders based on total share capital amounting to 365,500,000 shares at the end of 2002 and the rest is carried down to the next year. The Company shall not convert capital public reserve into share capital in this year. The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated July 23rd, 2003. On Aug. 13th, 2003, the Company proclaimed public notice on implementation of dividends distribution and conversion of share capital. The last trading date of this dividends distribution was Aug. 20th, 2003 and the ex-right date was Aug. 21st, 2003. The bonuses allotted this time have been accounted into shareholders’ securities account directly on Aug. 25th, 2003 and the commencement and termination of trading date for B Share bonuses was Aug. 26th, 2003. 2. In the report period, after being approved by the Shareholders’ General Meeting, the Company planned to directionally and additionally issue domestically listed foreign shares (B Share). The Board of Directors actively organized the implementation while 22 the additional issuance should still be approved by China Securities Regulatory Commission. In order to catch such chance, though the raised proceeds of the Company have still not been fully funded in the year, the Company has conducted the construction of projects invested with raised proceeds by using bank loans and self-owned capital according to the authorization of the Shareholders’ General Meeting. IX. Profit distribution preplan or preplan on converting capital public reserve into share capital of the year After being audited by PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. and PricewaterhouseCoopers Co., Ltd. according to Chinese Accounting System and International Accounting Principles respectively, the Company’s net profit in 2003 was RMB 143,046,587. According to relevant provisions in Company Law of the P.R.C. and Articles of Association of the Company, after being appropriated 10% of statutory public reserve amounting to RMB 14,304,659 and being appropriated 5% of statutory public welfare amounting to RMB 7,152,330 and adding the remained profit from last year, the profit available for distribution to shareholders is RMB 149,462,984. Since the capital input for joint-stock papermaking project is relatively large, the Board of Directors decided not to distribute profit to shareholders nor convert capital public reserve into share capital in 2003 in order to consider the interests of both the development of the Company and all shareholders. This preplan should be reported to Shareholders’ General Meeting for consideration. X. The analysis of the Board of Directors to changes in accounting policies The Group adopted the revised Accounting Standards for Business Enterprises-Events After-Balance-Sheet-Date from July 1, 2003. Before adopting the revised Standards, the cash dividends are confirmed as liabilities from shareholders’ rights and interests during the period when the Board of Directors establishes profit distribution scheme. While after July 1, 2003, the cash dividends are confirmed as liabilities during the period when Shareholders’ General Meeting approves the profit distribution scheme. The changes in accounting policy arising from the adoption of the Standards have been conducted retroactive adjustment. XI. Explanation on income from main operations in 2003 In the report period, the group company invested partial assets to jointly increase investment into Chengde Banhe Chemical Simulation Textile Co., Ltd. with Japan YAMASHITA Commercial Co., Ltd.. Through conducting business integration to internal production of the group company, the specialized production and main operations of all companies were outstanding, which was beneficial for all subsidiaries to give prominence to competitions in the market and to calculate the cost of products and pushed the enhancement of all subsidiaries’ economic benefits. In 2003, the group company had purchasing and selling transactions amounting to approximately RMB 300 million with Banhe Company (a share-holding company). The Company’s auditor thought, the Company should buy back those products after the processing of materials sold in this kind of related transaction and no profit accrued. According to the principle of essential being prior to form, the Company should write off this partial income. In the quarterly report and semi-annual report for 2003, the Group did not write off the said transaction income, while the writing off the said transaction income by certified public 23 accounts in the annual audit did not influence on the profits in the quarterly report and semi-annual report for 2003 ever disclosed. XII. Special explanation of CPA on the capital occupied by the Company’s controlling shareholder and other related parties We have audited the consolidated and parent company’s balance sheet as of Dec. 31, 2003 and the consolidated and parent company’s income statement, statement of profit distribution and cash flow statement for the year then ended of Chengde Dixian Textile Co., Ltd. (hereinafter referred to as the Company) and its subsidiaries according to the Independent Auditing Standards of Chinese CPA and have presented PricewaterhouseCoopers Zhong Tian AW (2004) No. 1098 unqualified auditor’s report on Mar. 9, 2004. According to the requirements in Circular on Standardizing Listed Companies’ Capital Relationships with Related Parties, External Guarantees and Other Several Problems promulgated by China Securities Regulatory Commission and State-owned Assets Supervision and Administration Commission of the State Council with SRI [2003] No. 56 document, the Company has prepared Statement of Capital Occupied by the Company’s Controlling Shareholder and Other Related Parties (hereinafter referred to as the Statement) for the year ended Dec. 31, 2003 listed in the appendix of the letter. It is responsibility of the Company to truly prepare for and disclose the Statement to outsiders and assure its truthfulness, legality and completeness. We have checked the materials carried in the Statement with the accounting information rechecked and relevant contents in the financial report audited while auditing the financial report for 2003 of the Company and have not found any variance in all material aspects. Except for implementing the auditing procedures related to related transactions carried out in the auditing of accounting statements for 2003 to the Company, we have not conducted extra auditing procedures on the materials carried in the Statement. In order to better understand the capital occupied by the Company’s controlling shareholder and other related parties, the appended Statement should be read along with the consolidated accounting statements ever audited. This letter is only used for the Company to disclose the capital occupied its controlling shareholder and other related parties and can not to be used for other purposes. Appendix: Statement of Capital Occupied by the controlling shareholder and other related parties of Chengde Dixian Textile Co., Ltd. Mar. 9, 2004 CPA: Deng Yuhui CPA: Xu Lizhou Chengde Dixian Textile Co., Ltd. Statement of Capital Occupied by the Controlling Shareholder and Other Related Parties (ended Dec. 31, 2003) Unit: RMB’0000 Capital occupation Name of Related Annual Accounting Balance at Remarks related parties relationship amount subjects year-end Operating capital relationship Borrowing capital Entrusted loan 24 Entrusting related parties to conduct investment Opening trade acceptance without true transaction Refunding liability instead Other (paid Chengde Affiliated 2,029 Other 2,029 (I) engineering account Banhe company receivables instead) Chemical 929 Other 929 (II) Simulation receivables Textile Co., Ltd. (Banhe Textile) Chengde Associated 12 Other 12 (III) North Japan company receivables Textile Co., Ltd. (North Japan Textile) (I) The machinery of the Company’s subsidiary, Chengde Dixian Fashion Co., Ltd. (hereinafter referred as “ Fashion Company”) transferred to Banhe Textile haven’t been invested in Banhe Textile because the procedure of raising capital of Banhe Textile is still in progress. Therefore, the amount of RMB20, 290, 000 of Chengde Dixian Textile Co., Ltd. (hereinafter referred as “the Company”) and its subsidiaries from the Banhe Textile became the accounts receivable instead of external investment. The Group company plans to invest the advance money RMB290, 000 for the project to the Banhe Textile. The machinery invested by the foreign party would be shipped and equipped this year in succession. The Fashion Company would pay for it according to the Contract. After the completion and settling of the program, the group Company would translate the accounts receivable as the investment to Banhe Textile. (II) The amount of RMB9, 290, 000 receivable is mainly the advance money for project. The machinery invested by the foreign party would be shipped and equipped in this year in succession. The Fashion Company would pay for it according to the Contract. After the completion and settling of the project, the group Company would translate the accounts receivable as the investment to Banhe Textile. (II) Dated Dec 31st, 2003, the investment of the Company to North Japan Textile. The above accounts receivable composes of mainly the costs for the project. After the completion of the project and the capital verification, the Company planned to translated the advance money for the project into the investment to North Japan Textile. The Statement has been approved by the Board of Directors on March 9, 2004. XIII. Special explanation and independent opinions of independent directors on the Company’s accumulative and current exterior guarantees and implementing regulations In compliance with the spirit in Circular on Standardizing Listed Companies’ Capital Relationships with Related Parties, External Guarantees and Other Several Problems 【SRI [2003] No. 56】(hereinafter referred to as “Circular”) promulgated by CSRC, we, as independent directors of the Company, has seriously inspected the Company’s implementation in exterior guarantee regulated in the Circular, and now make the following explanations on relevant problems: 25 Ended the end of the report period, the Company had not provided any guarantee for the controlling shareholder, other related parties where the Company holds below 50% equity, any non-legal person companies or individuals; the controlling shareholder and other related parties also did not force the Company to provided guarantees for others; the Company’s total accumulative exterior guarantee was RMB 260 million, including providing guarantee amounting to RMB 200 million for the wholly owned subsidiaries and controlling subsidiary and mutual guarantee amounting to RMB 60 million for Guangdong Rieys Company Ltd., and the Company’s examining procedures of external guarantees were in compliance with relevant provisions. The Board of Directors of the Company has set up draft on amending Articles of Association of the Company and made clear regulations to the examining procedures of external guarantees and credit standards of guaranteed objects in Articles of Association of the Company. The draft on amending Articles of Association shall be submitted to Shareholders’ General Meeting 2003 for consideration, which has provided guarantee for further standardizing the Company’s system in external guarantees, effectively controlling the Company’s risks in external guarantees and safeguarding the interests of vast investors. XIV. Other events In the report period, the newspapers chosen by the Company for information disclosure were Securities Times and Hong Kong Ta Kung Pao. There was no change in newspaper of information disclosure. Section 9. Report of the Supervisory Committee I. Meetings and resolutions of the Supervisory Committee in the report period In the report period, the Supervisory Committee of the Company held two meetings as follows: 1. The 2nd meeting of the 2nd Supervisory Committee of the Company was held in the meeting room on 2/F of the Company on Apr. 7, 2003 and the meeting examined and approved the following resolutions: (1) Examined and approved Work Report of the Supervisory Committee in 2002. (2) Examined and approved 2002 Financial Report. (3) Examined and approved 2002 Annual Report and Summary. The public notice on the resolutions of the meeting was published on Securities Times and Ta Kung Pao dated Apr. 9, 2003. 2. The 3rd meeting of the 2nd Supervisory Committee of the Company was held in the meeting room on 2/F of the Company in the morning of July 17, 2003 and the meeting examined and approved the following resolutions: (1) Examined and approved 2003 Semi-annual Financial Report of the Company; (2) Examined and approved 2003 Semi-annual Report and Summary; The public notice on the resolutions of the meeting was published on Securities Times and Ta Kung Pao dated July 19, 2003. II. Independent opinions of the Supervisory Committee 1. Operation according to law According to the relevant laws and regulations, the Supervisory Committee of the Company supervised over the holding procedure and resolutions of the Shareholders’ Meeting and the Board, implementation of the resolutions of the Shareholders’ Meeting by the Board, implementation of duties of the senior executives and the management system of the Company and believes that the Board of the Company can normatively 26 operate in 2003 strictly according to Company Law, Securities Law, Listing Rule, Articles of Association of the Company and other relevant regulations and systems in a patient and responsible way and its operations decisions are scientific and reasonable. It further perfected systems of internal management and internal control and set up good internal control system. The directors and managers had no behaviors of disobeying laws, regulations and Articles of Associations or damaging the interest of the Company when executing their duties. 2. Examination of the financial of the Company The Supervisory Committee of the Company patiently and meticulously examined the financial system and situation of the Company and believes that 2003 Financial Report of the Company can truly reflect the financial situation and operation result of the Company and auditing opinion issued by PricewaterhouseCoopers China Co., Ltd. and PricewaterhouseCoopers Zhong Tian Certified Public Accountants Co., Ltd. and the estimation on relevant events are external and fair. 3. Usage of the raised capital of the Company The Company has neither raised capital in the report period nor capital that was raised before the report period and its usage carried down to the report period. The actual invested items by the former raised capital are almost in accordance with the promised invested items and the change procedures of partial items are legal. 4. In the report period, the Company has no purchase or sale of assets. 5. Related transactions: The Supervisory Committee of the Company believes that the related transactions are fair and reasonable and there exists no situation of damaging the Company and its shareholders’ right and interest or causing decease and disappear of assets. 6. The civil and international certified public accountants engaged by the Company issued auditor’s report with no reservation opinion for 2003 financial statements of the Company and the Supervisory Committee has no events with special explanation. Section 10. Significant Events I. The Company involved in one lawsuit in the report period. The progress of the lawsuit that the Company indicted Tianjin TEDA Co., Ltd. (hereinafter referred to as TEDA Company) to act against machining contract is as follows: The case of machining contract dissension between Chengde Dixian Textile Co., Ltd. and Tianjin TEDA Co., Ltd. was judged by Hebei Province High People’s Court through (2003) JMEZZI NO. 22 Judgement as follows: 1. Withdraw (2002) CMCZI NO. 189 Civil Judgement of Hebei Province Chengde Intermediate People’s Court; 2. TEDA Company took away 14180 sets of warm underwear at its own expenses within 15 days after the judgement took effect and paid RMB 440,847.20 machining expense to the Company. 3. Turn down other lawsuit request of the Company. The Company believes that the judgement is not just and will continue to indict. II. In the report period, the Company has no significant purchase and sale of assets, absorption and merge. III. Related transactions (refer to auditor’s report) IV. Significant contract and implementation 27 The implementation of all business contracts of the Company in the report period is normal and there exists no significant contract dissension. (1) In the report period, the Company has not entrusted, contracted or leased other companies’ assets and other companies have not entrusted, contracted or leased assets of the Company. (2) In the report period, the Company continued to provide guarantee for RMB 60,000,000 loan of Guangdong Lieys Co., Ltd. in a way of mutual guarantee The public notice of guarantee was published on Securities Times and Ta Kung Pao dated Sep. 26, 2003. In the report period, the Company provided guarantee for RMB 0.12 billion loan from Construction Bank of China Chengde County Branch with three years guarantee term of Chengde Xingye Paper Making Co., Ltd., the share-controlling subsidiary of the Company. In the report period, the Company respectively provided guarantee for RMB 40 million loan from Guangdong Development Bank Dalian Branch for Hebei Xiaban Town Textile Co., Ltd., the Company’s whole subsidiary, and Chengde Dixian Fashion Co., Ltd., the Company’s share-controlling subsidiary with three years guarantee term. In the report period, the Company has no guarantee of getting out of line that Notification on Some Problems of Regulating Current Capital of Listed Companies and Associated Parties and Guarantee for External (ZJF [2003] No. 56) requests to disclose. The examination procedure of the Company’s guarantee for external parties is in accordance with the relevant regulations. (3) In the report year, the Company had never entrusted any other party to manage the Company’s cash assets and has no plan of entrusting any party to manage the assets in the future either. V. The commitments of the Company and the shareholders holding over 5% of the Company’s total shares in the report period or the time extending to the report period. The Company’s 2002 Profit Distribution Resolution is that Based on the total share capital of 365,500,000 shares ended 2002, the Company planed to distribute bonus shares at the rate of 2 bonus shares for every 10 shares. The Company has finished implementation of profit distribution proposal in August 2003. VI. The Company engaged PricewaterhouseCoopers Zhongtian Certified Public Accountants & Co. and PricewaterhouseCoopers (China) Co., Ltd. as the auditor of the Company in 2003. The audit expense in 2003 is RMB 0.98 million. PricewaterhouseCoopers (China) Co., Ltd. and PricewaterhouseCoopers Zhongtian Certified Public Accountants & Co. have provided the audit service for the Company for two years. The certified public accountants with signatures in the auditor’s report of the Company are Deng Yuhui and Xu Lizhou. VII. In the report year, the Company, the Board of Directors or its directors, the Supervisory Committee or its supervisors and other senior executives had never been investigated, underwent administrative punishment or had been criticized through public notice by China Securities Regulatory Commission; and had never been condemned by the stock exchange in public either. China Securities Regulatory Commission Shijiazhuang Office conducted a circuiting inspection of the Company from Nov. 25, 2002 to Nov. 30, 2002 and issued the Notice about Neatening and Reforming of Chengde Dixian Textile Co. Ltd. in a Stipulated Time on Dec. 10, 2002, which arose the high emphasis of the Company. The Company held special meetings in time to neaten and reform the problems brought forward in the 28 inspection. Neatening and Reforming Report was published on Securities Times and Ta Kung Pao dated Jan.10, 2003. VIII. In the report period, the Company decided to change the former plan of add capital to construct 0.62 million tons paper-making item with HK Zhanxi International Group Co., Ltd. to cooperate with Japan Paper-making Co., Ltd.. IX. In the report period, the Company’s subsidiary, Chengde Dixian Fashion Co., Ltd. and Xiaban Town Textile Co., Ltd. with Japan Shanxia Commerce Co., Ltd. signed the contract of adding capital to Chengde Banhe Copy Fabric Co., Ltd.. After increasing capital, the registered capital of Banhe Company is USD 60 million and the investment of Chengde Dixian Fashion Co., Ltd., Japan Shanxia Commerce Co., Ltd. and Xiaban Town Textile Co., Ltd. are respectively taking by 20%, 55% and 25% of registered capital of Chengde Banhe Copy Fabric Co., Ltd.. X. In the report period, China Securities Supervision Management Committee has accepted the Company’s application of directional reissue of not exceeding 0.15 billion domestic listed foreign shares (B share). Section 11. Financial Report (Attached) Section 12. Documents for Reference 1. Accounting statements carried with personal signatures and seals of legal representative, person in charge of the financial affairs and person in charge of accounting institution. 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public on Securities Times and Ta Kung Pao. The Company will provide timely the above documents for reference provided that China Securities Regulatory Commission or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Note: This report is prepared in both Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Chengde Dixian Textile Co., Ltd. Board of Directors: Wang Shuxian Mar. 8, 2004 29 CHENGDE DIXIAN TEXTILE CO., LTD. (Incorporated in the People’s Republic of China with limited liability) CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF THE AUDITORS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 30 CHENGDE DIXIAN TEXTILE CO., LTD. (Incorporated in the People’s Republic of China with limited liability) CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF THE AUDITORS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 Contents Page Report of the auditors 1 Consolidated income statement 2 Consolidated balance sheet 3 Consolidated statement of changes in shareholders’ equity 4 Consolidated cash flow statement 5 Notes to the consolidated financial statements 6 to 32 31 Mailing Address: P.O. Box 1448 New York, NY 10185-1448 United States of America Telephone +1 (212) 819 5083 Report of the Auditors To the shareholders of Chengde Dixian Textile Co., Ltd. (Incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Chengde Dixian Textile Co., Ltd. (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 32 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 statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as of 31 December 2003 and of the consolidated results of its operations and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers 9 March 2004 Business is undertaken in the registered name of PricewaterhouseCoopers China Limited. Registered address is Clarendon House, 2 Church Street, Hamilton, Bermuda. CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 For the year ended 31 December Notes 2003 2002 RMB’000 RMB’000 Sales 3,28(a) 523,600 463,088 Cost of sales 28(a) (298,484) (282,358) Gross profit 225,116 180,730 Other operating income 28,697 - Distribution costs (9,461) (11,945) Administrative expenses 28(c) (19,499) (19,183) Other operating expenses (24,958) (378) Profit from operations 4 199,895 149,224 Finance costs - net 6 (15,855) (9,936) Share of results of an associate before tax 213 - Profit before tax 184,253 139,288 Income tax expense 7 (24,359) (13,886) Profit before minority interest 159,894 125,402 Minority interest 19 (16,847) (10,099) Net profit 143,047 115,303 Dividends 8 - 11,395 Earnings per share - Basic 9 RMB0.34 RMB0.26 - Diluted 9 N/A N/A The accompanying notes form an integral part of these financial statements. 2 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003 Notes 31 December 2003 31 December 2002 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 10,28(b) 1,380,574 1,333,976 Land use rights 11 100,163 87,698 Prepayments for property, plant and equipment 28(b) 136,329 69,895 Investment in an associate 12 225,015 11,000 Prepayment for investment - 36,338 Deferred tax assets 21 314 969 Other non-current assets 2,421 2,475 1,844,816 1,542,351 Current assets Inventories 13 126,361 102,545 Trade receivables 14,28(b) 109,642 84,844 Other receivables and prepayments 15,28(b) 91,112 18,029 Cash and bank balances 16 135,880 91,892 462,995 297,310 Total assets 2,307,811 1,839,661 EQUITY AND LIABILITIES Capital and reserves Share capital 17 438,600 365,500 Reserves 18 254,993 188,228 693,593 553,728 Minority interest 19 277,340 260,393 Non-current liabilities Borrowings 20(a) 278,000 220,000 Deferred tax liabilities 21 2,634 3,073 Other non-current liabilities 22 26,905 27,887 307,539 250,960 Current liabilities Trade payables 23,28(b) 304,231 172,948 Other payables and accrued charges 24,28(b) 175,430 181,026 Current income tax liabilities 400 2,430 Borrowings 20(b) 549,278 418,176 1,029,339 774,580 Total equity and liabilities 2,307,811 1,839,661 The accompanying notes form an integral part of these financial statements. 3 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 Reserves Share Share Share Revaluation issuance Statutory Retained capital premium reserve costs reserves earnings Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note17) (Note 18) (Note 18) (Note I) (Note 18) (Note 18) Balance at 1 January 2002 215,000 128,438 24,819 - 24,203 57,360 449,820 Net profit for the year - - - - - 115,303 115,303 Appropriation from net profit (Note 18) - - - - 17,295 (17,295) - Appropriation – bonus issue 43,000 - - - - (43,000) - Transfer to share capital (Note 17) 107,500 (107,500) - - - - - Dividends - 2001 - - - - - (11,395) (11,395) Balance at 31 December 2002 365,500 20,938 24,819 - 41,498 100,973 553,728 Net profit for the year - - - - - 143,047 143,047 Appropriation from net profit (Note 18) -- - - - 21,457 (21,457) - Appropriation – bonus issue (Note 17) 73,100 - - - - (73,100) - Share issuance costs - - - (3,182) - (3,182) Balance at 31 December 2003 438,600 20,938 24,819 (3,182) 62,955 149,463 693,593 Note I: Share issuance costs represent expenses incurred for the planned additional future issue of shares of the Company to be listed in securities market. The balance will be offset against the share premium arising from the issue of new shares. The accompanying notes form an integral part of these financial statements. 4 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 For the year ended 31 December Notes 2003 2002 RMB’000 RMB’000 Cash flows from operating activities Cash generated from operations 25 238,811 328,522 Interest paid (17,506) (10,394) Taxes paid (25,221) (13,130) Net cash generated from operating activities 196,084 304,998 Cash flows from investing activities Purchases of property, plant and equipment (343,776) (382,554) Time deposits placed, net (12,902) (60,000) Interest received 2,578 1,090 Net cash used in investing activities (354,100) (441,464) Cash flows from financing activities Borrowings raised 189,102 151,235 Payment of dividends - (11,395) Net cash generated from financing activities 189,102 139,840 Increase in cash and cash equivalents 31,086 3,374 Cash and cash equivalents at beginning of year 31,892 28,518 Cash and cash equivalents at end of year 16 62,978 31,892 The accompanying notes form an integral part of these financial statements. 5 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 1. General Chengde Dixian Textile Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 3 November 1999 pursuant to a reorganization in preparation for the listing of its shares. The initial registered capital of the Company was RMB100,000,000, representing 100,000,000 shares with a par value of RMB1 each. Pursuant to the approval document No. [2000]121 issued by the China Securities Regulatory Commission (the “CSRC”) dated 29 August 2000, the Company issued a total of 115,000,000 domestically listed foreign shares (“B shares”) (inclusive of the exercise of the Over-allotment Option of 15,000,000 B shares) with a par value of RMB1 each. The registered capital of the Company after the issue of B shares was increased to RMB215,000,000. The Company’s B shares were listed on the Shenzhen Stock Exchange on 29 September 2000. Pursuant to the resolution in the annual general meeting dated 22 July 2003, the Company declared the issue of bonus shares to all shareholders with ratio of 2 shares for every 10 shares. The total number of bonus shares was 73,100,000 shares and the registered capital of the Company revised to 438,600,000 shares. In addition, the annual general meeting approved the Company’s plan to issue not more than 100,000,000 additional shares of RMB Ordinary Shares (“A shares”) or not more than 200,000,000 additional shares of B shares. The Company has already submitted application document in respect of the additional issue of B shares to the CSRC for approval. The Company and its subsidiaries (hereinafter collectively referred to as the “Group”) are principally engaged in the production and sale of clothes, synthetic fibers and a variety of paper products. The Company is granted the rights to import and export, which has been principally utilized in the import of raw materials and export of products for its subsidiaries. The address of the registered office of the Company is Xiaban Town, Chengde County, Hebei Province, the PRC. The total number of employees of the Group as of 31 December 2003 was approximately 8,300 (2002: approximately 9,700). 2. Accounting policies (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) including International Accounting Standards and interpretations issued by the International Accounting Standards Board. This basis of accounting differs from that used in the preparation of the Company's statutory financial statements (“PRC statutory financial statements”). The PRC statutory financial statements of the Company and its subsidiaries comprising the Group have been prepared in accordance with the relevant accounting principles and regulations applicable to them, as appropriate in the PRC. Appropriate adjustments have been made to the PRC statutory financial statements to conform with IFRS. Differences arising from the restatement have not been incorporated in the statutory accounting records of the Group. The consolidated financial statements have been prepared under the historical cost convention, except as disclosed in the accounting policies below. 6 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 2. Accounting policies (Cont’d) (a) Basis of preparation (Cont’d) As of 31 December 2003, the Group had a negative working capital of approximately RMB566 million and capital commitments of approximately RMB4 million (Note 27 (a)). This was mainly due to the Group’s significant capital expenditures in relation to the establishment of the papermaking business of Chengde Xingye Papermaking Co., Ltd. (“Xingye Papermaking”), a subsidiary of the Company, as well as the expansion of synthetic silk business of Chengde Dixan Fashion Co., Ltd. (“Dixian Fashion”), another subsidiary of the Company. The directors consider that, following the commencement of the operations of these new or expanded businesses, the pressure on its cash flow position will be resolved through growth in sales of the Group. In addition, the Company has renewed current bank borrowings of RMB220,000,000 in January 2004 and such bank borrowings will mature in 2006. Moreover, the Company will continue to apply for additional bank loan facilities and take other effective measures to improve the future cash flow position of the Group. (b) Group accounting (1) Subsidiaries Subsidiaries, which are those 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. 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. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Details of the Group’s subsidiaries are set out in Note 29. (2) Associates Investments in associates are accounted for by the equity method of accounting. 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. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Details of the Group’s associate are set out in Note 12. (3) Joint ventures The Group’s interest in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group’s financial statements. The Group recognizes the portion of gains or losses on the sale of assets by the Group to the joint venture that it is attributable to the other venturers. The Group does not recognize its share of profits or losses from the joint venture that result from the purchase of assets by the Group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realizable value of current assets or an impairment loss, the loss is recognized immediately. 7 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 2. Accounting policies (Cont’d) (c) Foreign currencies (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 RMB, which is the measurement currency of the parent. (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 recognized in the income statement. (3) Group companies Income statements and cash flows of foreign entities are translated into the Group’s measurement currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognized in the income statement as part of the gain or loss on sale. (d) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and bank balances, receivables, prepayments, payables and borrowings. The accounting policies on recognition and measurement of cash and bank balances, trade receivables and borrowings are disclosed in the respective accounting policies found in Note 2. All other financial assets without a quoted market price in an active market are measured at cost subject to impairment review. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Group companies have a legally enforceable right to offset and intend to settle either on a net basis or to realize the asset and settle the liability simultaneously. 8 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 2. Accounting policies (Cont’d) (e) Property, plant and equipment Property, plant and equipment are initially measured at cost. Subsequent to initial recognition, property, plant and equipment are stated at revalued amounts less accumulated depreciation and accumulated impairment loss. Depreciation is calculated on the straight-line method to write off the cost or revalued amount, after taking into account the estimated residual value, of each asset over its expected useful life. The expected useful lives are as follows: Buildings 25 years Machinery and equipment - Papermaking 20 years - Others 7-14 years Motor vehicles and office equipment 5-10 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. Valuation by independent valuers is performed periodically. Any increase in valuation is credited to the revaluation reserve in shareholders' equity; any decrease is first offset against an increase on earlier valuation in respect of the same asset and is thereafter charged to the consolidated income statement. Increase in revaluation directly related to a previous decrease in carrying amount for the same investment that was recognized as an expense is credited to income to the extent that it offsets the previously recorded reduction. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in the consolidated income statement. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained earnings. Repairs and maintenance are charged to the income statement during the accounting 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. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. (f) Land use right Land use right is stated at cost less accumulated amortization. Amortization is calculated using the straight-line method to write off the cost over a period of 50 years. 9 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 2. Accounting policies (Cont’d) (g) Inventories Inventories are stated at the lower of cost or net realizable 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 realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. (h) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the 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. (i) 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, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. (j) Borrowings Borrowings are recognized initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognized in the consolidated income statement over the period of the borrowings. (k) 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 income statement on a straight-line basis over the period of the lease. (l) Provisions Provisions are recognized 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, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The Group recognizes a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. 10 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 2. Accounting policies (Cont’d) (m) Revenue recognition Revenue comprises the invoiced value for the sale of goods and services net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is recognized when significant risks and rewards of ownership of the goods are transferred to the buyer. Revenue from rendering of services is based on the stage of completion determined by reference to services performed to date as a percentage of total services to be performed. Interest income is recognized on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. Dividends are recognized when the right to receive payment is established. (n) Taxation The Group companies provide for income taxes on the basis of their profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. (o) Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Company’s shareholders. (p) Employee social security and welfare The employees of the Group originated from urban areas have participated in the defined contribution retirement scheme organized and managed by the local government. The remaining employees, however, join the scheme based on individual preference. Apart from the above social security arrangement for employees, there is no other significant commitment in relation to employee welfare. The Group’s contributions to the retirement scheme are calculated based on the relevant regulations of the local government authorities and are charged to the income statement as incurred. 11 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 2. Accounting policies (Cont’d) (q) Impairment of assets (i) Financial instruments Financial instruments are reviewed for impairment at each balance sheet date. For financial assets carried at amortized cost, whenever it is probable that the Group will not collect all amounts due according to the contractual terms of loans or receivables, an impairment or bad debt loss is recognized in the consolidated income statement. Reversal of impairment losses previously recognized is recorded when the decrease in impairment loss can be objectively related to an event occurring after the write-down. Such reversal is recorded in income. However, the increased carrying amount is only recognized to the extent it does not exceed what amortized cost would have been had the impairment not been recognized. (ii) Assets other than financial instruments Assets other than financial instruments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the consolidated income statement or treated as a revaluation decrease for property, plant and equipment that are carried at revalued amount to the extent that the impairment loss does not exceed the amount held in the revaluation reserve for the same asset. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit. Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The reversal is recorded in the consolidated income statement or as a revaluation increase. However, the increased carrying amount of an asset due to a reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for that asset in prior years. 12 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 3. Segment information (a) Primary reporting format - business segments Textile Paper Unallocated items Group Year ended 31 December 2003 RMB’000 RMB’000 RMB’000 RMB’000 Sales 436,272 87,328 - 523,600 Other operating income 1,314 27,383 - 28,697 22,826 Segment result 179,563 - 202,389 Unallocated costs - - (2,494) (2,494) Profit from operations 199,895 Finance costs – net (15,855) Share of results of an associate before tax 213 - - 213 Profit before tax 184,253 Income tax expense - - (24,359) Profit before minority interest 159,894 Minority interest (16,847) Net profit 143,047 787,974 1,146,789 Segment assets - 1,934,763 254,593 Associate - - 254,593 Unallocated assets - - 118,455 118,455 Total assets 2,307,811 Segment liabilities 339,858 274,371 - 614,229 Unallocated liabilities - - 722,649 722,649 Total liabilities 1,336,878 Other segment items 214,749 Capital expenditure 128,184 1,878 344,811 Depreciation 26,661 8,746 384 35,791 Amortization 884 162 - 1,046 Impairment provision – (reversal)/charge (3,663) 502 - (3,161) 13 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 3 Segment information (continued) (a) Primary reporting format - business segments (continued) Textile Paper Unallocated items Group Year ended 31 December 2002 RMB’000 RMB’000 RMB’000 RMB’000 Sales 420,321 42,767 - 463,088 Segment result 142,910 8,376 - 151,286 Unallocated costs - - (2,062) (2,062) Profit from operations 149,224 Finance costs - net (9,936) Profit before tax 139,288 Income tax expense (13,886) Profit before minority interest 125,402 Minority interest (10,099) Net profit 115,303 889,154 Segment assets 799,005 - 1,688,159 Associate 47,338 - - 47,338 Unallocated assets - - 104,164 104,164 Total assets 1,839,661 Segment liabilities 127,856 138,317 - 266,173 Unallocated liabilities - - 759,367 759,367 Total liabilities 1,025,540 Other segment items 536,435 Capital expenditure 74,254 1,298 611,987 Depreciation 38,880 2,859 358 42,097 Amortization 790 - - 790 Impairment provision - charge 3,902 - - 3,902 There are no significant sales or other transactions between the business segments. Unallocated items mainly represent corporate expenses, assets and liabilities. Segment assets consist primarily of property, plant and equipment, land use rights, operating receivables and operating cash, and mainly exclude investments. Segment liabilities comprise operating liabilities and exclude items such as corporate taxation and borrowings. Capital expenditure comprise additions to property, plant and equipment (Note 10) and land use rights (Note 11). (b) Secondary reporting format - geographical segments As the Group operates within the PRC, which is considered as one geographical segment, no segment information is presented. 14 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 3 Segment information (continued) (c) Analysis of sales and other operating income For the year ended 31 December 2003 2002 RMB’000 RMB’000 Sales of goods - Textile Note 28 (a) 436,272 420,321 - Paper 87,328 42,767 Other operating income - Provision of electricity and steam Note 28(a) 27,062 - - Others 1,635 - 552,297 463,088 4. Profit from operations The following items have been included in arriving at profit from operations: For the year ended 31 December 2003 2002 RMB’000 RMB’000 Depreciation of property, plant and equipment (Note 10) 35,791 42,097 Amortization of land use rights (Note 11) 991 513 Amortization of other assets 55 277 Cost of inventories 265,679 239,727 Operating lease rentals in respect of property 1,000 1,055 Provision for bad and doubtful debts (Note 14) 741 236 (Reversal)/provision for inventory losses (Note 13) (3,902) 3,666 Profit on disposal of property, plant and equipment (211) - Repair and maintenance 700 407 Staff costs (Note 5) 49,425 50,762 5. Staff costs For the year ended 31 December 2003 2002 RMB’000 RMB’000 Wages and salaries 42,244 45,432 Contributions to retirement benefits scheme 7,112 3,513 Other social security costs 69 1,817 49,425 50,762 15 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 6. Finance costs - net For the year ended 31 December 2003 2002 RMB’000 RMB’000 Interest income 2,578 1,090 Interest expenses (17,506) (10,394) - Interest on bank borrowings (48,222) (37,941) Less: amounts capitalized in construction-in-progress 30,716 27,547 Net foreign exchange transaction gains/(losses) 67 (262) Bank charges (994) (370) Net financial expense (15,855) (9,936) Average capitalization rate 6.28% 6.89% 7. Income tax expense For the year ended 31 December 2003 2002 RMB’000 RMB’000 Current income tax 24,073 15,294 Deferred tax relating to the origination and reversal of temporary differences (Note 21) 216 (1,408) Share of tax of associates (Note 12) 70 - Tax charge 24,359 13,886 The Company and its major operating subsidiaries are subject to income tax at the rate of 33%, of which the enterprise income tax (“EIT”) rate is 30% and the local income tax (“LIT”) rate is 3%. In accordance with the “Income Tax Laws of the PRC for Enterprises with Foreign Investment” (“FIE EIT Laws”), Hebei Xiaban City Textile Co., Ltd. (“Xiaban City Textile”) will be entitled to a 50% reduction of EIT and full exemption of LIT in the year in which its export sales exceed 70% of the total sales in that year. For the year ended 31 December 2003, export sales of Xiaban City Textile exceeded 70% of the total sales and EIT was provided at the rate of 15% (2002: 15%). Dixian Fashion and Xingye Papermaking are both foreign investment enterprises. In accordance with FIE EIT Laws, foreign investment enterprises are entitled to full exemption of EIT for two years starting from its first profit-making year, after offsetting available tax losses carried forward from prior years, and 50% reduction for the three years thereafter. 2003 is the third profit-making year of Dixian Fashion, after offsetting available tax losses carried forward from prior years, and the applicable tax rate is 15% (2002: nil). Xingye Papermaking commenced its operation in 2002 and 2003 is its second profit- making year. Consequently, the applicable tax rate is nil (2002: nil). 16 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 7. Income tax expense (Cont’d) The reconciliation of the tax charge that would arise using the statutory tax rate to the effective tax charge is as follows: For the year ended 31 December 2003 2002 RMB’000 RMB’000 Profit before tax 184,253 139,288 Tax calculated at the statutory tax rate of 33% (2002: 33%) 60,803 45,965 Effect of tax holidays (16,209) (13,728) Differential tax rate on a subsidiary due to export sales exceeding 70% of the total sales (20,235) (18,351) Tax charge 24,359 13,886 8. Dividends In accordance with relevant regulations of the PRC and the Articles of Association of the Company, distributable profits of the Company shall be the lower of retained earnings as reported in the statutory financial statements prepared in accordance with PRC accounting standards and relevant accounting regulations (“PRC GAAP”) and the financial statements prepared in accordance with IFRS. The directors do not recommend any final dividend for the year ended 31 December 2003. 9. Earnings per share The calculation of basic earnings per share is based on the consolidated net profit for the year ended 31 December 2003 of approximately RMB143,047,000 (2002: approximately RMB115,303,000), divided by the weighted average number of shares in issue during the year ended 31 December 2003 of 438,600,000 shares (2002: 438,600,000 shares). The comparative earnings per share has been restated to reflect the increase in the average number of shares as a result of bonus issue of 73,100,000 shares . No diluted earnings per share was presented as there were no dilutive potential ordinary shares as of the respective year end. 17 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 10. Property, plant and equipment Movements in property, plant and equipment were as follows: Machinery Motor vehicles and and office Construction-in- Buildings equipment equipment progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 For the year ended 31 December 2003 Opening net book amount 137,820 545,696 4,645 645,815 1,333,976 Additions - 1,749 2,382 291,371 295,502 Transfers 8,535 186,293 - (194,828) - Disposals (Note 28(a)) - (20,307) (110) - (20,417) Contribution to an associate (3,148) (189,548) - - (192,696) Depreciation charge (5,861) (29,040) (890) - (35,791) Closing net book amount 137,346 494,843 6,027 742,358 1,380,574 At 31 December 2003 Cost or valuation 159,127 636,650 10,634 742,358 1,547,702 Accumulated depreciation (21,781) (141,807) (4,607) - (168,195) Net book amount 137,346 494,843 6,027 742,358 1,380,574 For the year ended 31 December 2002 Opening net book amount 55,422 402,529 5,290 288,634 751,875 Additions 17 332 234 623,615 624,198 Transfers 85,695 180,739 - (266,434) - Depreciation charge (3,314) (37,904) (879) - (42,097) Closing net book amount 137,820 545,696 4,645 645,815 1,333,976 At 31 December 2002 Cost or valuation 154,968 724,889 9,378 645,815 1,535,050 Accumulated depreciation (17,148) (179,193) (4,733) - (201,074) Net book amount 137,820 545,696 4,645 645,815 1,333,976 (a) The Group’s property, plant and equipment were last revalued on 31 July 1999 by independent professional valuers on a replacement cost basis. The revaluation surplus net of applicable income taxes amounting to approximately RMB24,819,000 were credited to revaluation reserve. The Group’s property, plant and equipment acquired subsequent to the last revaluation have not been revalued and are stated at cost less accumulated depreciation. The directors are of the opinion that the carrying amounts of property, plant and equipment do not differ materially from their fair values at the balance sheet date. 18 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 10. Property, plant and equipment (Cont’d) Had all the property, plant and equipment been carried at cost less accumulated depreciation and accumulated impairment loss, the carrying amounts of each class of assets would have been as follows: 31 December 2003 31 December 2002 RMB’000 RMB’000 Buildings 142,577 131,693 Machinery and equipment 475,426 534,484 Motor vehicles and office equipment 5,924 4,517 Construction-in-progress 742,358 645,815 1,366,285 1,316,509 (b) Construction-in-progress comprises: 31 December 2003 31 December 2002 RMB’000 RMB’000 Cost of construction, plant and equipment and other direct costs 707,378 629,337 Borrowing costs capitalized 34,980 16,478 742,358 645,815 (c) As of 31 December 2003, property, plant and equipment at cost or, as the case may be, revalued amount of approximately RMB630,520,000 (2002: approximately RMB923,370,000) were pledged for the Group’s borrowings (see Note 20). The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount as of 31 December 2003. 11. Land use rights 31 December 2003 31 December 2002 RMB’000 RMB’000 Cost 104,796 91,340 Accumulated amortization (4,633) (3,642) Net book amount 100,163 87,698 Land use rights comprise land use fees paid to the land administration authorities for the right to use land where the Group companies’ factory buildings in Chengde are located. As of 31 December 2003, land use rights at cost of approximately RMB40,910,000 (2002: approximately RMB91,340,000) were pledged for the Group’s borrowings (Note 20). 19 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 12. Investment in an associate 31 December 2003 31 December 2002 RMB’000 RMB’000 At beginning of year 11,000 - Additions 213,872 11,000 Share of results before tax 213 - Share of tax (Note 6) (70) - At end of year 225,015 11,000 Details of the associate are as follows: Percentage Place of of equity Registered Name incorporation interest held capital Principal activities Chengde Banhe Fibre Textile Hebei, PRC 40% USD60,000,000 Production and sales of Co., Ltd. (“Banhe”) knitwear and textile Banhe is unlisted and incorporated during the year ended 31 December 2002, of which 35% equity interest was held by Dixian Fashion. In February 2003, pursuant to a new equity joint venture agreement between Dixian Fashion, Xiaban City Textile and Yamashita Shoji Co., Ltd., a Japanese company, the registered capital of Banhe was increased from USD15,000,000 to USD60,000,000 and the equity interest held by the three owners were 20%, 25% and 55% respectively. 13. Inventories 31 December 2003 31 December 2002 RMB’000 RMB’000 Raw materials, at cost 16,825 16,504 Work-in-progress, at cost 55,484 63,031 Finished goods, at cost 55,768 28,627 128,077 108,162 Less: full provision for obsolete finished goods, net of reversal (1,716) (5,617) 126,361 102,545 During the year ended 31 December 2003, the Group reversed inventory provision of approximately RMB4,362,000 upon the sales of related finished goods. 20 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 14. Trade receivables 31 December 2003 31 December 2002 RMB’000 RMB’000 Trade receivables (Note 28(b)) 111,158 85,618 Less: Provision for bad and doubtful debts (1,516) (774) 109,642 84,844 As of 31 December 2003, approximately RMB8,738,000 (2002: RMB10,190,000) of trade receivables were pledged for the Group’s current borrowings (see Note 20(b)). 15. Other receivables and prepayments 31 December 2003 31 December 2002 RMB’000 RMB’000 Other receivables (Note 28(b)) 52,075 12,177 Prepayments to suppliers 39,006 5,779 Other prepayments 31 73 91,112 18,029 16. Cash and cash balances 31 December 2003 31 December 2002 RMB’000 RMB’000 Cash on hand 488 245 Current deposits at bank 85,392 31,647 Time deposits at bank 50,000 60,000 135,880 91,892 For the purposes of the cash flow statement, the cash and cash equivalents comprise the following: 31 December 2003 31 December 2002 RMB’000 RMB’000 Cash and bank balances 135,880 91,892 Deposits on letter of credit (22,902) - Time deposits (50,000) (60,000) 62,978 31,892 As of 31 December 2003, all time deposits, of which the maturity were within six months, were pledged for the discount of the Group’s trade acceptance to banks (Note 23). 21 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 17. Share capital As of 31 December 2003, share capital included promoters’ shares and B shares, all of which ranked pari passu in all respects with each other. Details of share capital are as follows: 31 December 31 December 31 December 31 December 2003 2002 2003 2002 Number of shares RMB’000 RMB’000 (in thousands) Registered, issued and fully paid: Unlisted - Promoters’ shares of RMB1 each 204,000 170,000 204,000 170,000 Listed - B shares of RMB1 each 234,600 195,500 234,600 195,500 438,600 365,500 438,600 365,500 Movements in share capital during the year are as follows: For the year ended For the year ended 31 December 31 December 2003 2002 2003 2002 Number of shares RMB’000 RMB’000 (in thousands) Balance, beginning of year 365,500 215,000 365,500 215,000 Transfer from retained earnings and reserves* 73,100 150,500 73,100 150,500 Balance, end of year 438,600 365,500 438,600 365,500 * Pursuant to a resolution in the annual general meeting dated 12 March 2002, the distribution plan for the year ended 31 December 2001 included bonus shares of 2 shares per 10 shares held appropriated from retained earnings (amounting to RMB 43,000,000), and capitalization of share premium of 5 shares per 10 shares held (amounting to RMB 107,500,000). Pursuant to a resolution in the annual general meeting dated 22 July 2003, the distribution plan for the year ended 31 December 2002 included bonus shares of 2 shares per 10 shares held appropriated from retained earnings, amounting to RMB 73,100,000. 22 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 18. Reserves (a) Share premium and revaluation reserve Share premium represents the premium on the issuance of B shares. Revaluation reserve represents the revaluation surplus arising from the valuation of property, plant and equipment (see Note 10 (a)). Pursuant to the relevant PRC regulations, share premium and revaluation reserve can only be used to increase share capital. (b) Statutory reserves According to the Company Law of the PRC and Articles of Association of the Company, the Company is required to provide the following statutory reserves which are appropriated from the net profit as reported in the statutory financial statements prepared in accordance with PRC GAAP: (i) Statutory surplus reserve fund The Group is required each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory surplus reserve fund until the balance reaches 50% of the registered share capital. This reserve can be used to make up any losses incurred 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. (ii) Statutory public welfare fund The Group is required each year to transfer 5%-10% of the profit after taxation as reported under the PRC statutory financial statements to the statutory public welfare fund. This reserve is restricted to capital expenditure for employees' collective welfare facilities that are owned by the Group. The statutory public welfare fund is not available for distribution to shareholders (except on liquidation). For the year ended 31 December 2003, the directors of the Company proposed that 10% and 5% (2002: 10% and 5%) of the net profit as reported in the statutory accounts be appropriated to statutory reserve fund and statutory public welfare fund respectively, totalling approximately RMB21,457,000 (2002: approximately RMB17,295,000). The resolution is subject to approval by shareholders in the annual general meeting. 19. Minority interest 31 December 2003 31 December 2002 RMB’000 RMB’000 At beginning of year 260,393 137,732 Capital injection in subsidiaries 100 120,350 Share of net profit of subsidiaries 16,847 10,099 Dividends paid - (7,788) At end of year 277,340 260,393 23 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 20. Borrowings (a) Non-current borrowings 31 December 2003 31 December 2002 RMB’000 RMB’000 Secured bank borrowings 278,000 220,000 Borrowings of RMB138,000,000 (2002: RMB220,000,000) are secured by property, plant and equipment and land use rights of the Group (Notes 10 and 11), borrowings of RMB140,000,000 (2002: nil) are cross-guaranteed by certain companies in the Group. These borrowings bear interest ranging from 5.49% to 6.04% (2002: at rate of 6.82%) per annum. The maturity of long-term borrowings is as follows: 31 December 2003 31 December 2002 RMB’000 RMB’000 Over one year but within two years 18,000 220,000 Over two years but within three years 260,000 - 278,000 220,000 (b) Current borrowings 31 December 2003 31 December 2002 RMB’000 RMB’000 Bank borrowings - secured bank borrowings 547,728 416,626 - unsecured bank borrowings 1,550 1,550 549,278 418,176 Borrowings of RMB389,150,000 (2002: RMB375,436,000) are secured by property, plant and equipment and land use rights of the Group (Notes 10 and 11), borrowings of approximately RMB8,738,000 (2002: RMB10,190,000) are secured by trade receivables of the Group (Note 14), borrowings of RMB149,840,000 (2002: nil) are cross-guaranteed by certain companies in the Group. These borrowings bear interest ranging from 2.60% to 6.59% (2002: 3.75% to 8.71%) per annum. 24 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 21. Deferred income taxes Deferred income taxes are calculated in full on temporary differences under the liability method using the enacted tax rates applicable to respective companies in the Group. The movements in deferred tax assets and liabilities are as follows: Credit to income Year ended 31 December 2002 1 January 2002 statement 31 December 2002 RMB’000 RMB’000 RMB’000 Deferred tax assets Deductible temporary difference on provision for inventory obsolescence - 843 843 Deductible temporary difference on provision for doubtful debts - 126 126 - 969 969 Deferred tax liabilities Assessable temporary differences on revaluation reserve of property, plant and equipment (3,512) 439 (3,073) (3,512) 1,408 (2,104) Credit/(debit) to Year ended 31 December 2003 31 December 2002 income statement 31 December 2003 RMB’000 RMB’000 RMB’000 Deferred tax assets Deductible temporary difference on provision for inventory obsolescence 843 (655) 188 Deductible temporary difference on provision for doubtful debts 126 - 126 969 (655) 314 Deferred tax liabilities Assessable temporary differences on revaluation reserve of property, plant and equipment (3,073) 439 (2,634) (2,104) (216) (2,320) 25 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 22. Other non-current liabilities Other non-current liabilities mainly represented outstanding consideration payable for the acquisition of land use rights. The balances were unsecured, interest free and repayable within two years. 23. Trade payables 31 December 2003 31 December 2002 RMB’000 RMB’000 Trade payables (Note 28(b)) 57,444 65,718 Notes payable 246,787 107,230 304,231 172,948 Notes payable of RMB92,000,000 (2002: 90,000,000) are trade acceptance issued by the Company to its subsidiaries, and RMB129,500,000 (2002: nil) are trade acceptance issued by a subsidiary to the Company. All of these trade acceptance have been discounted to banks, of which RMB60,000,000 (2002: RMB 30,000,000) are guaranteed by Guangdong Rieys Co., Ltd., an independent third party, and RMB100,000,000 (2002: 60,000,000) are guaranteed by the Group’s time deposits of RMB50,000,000 (Note 16). 24. Other payables and accrued charges 31 December 2003 31 December 2002 RMB’000 RMB’000 Advances from customers 716 3,808 Salary and welfare payables 16,402 19,311 Accrued charges 6,718 2,235 Other payables (Note 28(b)) 151,712 155,672 175,548 181,026 26 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 25. Cash generated from operations For the year ended 31 December 2003 2002 RMB’000 RMB’000 Net profit 143,047 115,303 Adjustments for: Minority interest 16,847 10,099 Tax (Note 7) 24,359 13,886 Depreciation (Note 10) 35,791 42,097 Amortization of land use right (Note 11) 991 513 Amortization of other assets 55 277 Provision for bad and doubtful debts (Note 14) 741 236 (Reversal)/provision for inventory obsolescence (Note 13) (3,902) 3,666 Interest expenses (Note 6) 17,506 10,394 Interest income (Note 6) (2,578) (1,090) Share of results of associates before tax (Note 12) (213) - Changes in working capital: Increase in inventories (19,915) (11,250) Increase in trade receivables (25,540) (36,284) (Increase)/decrease in prepayments and other receivables (73,083) 31,773 Increase in trade payables 131,283 127,744 (Decrease)/increase in accruals and other payables (5,596) 23,961 Decrease in other non-current liabilities (982) (2,803) Cash generated from operations 238,811 328,522 27 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 26. Financial instruments (a) Fair values The carrying amounts of the Group’s cash and bank balances, trade and other receivables, prepayments, payables and short-term borrowings approximate their fair values because of the short maturity of these instruments. The fair value of long-term borrowings is based on the current rates available for debt with the same maturity and credit-rating risk profile. As of 31 December 2003, the difference between the fair values and carrying amounts of the Group’s long-term borrowings was minimal since the difference between the current rates and the historical rates of such long-term borrowings was not significant. (b) Credit risk The carrying amounts of cash and bank balances, trade and other receivables and prepayments represented the Group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was 1.98% per annum. Majority of the Group’s trade receivables relate to sales of goods. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. Group procedures are in force to ensure that sales are made to customers with an appropriate credit history and do not exceed an acceptable credit exposure limit. The Group’s credit exposure relating to its major customer Y’S Corporation is disclosed in Note 28. 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. (c) Interest rate risk The directors believe that Group’s exposure to interest rate risk of financial assets and liabilities as of 31 December 2003 was minimal since their deviation from their respective fair values was not significant. (d) Liquidity risk The Group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. (e) Foreign exchange risk The foreign exchange risks of the Group occur due to the fact that the Group has business activities denominated in foreign currencies. The Group did not enter into any foreign exchange forward contracts to hedge against foreign currency fluctuations. However, the directors believe that the Group’s exposure to foreign exchange risk was minimal since most of the Group’s foreign currency transactions are denominated in USD and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD. 28 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 27. Commitments (a) Capital commitments As of 31 December 2003, capital commitments contracted for but not required to be recognized in the financial statements are as follows: 31 December 2003 31 December 2002 RMB’000 RMB’000 Investment in a subsidiary - 294,150 Investment in a jointly controlled entity 4,150 - 4,150 294,150 (b) Operating lease commitments As of 31 December 2003, the future aggregate minimum lease payments for plant by the Group under non-cancellable operating leases for each of the following periods are as follows: 31 December 2003 31 December 2002 RMB’000 RMB’000 - Within one year 1,000 1,000 - Later than one year and not later than five years 4,000 4,000 - Later than five years 21,000 22,000 26,000 27,000 28. Related party transactions and relationships Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Y’S Corporation is the Company’s major customer with long-term relationship. The Company also entered into an equity joint venture agreement with Y’S Corporation to set up Dixian Fashion during 2000. The directors are of the opinion that Y’S Corporation is a related party of the Company. Century Win International Holding Ltd. (“Century Win Co.”), a company incorporated in Hong Kong, entered into an equity joint venture agreement with the Company to set up Xingye Papermaking in 2001. The directors are of the opinion that Century Win Co. is a related party of the Company. Banhe is an associate of the Group, over which the Group has significant influence. As a result, the directors are of the opinion that Banhe is a related party of the Company. Chengde Dixian Kitanihon Knitwears and Textile Co., Ltd. (“Kitanihon”) is a jointly controlled entity of the Group. As a result, the directors are of the opinion that Kitanihon is a related party of the Company. 29 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 28. Related party transactions and relationships (Cont’d) (a) The Group had the following significant transactions with related parties: For the year ended 31 December 2003 2002 RMB’000 RMB’000 Purchase goods from Kitanihon 324 - Sales of goods to Y’S Corporation 31,709 86,048 Sales of goods/provision of services to Banhe - sales of synthetic silk 8,844 - - provision of electricity and steam 27,062 - Disposal of equipment to Banhe 20,290 - Transactions with Y’S Corporation and Kitanihon, and sales of goods to Banhe were carried out on normal commercial terms and conditions and at market prices. Disposal of equipment to Banhe was carried out at net book value. (b) The Group had the following significant balances with related parties: 31 December 2003 31 December 2002 RMB’000 RMB’000 Prepayments for purchase of machinery - Y’S Corporation 3,735 18,872 Trade receivables - Y’S Corporation 35,876 24,173 Other receivables and prepayments - Banhe 29,577 - - Kitanihon 118 - Trade payables - Y’S Corporation 877 877 Trade advances received - Y’S Corporation 107 - Other payables and accrued charges - Century Win Co.* 128,650 128,650 *The payable to Century Win Co. represented the value of machinery contributed by Century Win Co. in excess of its required capital contribution to Xingye Papermaking (Note 29). Trade receivables were repayable within 6 months and there are no fixed terms of repayment for other balances. All balances with related parties were unsecured and interest free. (c) Directors’ remuneration The total remuneration payable to key management personnel for the year ended 31 December 2003 was approximately RMB548,000 (2002: RMB506,000). 30 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 29. Subsidiaries As of 31 December 2003, the Company had the following subsidiaries: Percentage of equity interest Place of held Name incorporation Direct Indirect Registered capital Principal activities Xiaban City Textile Hebei, PRC 75% 25% USD4,000,000 Production and sale of clothes Dixian Fashion Hebei, PRC 75% - USD24,000,000 Production and sale of clothes and synthetic fibers Xingye Papermaking Hebei, PRC 75% - USD100,000,000 Production and sale of various kinds of paper products Gold Axe Investment Group British Virgin 100% - USD1 Investment holding and liaison of Limited (“Gold Axe”) Islands export business Huaxin Waste Paper Collection Hebei, PRC - 90% RMB1,000,000 Collection and sales of paper Co., Ltd. (“Huaxin”) Xingye Papermaking is a Sino-foreign equity joint venture incorporated on 9 May 2001 pursuant to an equity joint venture agreement between the Company and Century Win Co. As of 31 December 2003, the Company and Century Win Co. had paid in capital of approximately RMB456,844,000 and RMB207,500,000 respectively. According to the joint venture agreement, the remaining registered capital would be contributed in full by the Company within three years from the business license date of Xingye Papermaking (the “Investment Period”). During the year ended 31 December 2002, Century Win Co. contributed approximately RMB128,650,000 more of machinery than its required capital contribution to Xingye Papermaking (Note 28(b)). According to an agreement signed between the Company and Century Win Co. on 18 March 2002, in case that the Company cannot contribute the remaining registered capital during the Investment Period, the above said payable to Century Win Co. will be converted into its additional capital contribution to Xingye Papermaking. The share of equity interests in Xingye Papermaking between the Company and Century Win Co. will also be re-determined according to the actual capital contributed by each party at such time. 30. Interest in a jointly controlled entity The Group has a 50% interest in a joint venture, Chengde Dixian Kitanihon Knitwears and Textile Co., Ltd., which is engaged in the production and sales of products in the textile industry. The Group’s 50% share of the assets, liabilities, income and expenses of the jointly controlled entity are included in the consolidated balance sheet and income statement. 31 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2003 31. Contingent liabilities As of 31 December 2003, the Group provided a guarantee to Guangdong Rieys Co., Ltd., an independent third party, in respect of a short-term bank loan of RMB60,000,000 (2002: RMB60,000,000). This bank loan bears interest at 4.78% (2002: 5.85%) per annum and will mature in September 2004. 32. Post balance sheet events In January 2004, the Company renewed current bank borrowings of RMB220,000,000 and such bank borrowings will mature in 2006. Pursuant to the resolution of the board of directors' meeting dated 9 March 2004. The directors of the Company do not recommend any final dividend for the year ended 31 December 2003.. 33. Approval of financial statements The consolidated financial statements were approved by the board of directors on 9 March 2004. 32