招商地产(000024)招商局2003年年度报告（英文版）

CHINA MERCHANTS SHEKOU HOLDINGS CO., LTD. 2003 ANNUAL REPORT No.: [CMSH] 2004-008 Section I. Important Notes and Contents Important Notes: The Board of Directors of China Merchants Shekou Holdings Co., Ltd. (hereinafter referred to as the Company) and its directors individually and collectively accepts responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Legal representative of the Company Mr. Sun Chengming, chief financial supervisor of the Company Mr. Huang Peikun and manager of financing dept. Mr. Li Yingxin hereby confirm that the Financial Report of the Annual Report is true and complete. This report has been prepared in Chinese version and English version respectively. In the event of difference in interpretation between the two versions, the Chinese report shall prevail. Deloitte Touche Tohmatsu CPA Ltd. and Deloitte Touche Tohmatsu Certified Public Accountants respectively audited the Company’s domestic Financial Report and International Financial Report for 2003 and issued standard unqualified Auditors’ Report for the Company. CONTENTS COMPANY PROFILE-----------------------------------------------------------------------------------------------------2 SUMMARY OF FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT--------------------------------3 CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS--------------------4 PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND STAFF-------7 ADMINISTRATIVE STRUCTURE-------------------------------------------------------------------------------------9 BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING---------------------------------------------------10 REPORT OF BOARD OF DIRECTORS------------------------------------------------------------------------------11 REPORT OF SUPERVISORY COMMITTEE-----------------------------------------------------------------------21 SIGNIFICANT EVENTS-------------------------------------------------------------------------------------------------22 FINANCIAL REPORT----------------------------------------------------------------------------------------------------27 DOCUMENTS AVAILABLE FOR REFERENCE------------------------------------------------------------------27 -1- Section II. Company Profile 1. Legal Name of the Company: In Chinese: 招商局蛇口控股股份有限公司 Abbr.: 蛇口控股 In English: CHINA MERCHANTS SHEKOU HOLDINGS CO., LTD. Abbr.: CMSH 2. Legal Representative: Sun Chengming 3. Secretary of Board of Directors: Chen Yu Authorized Representative in Charge of Securities Affairs: Liu Ning Contact Address: 9/F, New Times Plaza, Shekou Industrial Zone, Nanshan District, Shenzhen Post Code: 518067 Tel: (86) 755-26819600 Fax: (86) 755-26819680 E-mail: investor@cmre.com.cn 4. Registered Address: 9/F, New Times Plaza, Shekou Industrial Zone, Nanshan District, Shenzhen Office Address: 9/F, New Times Plaza, Shekou Industrial Zone, Nanshan District, Shenzhen Post Code: 518067 E-mail: investor@cmre.com.cn 5. Newspaper Chosen for Disclosing the Information of the Company: China Securities, Securities Times and Ta Kung Pao Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of Board of Directors of the Company 6. Stock Exchange Listed with: Shenzhen Stock Exchange The 2nd Exchange Listed with: Singapore Stock Exchange Short Form of the Stock: China Merchants - A, China Merchants - B Stock Code: 000024, 200024 7. Other Related Information of the Company (1) Initial registration date: Sep. 19, 1990. (2) Initial registration place: Shenzhen. (3) Registration Number of enterprise legal person’s business license: QGYSZ Zi No. 101828 (4) Reference Number of tax: National Revenue S Zi 440305618845136 Local Tax D Zi 440305618845136 (5) Name and office address of certified public accountants engaged by the Company ①Domestic: Deloitte Touche Tohmatsu CPA Ltd. Address: 30/F, Bund Center, Yan An Road East, Shanghai ②Overseas: Deloitte Touche Tohmatsu Certified Public Accountants Address: 26/F, Wing On Centre, 111 Connaught Road Central, Hong Kong 8. Definition: Unless otherwise stated, the following words and expressions have the following meanings: 1. “the Company”: China Merchants Shekou Holdings Co., Ltd. 2. “CMSIZ”: China Merchants Shekou Industrial Zone Co., Ltd. 3. “CMRE”: Shenzhen China Merchants Real Estate Co., Ltd. 4. “CMPS”: Shenzhen China Merchants Power Supply Co., Ltd. 5. “CMWS”: Shenzhen China Merchants Water Supply Co., Ltd. 6. “CMP”: Shenzhen China Merchants Petrochemicals Co., Ltd. 7. “Huang Jin Tai Co.”: Shenzhen Huang Jin Tai Co., Ltd. -2- 8. “CML”: China Merchants Logistics Group Co., Ltd. Note: The financial data and amount in this report are expressed in RMB (except for otherwise stated) Section III. Summary of Financial Highlight and Business Highlight (I) Major profit indexes as of the year 2003 (Unit: In RMB) No. Indexes Amount 1 Total profit 455,199,188 2 Net profit 330,477,566 3 Net profit after deducting non-recurring gains and losses 349,825,263 4 Profit from main operations 613,432,610 5 Other operating profit 5,613,511 6 Operating profit 479,815,944 7 Investment income -35,357,065 8 Subsidy income 33,161,389 9 Net non-operating income/expenses -22,421,080 10 Net cash flows arising from operating activities -202,355,920 11 Net increase/decrease in cash and cash equivalents 86,900,189 [Note] In the report year, the total amount of non-recurring gains and losses is RMB -19,347,697, including: various non-operating income/expenses after deducting reserve for impairment of assets and the other recurring gains and losses withdrawn according to the regulations of Accounting System for the Business Enterprise amounting to RMB –22,601,002; reversal of reserve for impairment of long-term investment amounting to RMB 4,360,108, and impact on income tax and gains and losses of minority shareholders of RMB –1,106,803. (II) Impact on profit and net assets adjusted based on International Accounting Standards (Unit: RMB’000) Net profit Net assets As reported under Chinese Accounting Standards 330,478 3,118,874 Adjustment under International Accounting Standards: Adjustment of assets exchange -20,095 -102,066 Adjustment of amortization of goodwill 12,596 40,583 Income from drawback of VAT adjusted based on accrual basis -776 27,411 Subsidy income 3,192 - Adjustment of minority shareholders’ gains and losses 196 -20,475 Deferred taxes -9,636 -37,195 Others 9,419 5,685 Adjusted amount under IAS 325,374 3,032,817 [Note] The net profit as of the year 2003 was RMB 325,374,000 as audited by overseas Certified Public Accountants. The main reason for the difference between the results under CAS and IAS is because the different accounting policies were adopted in the treatment of assets replacement over the past years, occurring and amortization of balance of equity investment, confirmation of subsidy income and income tax. (III) Major accounting date and indexes over the recent past three years (Unit: RMB) 2002 2001 Items/indexes 2003 (Before adjustment) (After adjustment) (Before adjustment) (After adjustment) Income from main operations 4,838,834,917 3,854,153,934 3,854,153,934 3,320,820,664 3,320,820,664 Net profit 330,477,566 241,815,815 241,815,815 174,961,781 174,961,781 Total assets 5,923,647,954 5,268,964,574 5,239,818,120 4,692,619,143 4,692,619,143 Shareholders’ equity (excluding minority 3,118,874,132 2,444,370,973 2,501,538,493 2,250,277,995 2,302,681,555 interests) Earnings per share（diluted）(RMB/share) 0.641 0.508 0.508 0.367 0.367 Earnings per share (weighted) (RMB/share) 0.689 0.508 0.508 0.367 0.367 Earnings per share after deducting non-recurring 0.678 0.540 0.540 0.398 0.398 gains and losses（diluted）(RMB/share) -3- Earnings per share after deducting non-recurring 0.729 0.540 0.540 0.398 0.398 gains and losses（weighted）(RMB/share) Net assets per share (RMB/share) 6.048 5.131 5.251 4.724 4.834 Net assets per share after adjustment (RMB/share) 5.985 5.059 5.179 4.656 4.766 Return on equity (diluted) 10.60% 9.89% 9.67% 7.78% 7.60% Return on equity (weighted) 12.42% 10.20% 10.09% 7.89% 7.79% Return on equity after deducting non-recurring 11.22% 10.53% 10.29% 8.42% 8.23% gains and losses (diluted) Return on equity after deducting non-recurring 13.15% 10.86% 10.74% 8.54% 8.44% gains and losses (weighted) Net cash flows per share arising from operating -0.392 1.734 1.734 0.057 0.057 activities (RMB/share) (IV) Supplement of statement of profit Return on equity Earning per share (%) (RMB/share) Profit indexes as of the year 2002 (RMB) Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 19.67% 23.06% 1.190 1.279 Operating profit 15.38% 18.04% 0.930 1.000 Net profit 10.60% 12.42% 0.641 0.689 Net profit after deducting non-recurring gains and losses 11.22% 13.15% 0.678 0.729 (V) Particulars about changes in share equity during the report period (Unit: In RMB) Statutory Post Balance in Share Capital Surplus Total public balance Retained translation Items capital public public shareholders’ welfare sheet profit profit of foreign (share) reserve reserve equity fund distributed currency Amount at the 476,396,000 1,163,570,461 454,519,256 87,277,369 57,167,520 367,376,249 -17,490,993 2,501,538,493 period-begin Increase in this 39,289,560 303,803,448 54,365,040 21, 234,365 51,568,556 330,477,566 932,585 780,436,755 report year Decrease in this 57,167,520 105,933,596 163,101,116 report year Amount at the 515,685,560 1,467,373,909 508,884,296 108,511,734 51,568,556 591,920,219 -16,558,408 3,118,874,132 period-end Note: Reason for changes ① Capital public reserve: in this year, the Company allotted shares to the social public shareholders, newly-increased premium price of share capital amounting to RMB 300,611,449; CMWS, subsidiary of the Company, took the appropriation of the special project of Shenzhen Water Bureau to transfer into capital public reserve, then, the Company adjusted and increased capital public reserve amounting to RMB 3,191,999 according to equity investment proportion. ② surplus public reserve and statutory public welfare fund: in the report period, the Company and the subsidiaries distributed the profit and withdrew statutory surplus public reserve and statutory public welfare fund; ③ Increase of retained profit was due to the net profit was realized in the report period, decrease of it is because the Company and subsidiaries distributed the profit and withdrew surplus public reserve of RMB 54,365,040 and distributed the bonus in cash of RMB 51,568,556; ④ Balance in translation of foreign currency: due to the change of the SGD market rate of exchange, at the end of report period, the translation balance was changed accordingly when the accounting statement of foreign currency of the subsidiary company China Merchant Singapore Port Service Co., Ltd. was converted into accounting statement of RMB. Section IV. Changes in Share Capital and Particulars about Shareholders (I) Statement of change in share capital (Unit: share) Increase / decrease this time (+, -) Before the After the Allotment of Bonus Shares capital transferred Additional change Others change Shares shares from public reserve issuance I. Unlisted shares 1. Sponsors’ shares Including: State-owned shares Domestic legal person’s share 156,906,750 156,906,750 Foreign legal person’s share 52,302,250 52,302,250 Others 2. Raised legal person’s shares 3. Employees’ shares -4- 4. Preference shares or others Total unlisted shares 209,209,000 209,209,000 II. Listed shares 1. RMB ordinary shares 130,965,200 +39,289,560 170,254,760 2. Domestically listed foreign shares 136,221,800 136,221,800 3. Overseas listed foreign shares Others Total listed shares 267,187,000 +39,289,560 306,476,560 III. Total shares 476,396,000 515,685,560 (II) Issuance and listing 1. Particulars about issuance of shares over the previous three years ended the end of the report period On Nov. 3, 2003, the Company obtained the approval from CSRC on Notice on Approving Shares Rationing of China Merchants Shekou Holdings Co., Ltd. with (ZJFXZ [2003]124 document), and published the Placing Prospectus on Nov. 4, 2003. The Company allotted shares to the whole shareholders at the rate of 3 for 10 based on the total shares amounting to 476,396,000 shares ended Dec. 31, 2002. The price of shares rationing was RMB 8.93 per share, converting into HKD 8.38 per share. Term of payment was from Nov. 12, 2003 to Nov. 25, 2003. In the course of shares rationing, the actual number of shares rationing was 39,289,560 shares because the Company’s shareholders of B circulating share and shareholders of legal person’s share gave up the shares rationing rights, thus, the Company’s total share capital has increased to 515,685,560 shares. Shares allotted have listed for trading in Shenzhen Stock Exchange dated Dec. 4, 2003. 2. Particulars about change in total shares and its structure during the report period During the report period, the Company implemented shares rationing, the status of change in total shares and its structure after shares rationing are as following: (Unit: share) Type of shares Before the Proportion Increase After the share Proportion (%) share rationing (%) rationing I. Unlisted shares Domestic legal person’s share 156,906,750 32.94% 156,906,750 30.43% Foreign legal person’s share 52,302,250 10.98% 52,302,250 10.14% Total unlisted shares 209,209,000 43.91% 209,209,000 40.57% II. Listed shares RMB ordinary shares (A-share) 130,965,200 27.49% 39,289,560 170,254,760 33.01% RMB special shares (B-share) 136,221,800 28.59% 136,221,800 26.42% Total listed shares 267,187,000 56.09% 39,289,560 306,476,560 59.43% Total shares 476,396,000 100.% 39,289,560 515,685,560 100% (III) About shareholders 1. Total shareholders at the end of the report period Ended Dec. 31, 2003, the Company has 74,580 shareholders in total, reducing 9531 shareholders compared with the last year; of them, including 58,788 shareholders of A-share and 15,792 shareholders of B-share, reducing 6686 ones and 2845 ones respectively compared with the last year. 2. About shares held by the top ten shareholders (Unit: share) Amount at the Increase/decrease Amount at the Shareholder’s name Proportion Type period-begin in this period period-end 1. CHINA MERCHANTS SHEKOU Domestic sponsor’s legal 156,906,750 0 156,906,750 30.43% INDUSTRIAL ZONE CO., LTD. person’s share 2. HONG KONG PANORAMA INVESTMENT Foreign sponsor’s legal 52,302,250 0 52,302,250 10.14% LTD. person’s share 3、FOXTROL INTERNATIONAL LTD. 15,400,000 0 15,400,000 2.99% Foreign social public share 4、ORIENTURE INVESTMENT LTD. 14,779,525 0 14,779,525 2.87% Foreign social public share 5 、 BOSHI VALUE INCREASE SECURITIES 0 +6,483,448 6,483,448 1.26% Domestic social public share INVESTMENT FUND 6、YANGBANG INTERNATIONAL CO., LTD. 6,256,168 0 6,256,168 1.21% Foreign social public share 7、AN XIN SECURITIES INVESTMENT FUND 1,781,589 +3,038,411 4,820,000 0.93% Domestic social public share 8 、 AN SHUN SECURITIES INVESTMENT 3,911,784 +588,216 4,500,000 0.87% Domestic social public share FUND 9 、 CBNY S/A PNC/SKANDIA SELECT 2,498,264 +1,397,210 3,895,474 0.76% Foreign social public share FUND/CHINA EQUITY AC 10、AN RUI SECURITIES INVESTMENT FUND 1,225,800 +2,174,200 3,400,000 0.66% Domestic social public share -5- [Note] (1) During the report period, CMSIZ became the parent company of Hong Kong Panorama Investment Ltd., Foxtrol International Ltd. and Orienture Investment Ltd.. Yangbang International Co., Ltd. became the wholly-owned subsidiary company of Hong Kong China Merchants Holding (International) Co., Ltd.. CMSIZ became the wholly-owned subsidiary company of China Merchants Group Co., Ltd.; china Merchants Group Co., Ltd. became the holding shareholder of Hong Kong China Merchants Holdings (International) Co., Ltd.. (2) An Xin Securities Investment Fund, An Shun Securities Investment Fund and An Rui Securities Investment Fund were managed by Hua An Fund Management Co., Ltd.. (3) The Company was unknown whether there exists associated relationship or consistent action among the other shareholders. 3. Brief introduction of legal person shareholders holding over 10% (including 10%) of total shares of the Company (1) CMSIZ Legal representative: Fu Yuning Registration date: April 1, 1992 Registered capital: RMB 2,236,000,000 Business scope: establishment and management of communication and transportation, industrial manufacturing, finance and insurance, foreign trade, real estate, post and telecommunications, tourism, restaurant, etc.; organization and management of the affiliated enterprises, associated enterprises, foreign-funded enterprises and enterprises in which the Company holds equity interest; dock and warehousing business; overall contracting of water/land construction projects and the related offshore petroleum development projects, and their construction organization and logistics services; product sale of the affiliated enterprises and supply and sale of the required equipment, raw materials and components and parts (where there are state regulations for special operation of special items, handle according to regulations); holding commodity exhibitions, sports games, theatrical performances and cable TV business etc.; and providing technical, operation and legal consultation related to the above business, as well as technology and information services. (2) Hong Kong Panorama Investment Ltd. Legal representative: Qin Yi Date of foundation: Aug. 13, 1997 Registered capital: HKD 10,000 Business scope: investment and share holding (3) About the holding shareholder of the Company’s holding shareholder China Merchants Group Co., Ltd. is the controlling shareholder of CMSIZ, whose legal representative is Qin Xiao. The foundation date is in Oct. 1986, as well as registered capital of RMB 800 million. Its business scope include: lease and agency of water/land passenger-cargo transportation, water/land conveyance and facilities; dock and warehousing business; salvage, refloatation and tugboat; construction, repairing, checking and marketing of shipping, offshore petroleum drilling equipment; repairing and checking of drilling platform and container; overall contracting of water/land construction projects and the related offshore petroleum development projects, and their construction organization and logistics services; procurement, supply and sale of water/land communication and transportation equipment; establishment of transportation and industry and commerce; organization and management of finance, insurance and the other relevant business; development, management of Shekou Industrial Zone. (4) During the report year, the holding shareholder of the Company remained unchanged. (5) Particulars about the shares held by the top ten shareholders of A circulating share Unit: share Holding shares at Type of Name of Shareholders the period-end shares -6- 1. BOSHI VALUE INCREASE SECURITIES INVESTMENT 6,483,448 A-share FUND 2. AN XIN SECURITIES INVESTMENT FUND 4,820,000 A-share 3. AN SHUN SECURITIES INVESTMENT FUND 4,500,000 A-share 4. AN RUI SECURITIES INVESTMENT FUND 3,400,000 A-share 5. HAI TONG SECURITIES CO., LTD. 3,179,939 A-share 6. DE SHENG SOLIDITY SECURITIES INVESTMENT FUND 2,899,832 A-share 7. HAN XING SECURITIES INVESTMENT FUND 2,045,214 A-share 8. ORIENT SECURITIES CO., LTD. 2,029,782 A-share 9. XIANGCAIHEFENG VALUE OPTIMIZED PERIODIC 2,018,951 A-share TRADE FUND 10. NATIONAL SOCIAL FUND 101 COMBINATION 2,015,980 A-share 6. Particulars about the shares held by the top ten shareholders of B circulating share Unit: share Holding shares at Type of Name of Shareholders the period-end shares 1. Foxtrol International Ltd. 15,400,000 B-share 2. Orienture Investment Ltd. 14,779,525 B-share 3. YANGBANG INTERNATIONAL CO., LTD. 6,256,168 B-share 4. CBNY S/A PNC/Skandia Select Fund/China Equity AC 3,895,474 B-share 5. Deutsche Bank AG London 3,241,712 B-share 6. The Central Depository (PTE) LTD 1,452,396 B-share 7. Diam China Open Mother Fund 1,437,000 B-share 8. Bear Stearns Securities Corpora Tion 1,000,069 B-share 9. SHANGHAI (HK) WAN GUO SECURITIES 745,500 B-share 10. ZHANG XU QING 710,000 B-share Section V. Particulars about Director, Supervisor, Senior Executive and Staff (I) Particulars about director, supervisor and senior executive 1. Basic information (1) About Directors Holding Increase/ Holding Reason for Name Title Gender Age Office term shares at the decrease in shares at the change year-begin this year year-end Sun Chengming Chairman of the Jun. 28, 2002 – 0 0 0 / Male 45 Board Jun. 27, 2005 Fan Jianxiong Vice Chairman of Jun. 28, 2002 – 0 0 0 / Male 48 the Board Jun. 27, 2005 Lin Shaobin Director, Jun. 28, 2002 – 0 +13,000 13,000 To buy shares General Manager Male 44 Jun. 27, 2005 and share allotment Hong Xiaoyuan Director Jun. 28, 2002 – 0 0 0 / Male 41 Jun. 27, 2005 Li Yasheng Director Jun. 28, 2002 – 0 0 0 / Male 51 Jun. 27, 2005 Chen Gang Director Jun. 28, 2002 – 0 0 0 / Male 46 Jun. 27, 2005 Liu Hongyu Independent Jun. 28, 2002 – 0 0 0 / Male 42 director Jun. 27, 2005 Shi Xinping Independent Jun. 28, 2002 – 0 0 0 / Male 45 director Jun. 27, 2005 Li Tiancai Independent Jun. 28, 2002 – 0 0 0 / Male 55 director Jun. 27, 2005 Total of holding +13,000 13,000 shares (2) About Supervisors Holding Increase/ Holding Name Title Gender Age Office term shares at the decrease in shares at the year-begin this year year-end Zhou Yali Chairman of the Jun. 28, 2002 – 0 0 0 Supervisory Male 49 Jun. 27, 2005 Committee -7- Feng Baihai Supervisor Jun. 28, 2002 – 0 0 0 Male 48 Jun. 27, 2005 Wen Chongping Supervisor Jun. 28, 2002 – 0 0 0 Male 53 Jun. 27, 2005 Hao Yu Employee’s Jun. 28, 2002 – 0 0 0 Male 35 supervisor Jun. 27, 2005 Zhang Linmei Employee’s Jun. 28, 2002 – 0 0 0 Female 28 supervisor Jun. 27, 2005 (3) About Senior Executives Holding Increase/ Holding Reason for Name Title Gender Age Office term shares at the decrease in shares at the change year-begin this year year-end Lin Shaobin Director and Jun. 28, 2002 – 0 +13,000 13,000 To buy shares General Manager Male 44 Jun. 27, 2005 and share allotment Yang Baiqian Deputy General Jun. 28, 2002 – 0 0 0 / Male 38 Manager Jun. 27, 2005 Huang Peikun Chief Financial Jun. 28, 2002 – 0 0 0 / Male 41 Supervisor Jun. 27, 2005 Chen Yu Secretary of the Jun. 28, 2002 – 0 0 0 / Male 32 Board of Directors Jun. 27, 2005 Li Shuming General Manager of Jun. 28, 2002 – 10,388 0 10,388 / Male 40 CMPS Jun. 27, 2005 Zhu Guohui General Manager of Jun. 28, 2002 – 0 0 0 / Male 55 CMWS Jun. 27, 2005 Total of 10,388 +13,000 23,388 holding shares (4) Particulars about directors, supervisors holding the post in Shareholding Company Title in shareholding Name Name of shareholding Company Office term Company To take the post Sun Chengming CMSIZ General Manger from May 2002 China Merchants Holdings (International) To take the post Fang Jianxiong Deputy General Manager Co., Ltd. from May 2001 To take the post Hong Xiaoyuan CMSIZ Deputy General Manager from May 2001 To take the post Li Yasheng China Merchants Logistics Group Co., Ltd. General Manger from May 2001 To take the post Chen Gang CMSIZ Vice Chief Economist from Jun. 1994 Secretary of Party To take the post Zhou Yali CMSIZ Committee, the 1st from May 2002 Deputy General Manager To take the post Feng Baihai Financing Dept. of CMSIZ General Manger from Sep. 2000 To take the post Wen Chongping Auditing Dept. of CMSIZ General Manger from Sep. 1997 2. About annual payment There were 6 directors in the Company. Of them, Mr. Lin Shaobin drew his salary from the Company because he took the post of General Manager of the Company. Except for this, the Company hasn’t paid the remuneration to the other directors in the report period. There were 3 independent directors in the Company. As approved by the Board of Directors and Shareholders’ General Meeting, they respectively received the allowance of RMB 30,000 per year in the report period. Except for this, the Company hasn’t paid the other remuneration to independent directors. There were 5 supervisors in the Company. Mr. Hao Yu and Ms. Zhang Linmei, Employee Supervisor of the Company, drew the remuneration from CMRE. Except for this, the Company hasn’t paid the payment to the other supervisors in the report period. According to the relevant regulations of Articles of Association of the Company, the Board of Directors determined the payment of senior executives. In the report period, senior executives of the Company drew their salary from the Company or subsidiaries. The payment of senior executives was confirmed based on accomplishment effect of the Company’s achievements, and the payment situation of the same industry and the comparability enterprises. There are 8 directors (excluding independent directors), supervisors and senior executives of the Company draw their remuneration from the Company and its subsidiaries in the report period. The total -8- annual remuneration is RMB 2,188,300. Total annual remuneration of the top three senior executives is RMB 1,096,000. The range of annual remuneration is as following: Annual remuneration Number of persons RMB 100,000 to RMB 200,000 1 RMB 200,000 to RMB 100,000 3 Over RMB 300,000 4 Chairman of the Board Mr. Sun Chengming, Vice Chairman of the Board Mr. Fan Jianxiong, Director Mr. Hong Xiaoyuan, Mr. Li Yasheng and Mr. Chen Gang, Chairman of the Supervisory Committee Mr. Zhou Yali, Supervisor Mr.. Wen Chongping and Mr. Feng Bohai draw their annual payment from Shareholding Company, in which they respectively engaged the post. 3. Particulars about changes in directors, supervisors and senior executives (1) On Feb. 22, 2003, the 4th Board of Directors of China Merchants Shekou Holdings Co., Ltd. was held by means of telecommunication, the meeting agreed that Ms. Wu Zhenqin resigned from the post of Chief Financial Supervisor and engaged Mr. Huang Peikun as Chief Financial Supervisor. The said resolution was published on China Securities, Securities Times and Ta Kung Pao dated Feb. 25, 2003. (2) On Apr. 25, 2003, the Company held 2002 Annual Shareholders’ General Meeting. The meeting approved the proposal on change of Directors, and agreed the resignation of the following directors, Mr. Fu Gangfeng, Ms. Wu Zhenqin, Mr. Wang Zhengde and Mr. Yu Zhihan, and agreed not to elect other directors after the change. The member of the Board of Directors was changed from 13 to 9. The said resolution was published on China Securities, Securities Times and Ta Kung Pao dated Apr. 26, 2003. (3) On July 18, 2003, the Company held the 1st Extraordinary Shareholders’ General Meeting of 2003. The meeting approved the proposal on change of Supervisors. Mr. Feng Baihai instead of Mr. Li Feng as supervisory of the Company. The said resolution was published on China Securities, Securities Times and Ta Kung Pao dated July 19, 2003. (II) About employee (Ended Dec. 31, 2003) Unit: person Total employees 1413 Composing of professional Production personnel 865 Salespersons 204 Technicians 194 Financial personnel 76 Administrative personnel 63 Other 11 Background of education Master degree or above 52 Bachelor degree 260 3-years regular college 182 Other 919 [Note] 1. The aforesaid persons included persons of the Company and its controlling subsidiaries. 2. The Company needn’t pay the expenses of retirees because the Company and its controlling subsidiaries performed Shenzhen Social Insurance System. Section VI. Administration Structure (I) Status of the Company’s Administration The Company has three independent directors, taking one third of the total members of the Board of Directors, which is in compliance with the requirements of Guide Opinion of Establishing Independent Directors System in Listed Companies. In the report period, according to the relevant laws and the Company’s actual situation, the Company amended the Articles of Associations of the Company in respect of the election of the Board of Directors, -9- and approved by the 2002 Shareholders’ General Meeting, thereby, the Company’s administration structure is more standard. The Company attached great importance to strengthen investor’s relationship. In the report period, the Company advanced the disclosing of annual report 2002 by 21 days than that of annual report 2001. The Company set up investor database, held the First Analyst Annual Meeting, attended the road show held by Lyons Securities in Hong Kong and Hang Zhou, held the several recommendation meeting, and sent out the letter of return visit of shareholders’ annual meeting to main shareholders and published the replaying on the major medias. The Company carried through the road show on the network actively when shares allotment. Through a series of acts, the Company strived to standardize the information disclosing and make it clarity, and cause investors to know the Company’s operation status and strategic layout definitely. In the report period, the Company was chosen as an excellent enterprise in the information disclosing by Shenzhen Stock Exchange. (II) Particulars about performance of duties by independent directors In the report period, according to the requirements of Company Law and Securities Law, three independent directors of the Company motivated by a desire to take responsibility for the whole shareholders, performed their duties, attended actively the Board meeting, and participated patiently the decision-making of significant events of the Company. In the report period, they issued independent opinion on the several related transaction, and played a positive role scientific and objective decision-making made by the Board of Directors. (III) The Company was separated with the holding shareholder in business, assets, personal, organization and financing The Company has been perfect legal administration structure, and strictly performed the principle of “five separation” with the holding shareholders: Independence of business, the business of the Company and its holding shareholder is completely independent and there is no relationship of same industrial competition between them. The Company’s Board of Directors or Shareholders’ General Meeting examined and decided the Company’s significant operation decision-making and investment events in conformity with the relevant authorization; Independence of assets, the Company separated clearly assets from its holding shareholder CMSIZ; Independence of personnel, the Company adopted a market-oriented recruiting mechanism and had an independent staff group. Independence of financing, the Company established an independent financing department, and held independent accounting settlement system and independently made financial decisions; Independence of organization, the Company’s organization was set up independently and the functional organizations are responsible to relevant supervisors and leaders, and performed the basic management system of Rules of Procedures of the Board of Directors, Rules of Procedures of the Supervisory Committee and Rules of Procedures of Shareholders’ General Meeting. (IV) Valuation and Encouragement of Senior Executives The Company elementarily established three series of payroll system including management, marketing and specialty technology. The Company implemented a marketability payroll system relating with performance level for senior executives and backbone staffs. At present, the Company strictly assessed the performance of senior executives according to the annual work plan. At the same time, the Company searched after the other encouragement and binding mechanism actively in order to establish more marketability and perfect encouragement system. Section VII. Brief Introduction to Shareholders’ General Meeting I. Notification, convening and holding of Shareholders’ General Meeting and their relevant resolutions In the report period, totally three Shareholders’ General Meeting were held with details as follows: (I) Shareholders’ General Meeting for 2002 On Mar. 18, 2003, the Company published Notification on Holding Shareholders’ General Meeting for 2002 on Securities Times, China Securities and Hong Kong Ta Kung Pao. Shareholders’ General Meeting for 2002 was held in Conference Room No. 3003, New Times Plaza, Shekou, Shenzhen as scheduled on the morning of April 25, 2003. Totally 14 shareholder’s representatives and agents attended the Meeting, - 10 - representing 255,104,814 shares of the Company, taking 53.55% of total share capital of the Company, including 166,366,871 A shares, taking 57.79% of total A shares, and 88,737,943 B shares, taking 47.07% of total B shares. Guangdong Huashang Law Office has produced Legal Opinion on the Shareholders’ General Meeting. The following proposals have been considered and passed in the Meeting by signed voting: 1. Financial Settlement Report 2002 2. Profit Distribution Scheme 2002 3. Proposal on Considering Annual Report 2002 4. Proposal on Director Change Director Mr. Fu Gangfeng, Ms. Wu Zhenqin, Mr. Wang Zhengde and Mr. Yu Zhihan resigned from their positions. The Meeting agreed not to additionally elect directors after this change, thus the members in the Board of Directors were adjusted from 13 persons into 9 persons. 5. Proposal on Amending Articles of Association The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated April 26, 2003. (II) The 1st Provisional Shareholders’ General Meeting 2003 On June 18, 2003, the Company published Notification on Holding the 1st Provisional Shareholders’ General Meeting 2003 on Securities Times, China Securities and Hong Kong Ta Kung Pao. The 1st Provisional Shareholders’ General Meeting 2003 was held as scheduled in Conference Room No. 3003 in New Times Plaza, Shekou, Shenzhen on the morning of July 18, 2003. Totally 17 shareholder’s representatives and agents attended the Meeting, representing 257,304,763 shares of the Company, taking 54.01% of total share capital of the Company, including 167,800,416 A shares, taking 58.29% of total A shares, and 89,504,347 B shares, taking 47.48% of total B shares. Guangdong Huashang Law Office has produced Legal Opinion on this Shareholders’ General Meeting. The following proposals have been considered and passed in the Meeting by signed voting: 1. Proposal on Changing the Way of Financing into Shares Allotment 2. Proposal on Requesting Shareholders’ General Meeting to Authorize the Board of Directors to Deal with Relevant Issues in this Shares Allotment 3. Proposal on Supervisors Change Succeeding Mr. Li Feng, Mr. Feng Bohai took the position of Supervisor of the Company. The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated July 19, 2003. (III) The 2nd Provisional Shareholders’ General Meeting 2003 On Nov. 27, 2003, the Company published Notification on Holding the 2nd Provisional Shareholders’ General Meeting 2003 on Securities Times, China Securities and Hong Kong Ta Kung Pao. The 2nd Provisional Shareholders’ General Meeting 2003 was held as scheduled in Conference Room No. 3003, New Times Plaza, Shekou, Shenzhen on the morning of Dec. 27, 2003. Totally 25 shareholder’s representatives and agents attended the Meeting, representing 268,356,620 shares of the Company, taking 52.04% of total share capital of the Company, including 184,946,021 A shares, taking 56.53% of total A shares, and 83,410,599 B shares, taking 44.24% of total B shares. Guangdong Huashang Law Office has produced Legal Opinion on this Shareholders’ General Meeting. Proposal on CMRE’s Transferring Land Use Right of CMSIZ has been considered and passed in the Meeting by signed voting. The said resolution was published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated Dec. 30, 2003. Section VIII. Report of the Board of Directors I. Main operations in the report period (I) Scope of main operations and their operating status In 2003, the Company is mainly engaged in development and operation of real estate, power and water supply in the Zone and petrochemical distribution. In the report period, the Company was active and aggressive and advanced with the times. After experiencing various testing such as intensified competition in the market, influence of SARS, adjustment of bank credit policies in real estate and decrease of price in electric power etc., the Company has further gained rapid development based on what has gained in the last year. Within the year, the Company’s income from main operations and profit - 11 - from main operations was RMB 4,838,834,917 and RMB 613,432,610 respectively, an increase of 25.55% and 19.02% respectively than that in the last year. The Company’s diluted earnings per share after shares allotment was RMB 0.641, an increase of 26.18% than that in the last year. In the report period, the Company’s development strategy was “Continuing to improve the business structure of both having growth and stability, attracting and encouraging excellent talents, continuously increasing reserve of superior lands, gaining abundant capital support through multi-channels, gradually expanding to national scope and making the main operations with development of real estate as the core strong and large step by step”. According to the said development strategy, the Company decided to peel off the business of petrochemical distribution and centralize the resources to expand the real estate business. In the report period, the Board of Directors of the Company passed relevant proposals on selling equity of CMP. The Company shall form the business structure with rapidly growing real estate development and housing lease and power and water supply in the Zone with stable earnings capability as the main body. In the report period, the Company totally carried forward sales area of commercial housing, income from housing lease and income from power and water supply amounting to 196,200 sq. m., RMB 177 million and RMB 649 million, an increase of 100%, 9.43% and 7.81% respectively than that in the last year. In the report period, while continuously increasing land reserve in Shenzhen with Shenzhen as core development zone, the Company also caught the chance to enter into the real estate market in such areas as Beijing, Shanghai, Guangzhou and Zhangzhou etc. in order to seek for more chances for development. Within the year, the areas under construction of the Company’s main projects were 763,400 sq. m.; the planned construction areas of those planned projects in CMSIZ were 306,500 sq. m.; the total newly increased land reserve outside CMSIZ reached planned construction area amounting to 1.83 million sq. m.. Besides, CMRE has priority to develop commercial housing in China Merchants CMSIZ and Zhangzhou Development Zone; the total area of leased property has reached 350,500 sq. m. and the area of property that could be leased under construction was 42,600 sq. m.. At the same time, the Company continued to keep tight cooperation relationships with domestic and foreign banks and at the same time used the financial tools in a reasonable way so that the Company’s capital cost was decreased effectively. In the capital market, the Company smoothly raised capital amounting to RMB 340 million actually through shares allotment, which further enriched the Company’s working capital. After untiring efforts, the Company’s strategic planning was realized steadily. In 2003, the Company was chosen into Indexes 100 in Shenzhen Stock, was awarded as “Top 10 in Listed Real Estate Companies of China” by Chinese Real Estate Top 10 Research Team and was selected into Top 50 in the Most Potential Listed Companies of China held by China Securities and Asia Business Consulting Co., Ltd.. Brief particulars about the business operation taking over 10% of the total amount of the Company’s income from main operations or profit from main operations with details as follows: (Unit: RMB) Classification of Income from main operations Profit from main operations Cost of main Gross Involved industries operating Amount Percentage Amount Percentage operations profit activities in total in total ratio amount amount Development of Development and commercial operation of real estate house 1,453,221,304 30.03% 283,689,308 46.25% 1,096,144,320 24.57% Lease of house Development and 176,859,502 3.66% 75,536,527 12.31% 92,126,281 47.91% operation of real estate Power supply Production and supply and water supply of electric power and in the Zone 649,095,492 13.41% 106,813,403 17.41% 541,255,808 16.61% water Petrochemical Storage and supply of distribution 2,533,892,357 52.37% 140,337,139 22.88% 2,391,140,471 5.63% oil and gas Schedule of main real estate projects under construction of the Company in 2003 Name of Planned Start areas in Completion Constructing Type of Sales Actual/predicted projects construction 2003(M2) areas in areas in projects percentage completion time - 12 - areas (M2) 2003(M2) 2003(M2) (pre-sold) in 2003 Hillside Seaview Villa 25,380 4,000 4,000 100% 2003.12 Villa Spring Square 15,300 15,300 15,300 Ordinary house 97% 2003.01 Sea Moon 2nd Ordinary house 220,367 62,119 62,119 93% 2003.04 Stage Brocade Shore 175,663 175,663 175,663 Ordinary house 77% 2003.08 Rainbow Shore 161,013 161,013 Ordinary house 43% 2004.08 City Image 39,636 39,636 Ordinary house 58% 2004.10 Flower Garden Ordinary house Unsold 3rd Stage 1 ﹟ 50,102 50,102 50,102 2004.12 Plot Hillside. Orchid Ordinary house Unsold 124,000 124,000 2004.10 Valley Sea Moon 3rd Ordinary house Unsold 178,970 88,970 88,970 2005.03 Stage Taige Flat Leased flat Used for 42,608 42,608 2005.01 lease Total 1,033,030 139,063 257,082 763,411 Notes: The former name of Taige Flat is Hushan Flat, used for lease after construction; the former name of Hillside Orchid Valley is Hillside Seaview Garden 1st Stage; The project of Brocade Shore and the project of Rainbow Shore are both called “Sunshine Cincture· Seaside Garden” while being propagandized. Flower Garden 3rd Stage is developed gradually by being divided into 1﹟ plot and 2﹟ plot according to the development speed. Notes: The geographic positions of all the said projects are in the areas inside or near to Shekou Industrial Zone. Schedule of main projects of land reserve newly increased by the Company outside Shekou Industrial Zone in 2003 Projects Locations Occupation Content Planned Type of Land price Predicted areas (M2) rate construction projects (RMB’0000) time of start areas (M2) Shenzhen New Longgang, 150,443 1.56 234,164 Ordinary house 17450 2004.10 Asia Shenzhen Shenzhen Bao’an, Shenzhen 213,187 0.5 106,600 House with low 58000 2004.12 Jiangang density Mountain Shanghai Songjiang, 134,634 0.7 94,244 House with low 16156 2004.10 Songjiang Huting Shanghai density Panyu Feieling Panyu, Guangzhou 743,533 1.27 946,065 Ordinary house 66880 2005.02 Fengtai Liuquan Fengtai, Beijing 234,664 1.92 450,000 Ordinary house - 2004.12 Total - 1,476,457 --- 1,831,073 Notes: 1.Except for the said projects, CMRE, a subsidiary of the Company, and Shenzhen TCL Investment Co., Ltd. jointly cooperated and developed Plot B310-0030 in Bagualing, Futian District, Shenzhen, whose construction area is 81,756 sq. m.. 2. The land used in project of Fengtai Liuquan is to be checked and ratified by the local land planning department according to new policies. 3. The project of Panyu Feieling is planned to be developed through cooperation of the Company and other companies. Schedule of main real estate projects planned to be constructed by the Company in Shekou Industrial Zone in 2003 Name of projects Occupation Content Planned construction Type of Land price Predicted areas (M2) rate areas (M2) projects (RMB’0000) time of start Flower Garden 2nd Emporium - 25,631 1.97 50,500 2004.05 Stage Flower Garden 3rd House - 35,735 2.5 111,625 2004.08 Stage 2﹟ Plot Hillside Seaview House - 57,752 2.5 144,400 2004.10 Garden 2nd Stage Total 119,118 306,525 - 13 - Notes: The land transfer price of the said planned projects is to be based on the land transfer agreement signed finally. Classification of leased property under operation and construction of the Company in 2003 Type of Areas under Typical Areas under Typical properties operation properties construction properties Villa 67,400 M2 Jingshan Villa Flat 30,200 M2 Seaside Flat 42,600 M2 Taige Flat Office 76,200 M2 Financial Center, Peninsula Building Factory 96,500 M2 Technology Building Shop 80,200 M2 Shekou Walmart Total 350,500 M2 42,600 M2 (II) The operations and achievements of major holding companies and share-holding companies In the report period, the Company had four major holding companies, including CMRE, CMPS, CMWS and CMP. The basic particulars and operating achievements of the major holding companies were as follows: 1. CMRE CMRE was established in 1984 with a registered capital of RMB 106 million, where the Company holds 95% of its equity. Ended the end of the report period, the total assets and the net assets of CMRE amounted to RMB 3,041.30 million and RMB 956.47 million respectively. Since it has been established for about 20 years, CMRE has the business structure of both development of commercial housing and lease of house with bright features. In the report period, the Company’s real estate business is mainly implemented by CMRE. In recent years, CMRE has entered into the rapidly developing prophase. While steadily developing housing lease business, its development of real estate was expanded to national scope in a stable way with Shenzhen as the center. In the report year, CMRE newly increased a construction area of 139,100 sq. m., completed an area of 257,070 sq. m. and carried forward sales area of commercial housing of 196,200 sq.m.. The accumulated leasing area in the report year amounted to 3,356,000 sq. m. and the net profit realized totally was RMB 264.36 million, an increase of 31.92% than that in the last year. In the report period, CMRE was awarded as the 2nd place in comprehensive development certificate of Shenzhen Real Estate by Shenzhen Bureau of Land Planning again. 2. CMPS CMPS was established on Nov. 9, 1980 with a registered capital of RMB 57 million. The Company holds 99.75% of its equity. Ended the end of the report period, the total assets of the CMPS was RMB 429.61 million and its net assets amounted to RMB 242.06 million. In 2003, CMPS realized a net profit of RMB 109.41 million. As the only company with power supply certificate in Shekou, CMPS enjoys an obvious regional advantage and advanced overall planning of power supply network and technical management. In the report period, CMPS and CLP Power Hong Kong Limited signed power supply agreement of the 3rd seabed cable and the engineering of the 3rd Transformer Substation has also been finished and has been put into operation. Within the year, CMPS totally completed a volume of power supply amounting to 824 million degrees, an increase of 14.13% than that in the last year, which was over the business plan; the income from business of power supply was still better than that in the last year influenced by the decrease of electric price but made up by the increase of volume of power supply. 3. CMWS CMWS was established on Oct. 29, 1989 with a registered capital of RMB 43 million. The Company holds 99.75% of its equity. Ended the end of the report period, the total assets of CMWS was RMB 184.88 million and its net assets amounted to RMB 140.20 million. In 2003, CMWS realized profit from main operations amounting to RMB 10.71 million. However, since CMWS estimated a liability amounting to RMB 20.25 million in the year due to a dispute of crude water with Shenzhen Water (Group) Co., Ltd., net profit of CMWS was RMB –10.49 million. As the only company with water supply certificate in Shekou, CMWS enjoys an obvious regional advantage. In the report period, experiencing - 14 - such difficulties as influence of SARS and frontal raid of strong typhoon landing on Shekou etc., CMWS ensured the quality of water and safety of water supply by adopting measures from the aspects of technology and craftwork; at the same time, CMWS pushed the planning management and reinforced system construction and supervision and control on the operating process in order to provide good environment for the production and operation; while the continuously good oriented economic condition in Shekou region has also supported the increase in volume of water sales. In the report year, CMWS realized volume of water sales amounting to 28.78 million tons, an increase of 6.43% than that in the last year, which has completed the business plan. 4. CMP CMP was established on March 7, 1989 with a registered capital of RMB 100 million. The Company holds 75% of its equity. Ended the end of the report period, the total assets of CMP were RMB 706.26 million and its net assets amounted to RMB 461.06 million. In 2003, CMP realized the net profit of RMB 48.31 million. CMP is mainly engaged in the sales, distribution and storage of the light oil, heavy oil and LPG products in Shenzhen and its adjacent areas. In the report period, influenced by War in Iraq and continuous fluctuation in international price of crude oil and facing austere operating situation such as passive consumption condition, intensified monopoly and drastic retail etc. caused by SARS, CMP finally completed the oil and gas storage and business volume amounting to 1,475,000 tons through such measures as reinforcing the internal coordination, strengthening the construction of retail network and customers’ management and strictly controlling the accounts receivable etc.. (After-period events: on Feb. 6, 2004, the Provisional Shareholders’ General Meeting of the Company considered and passed relevant proposals on selling equity of CMP and the changing procedures for industry and commerce were completed on Feb. 26, 2004. The Company would no longer burden any relevant gains and losses from CMP from Feb. 27, 2004. Since the income from main operations of CMP takes 52.37% of the Company’s total income, while its net profit takes 10.96% of the Company’s consolidated total profit, the Company’s income from main operations would decrease by a relatively large margin in the short term while the influence on profit from main operations was relatively small after the Company’s peeling off petrochemical business. Along with the rapid development in the Company’s such businesses as real estate etc. and new benefits accrued from the reinvestment of capital gained from selling of CMP, the influence on income and profit caused by the Company’s selling petrochemical business would be eliminated gradually). (III) Major suppliers and customers Since the Company is the holding company and the suppliers and customers of its holding subsidiaries exist big difference, the transverse comparison among them is not applicable. Of which, the purchase amount of the real estate business takes a small proportion in the development cost of real estate, while the main objects of sales of commercial house are individual customers. The original power of power supply business is purchased from CLP Power Hong Kong Limited and the sales of power supply of the top five customers takes 39% of the total sales volume of the Company’s electric power. The original water of water supply is supplied by the top three large reservoirs of Shenzhen and the sales of water supply of the top five customers takes 17% of the total sales volume of the Company’s water supply. The business of the top five customers of CMP takes 19% of the total volume of the selling business of CMP. (IV) Problems and difficulties arising from the operation and their solutions Full competition in real estate market of Shenzhen and influence from SARS: after rapid development for several years, the real estate market in Shenzhen continues to develop oriented to the market with full competition. In the first half year of 2003, in the rear see area of Nanshan District where the Company’s projects of Sea Moon 2nd Stage and Brocade Shore locate, large quantities of buildings newly completed came into the market intensively and consumers purchased in succession, thus the sales of the said two buildings faced relatively large pressure. In May, SARS indulged in willful persecution, thus the Company’s sales of commercial housing and lease of houses were influenced. Facing such pressure, through deeply researching the market demand and continuously improving such links as product and service etc., the Company strengthened the management in sales, tried its best to enhance the customers’ satisfaction and boosted the comprehensive quality of all projects, which made all buildings gained relatively good sales achievements in the drastic competitive environment in the report period. - 15 - II. Investment in 2003 (I) Use of raised proceeds in the report period In the report period, the Company implemented shares allotment to all shareholders at the rate of 3 shares allotted for every 10 shares at price amounting to RMB 8.93 per share, which totally amounted to 39,289,560 shares allotted. The accounts receivable from shares allotment was RMB 350,855,771, after adding the frozen interests of subscription capital from shares allotment and deducting such issuance expenses as commissions of underwriters and handling charges of transactions etc., the actual proceeds raised through shares offering were RMB 339,901,009 with details of use as follows (unit: RMB’0000): Committed Investment of Investment of Change Raised Balance of Earnings Reaching planned progress projects planned raised actual raised projects proceeds raised accrued and earnings or not proceeds proceeds or not invested proceeds Rainbow 20,000 20,000 No 1,789 18,211 - Reaching planned progress Shore and estimated to be completed and be carried forward earnings in 2004 Flower 15,000 13,990 No 1,085 12,905 - Reaching planned progress Garden 3rd and estimated to be completed Stage Plot 1﹟ and be carried forward earnings in 2004 (II) Material projects invested with the proceeds not raised through shares offering and their progress and earnings 1. Real estate projects mainly invested by CMRE in the report period (unit: RMB’0000) Name of projects Investment in the Increase in Progress of projects Earnings in the year year investment amount over the last year Sea Moon 2nd Stage Finished completely Realizing gross profit of sales 8,841 20.59% amounting to RMB 87.15 million Brocade Shore Finished completely Realizing gross profit of sales 21,119 36.28% amounting to RMB 119.02 million Hillside Seaview Finished completely Realizing gross profit of sales Villa 892 8.75% amounting to RMB 66.59 million Spring Square Finished completely Realizing gross profit of sales 1,646 41.42% amounting to RMB 2.65 million Rainbow Shore Top cover in main body No earnings accrued yet 19,028 63.69% Hillside Orchid Top cover in main body No earnings accrued yet Valley 19,789 249.21% City Image Top cover in main body No earnings accrued yet 6,288 119.23% Taige Flat 3,154 Top cover in main body No earnings accrued yet 1314.20% rd Sea Moon 3 Stage Finished in stake base No earnings accrued yet 6,096 134.92% Flower Garden 3rd New project in the Five floors on the No earnings accrued yet Stage Plot 1﹟ 2,253 year ground Shenzhen New Asia New project in the Prophase planning No earnings accrued yet 18,996 year Panyu Feieling New project in the Prophase planning No earnings accrued yet 10,063 year 2. In the report period, the Company completed to invest RMB 53,856,200 in the fixed assets, including: CMPS actually completed to invest RMB 24,077,200 in the renewal and reconstruction of the equipments of the electric power; CMP actually completed to invest RMB 11,874,700 in the reconstruction of the gas station and the increase of transportation equipments and loading and unloading of the machines; CMRE actually completed to invest RMB 7,671,800 in the maintenance of real property and the purchase of productive equipments; CMWS actually completed to invest RMB 5,834,200 in the renewal and reconstruction of the water supply pipes network and the alteration of the water factory; Huangjintai Company actually completed to invest RMB 2,874,300 in the construction of Huangjintai Commercial Building; the Company and other companies actually completed to invest RMB 1,524,000 in the renewal - 16 - of transport tools. III. Analysis to the financial status and operating results of the Company in 2003 (Unit: RMB’0000) Items On Dec. 31, 2003 On Dec. 31, 2002 Increase/decrease Increase/decrease rate amount Total assets 592,365 523,982 68,383 13.05% Other receivables 12,703 2,264 10,439 461.09% Inventories 273,835 233,472 40,363 17.29% Short-term loans 68,111 42,991 25,120 58.43% Notes payable 23,831 42,334 -18,503 -43.71% Other payables 67,682 30,537 37,145 121.64% Long-term loans 4,546 28,156 -23,610 -83.85% Shareholders’ rights and interests 311,887 250,154 61,733 24.68% Profit from main operations 61,343 51,542 9,801 19.02% Subsidy income 3,316 1,461 1,855 126.97% Net profit 33,048 24,182 8,866 36.66% Net increase in cash and cash equivalents 8,690 13,213 -4,523 -34.23% Main reasons for changes: ①Total assets and inventories: It was due to the expansion of the Company’s scale in property development business. ②Other receivables: The main reasons for increase in other receivables in the year were because approximately RMB 90.40 million was paid to enter a land bidding and as a deposit for implementing contracts at the end of the year. ③Short-term loans and long-term loans: In order to effectively decrease the cost of capital occupation, the Company has adjusted the structures of short-term and long-term bank loans within the year. ④Notes payable: Since the discount interest rate of notes increased, notes’ opening was stopped in property business from October, which resulted into the decrease in balance of notes payable. ⑤Other payables: The increase in land transfer account payable at the end of the year and receiving the prophase accounts from the transfer of equity of CMP led to the increase in other payables. ⑥Shareholders’ rights and interests: Its increase was because the Company conducted shares allotment to raise the proceeds and realized net profit in the report period. ⑦Profit from main operations: It was because that the profit from property development and lease business increased by a relatively large margin. ⑧Subsidy income: The Company actually drew back value-added tax return of electric power amounting to RMB 33.16 million in the year, an increase of RMB 18.55 million than that in the last year. ⑨Net profit: The profit from property development, properties lease business and supply business of electric power increased by a relatively large margin in the year. ⑩Net increase in cash and cash equivalents: There was no expenditure of land reserve in the year, thus net increase amount in cash and cash equivalents was relatively large; net cash arising from operating activities due to the enlargement of development and input scale and land reserve newly increased in the year did outflow by a relatively large margin. However, the Company received the capital account raised through shares allotment and prophase account from transfer of equity of CMP, which has filled up the gap of partial capital. IV. Business plan in 2004 Viewing 2004, people’s demand for good houses shall continue to increase, while it is hopeful that the government shall further implement strict management and control on the credit capital of land and real estate, which shall be beneficial to the enhancement of centralization degree in real estate industry and shall also be beneficial to the continuous development of advanced real estate enterprises. On the other hand, the Company shall face various kinds of challenges and shall face the short-term influence after peeling off the petrochemical business in the course of rapid growth. Thus, the Company makes year 2004 as one year of overcoming difficulties and as one year of continuing to tamp the foundation. Basing itself upon the long term, the enterprise can just make strong after making firm and can just make large after making strong. In the new year, the Company shall make the enhancement of development quality - 17 - as the priority, fully exert the Company’s feature of product oriented and go all out to make the qualities of all projects much better; greatly dig the potential in management and try its best to reduce the cost; continuously probe into advanced encouragement and binding mechanism and gain talents by means of combining both internal cultivation and external import. At the same time, the Company shall still actively seek for increasing more and more better land reserve in national scope. To sum up, in 2004, the Company shall firmly develop ahead step by step according to strategic planning, try its best to continuously construct more perfect houses for people and create more wealth for the shareholders. The main indexes of the Company’s operation in 2004: In the aspect of the business of real estate, the settlement area is planned to complete 250,000 sq. m. and the leasing area is planned to accumulatively reach 3,400,000 sq. m.. In the aspect of the business of power supply in the Zone, the power sales volume is planned to complete 813 million degrees. In the aspect of the business of water supply in the Zone, the water sales volume is planned to complete 28.50 million tons. V. Routine work of the Board of Directors (I) Board meetings and resolutions In the report year, the Board of Directors totally held seven meetings with details as follows: 1. On Mar. 14, 2003, the 6th Meeting of the 4th Board of Directors was held, in which the following proposals have been considered and passed: (1) Work Report of General Manager 2002 (2) Financial Settlement Report 2002 (Draft) (3) Profit Distribution Preplan 2002 (4) Preplan on Profit Distribution Policy 2003 (5) Annual Report and its Summary 2002 (Draft) (6) Proposal on Director Change (7) Proposal on Amending Articles of Association (8) Proposal on Authorization of the Company’s Bank Loans (9) Proposal on Holding Shareholders’ General Meeting 2002 The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated Mar. 18, 2003. 2. On April 10, 2003, the 7th Meeting of the 4th Board of Directors was held, in which the following proposals have been considered and passed: (1) Proposal on Accepting the Transfer of 45% Equity of Zhangzhou CMB Real Estate Co., Ltd. (2) Proposal on Accepting the Transfer of 5% Equity of Zhangzhou CMB Real Estate Co., Ltd. (3) Proposal on Increasing Investment into Zhangzhou CMB Real Estate Co., Ltd. (4) Proposal on Changing Name of Zhangzhou CMB Real Estate Co., Ltd. (5) Proposal on Authorizing Director General Manager Mr. Lin Shaobin to Sign Relevant Documents on Holding Shares of CMB Real Estate The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated April 15, 2003. 3. On April 17, 2003, the 8th Meeting of the 4th Board of Directors was held, in which the following proposal has been considered and passed: (1) The 1st Quarterly Report 2003 The said resolution was published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated April 19, 2003. 4. On June 16, 2003, the 9th Meeting of the 4th Board of Directors was held, in which the following proposals have been considered and passed: (1) Proposal on Changing the Way of Financing into Shares Allotment (2) Proposal on Requesting Shareholders’ General Meeting to Authorize the Board of Directors to Deal with Relevant Issues in this Shares Allotment (3) Proposal on Holding the 1st Provisional Shareholders’ General Meeting 2003 The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated June 18, 2003. - 18 - 5. On July 23, 2003, the 10th Meeting of the 4th Board of Directors was held, in which the following proposals have been considered and passed: (1) Semi-annual Report and its Summary 2003 (2) Applying for USD and HKD Revolving Loans amounting to USD 60 Million in Term of One Year from Bank Syndicate with Holland Commercial Bank Shanghai Branch as the Lead Bank (3) Authorizing Director General Manager Lin Shaobin to Sign Loan Agreement and Relevant Documents; Authorizing Chief Financial Officer Huang Peikun to Sign Drawing Notice and Other Current Documents The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated July 25, 2003. 6. On Oct. 20, 2003, the 11th Meeting of the 4th Board of Directors was held, in which the 3rd Quarterly Report 2003 has been considered and passed. The said resolution was published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated Oct. 22, 2003. 7. On Nov. 25, 2003, the 12th Meeting of the 4th Board of Directors was held, in which the following proposals have been considered and passed: (1) Proposal on Transferring 10% Equity of CMP Held by the Company to CMSIZ (2) Proposal on Transferring 65% Equity of CMP Held by the Company to CML (3) Proposal on Accepting the Transfer of Land Use Right of CMSIZ by CMRE (4) Proposal on Continuing to Lease Assets to China Merchants Port Service (Shenzhen) Co., Ltd. (5) Proposal on Holding the 2nd Provisional Shareholders’ General Meeting 2003 The said resolutions were published on Securities Times, China Securities and Hong Kong Ta Kung Pao dated Nov. 27, 2003. (II) Implementation of the Board of Directors on resolutions of Shareholders’ General Meeting 1.Implementation of the Board of Directors on authorization of Shareholders’ General Meeting In the report period, the Board of Directors strictly implemented all resolutions of Shareholders’ General Meeting with no material warp and misplay. The Board of Directors strictly implemented and carried out the authorization from the Shareholders’ General Meeting on relevant issues of the Company’s shares allotment. 2. Implementation of the Board of Directors on profit distribution scheme of the Company Shareholders’ General Meeting 2002 held on April 25, 2003 has considered and passed Profit Distribution Scheme 2002, in which based on the issued shares amounting to 476,396,000 shares, the Company distributes cash dividends to all shareholders at the rate of cash RMB 1.20 (tax included) for every 10 shares, which totally amounts to RMB 57,167,520; the Company shall not convert capital public reserve into share capital in the year. On June 11, 2003, the Company published Public Notice on Dividends Allotment for 2002, in which it confirms that the equity registration date is June 23, 2003 (final transaction date for B shares) and ex-right date is June 24, 2003. The details for dividends allotment are: shareholders of A share gain dividends amounting to RMB 0.96 after tax for every 10 shares; For shareholders of B share, the tax is not deducted and their dividends are converted according to HKD 1=RMB 1.0612; the dividends of shareholders under Singapore Central Depository Private Co., Ltd. are accounted for according to SGD 1=RMB 4.6356. The dividends allotment was implemented completely on July 10, 2003. 3. Implementation of shares allotment in the report period On Nov. 4, 2003, the Company promulgated Public Notice on Gaining Approval of Shares Allotment and Placing Prospectus, in which based on total share capital amounting to 476,396,000 shares on Dec. 31, 2002, the Company allots shares to all shareholders at the rate of 3 shares allotted for 10 shares at price of RMB 8.93 per share, converting into HKD 8.38, while the equity registration date, ex-right base date and payment term for shares allotment is Nov. 11, Nov. 12, 2003 and Nov. 12-Nov. 25, 2003 respectively. In this shares allotment, totally 39,289,560 shares are allotted, in which the raised proceeds totally amount to RMB 341,410,979 after adding the frozen interests of subscription capital from this shares allotment - 19 - and deducting commissions of underwriters and handling charges of transactions, which was fully funded on Nov. 28, 2003. Deloitte Touche Tohmatsu Certified Public Accountants Ltd. has produced DSBYZ (03) No. 058 Capital Validation Report. The actual raised proceeds amount to RMB 339,901,009 after relevant expenses for agencies being deducted. The circulating shares newly increased amounting to 39,289,560 shares in this shares allotment were quoted and traded on Dec. 4, 2003. VI. Profit distribution preplan or preplan on converting capital public reserve into share capital in 2003 According to the provision of adopting the lower amount between Chinese Accounting Standards and International Accounting Standards as the maximum for distribution, the profit available for distribution is RMB 617,588,667 in 2003. According to the provisions in relevant laws and regulations and Articles of Association of the Company, the profit distribution scheme in 2003 is as follows: 1. Appropriating 10% of net profit under Chinese Accounting Standards as statutory public reserve amounting to RMB 33,047,757; 2. Appropriating 5% of net profit under Chinese Accounting Standards as statutory public welfare amounting to RMB 16,523,878; 3. From net profit in the year, based on the issued shares amounting to 515,685,560 shares, the Company allots bonuses and cash dividends to all shareholders at the rate of 2 bonus shares and cash RMB 1.00 (tax included) for every 10 shares, which totally amounts to bonuses of 103,137,112 shares and cash dividends amounting to RMB 51,568,556.00. 4. The Company shall not convert capital public reserve into share capital this time. This profit distribution preplan is to be implemented after being approved by Shareholders’ General Meeting. VII. Other issues (I) Special explanations of CPA on capital occupied by the controlling shareholder and other related parties The Board of Directors of China Merchants Shekou Holdings Co., Ltd.: We have audited the balance sheet of China Merchants Shekou Holdings Co., Ltd. (the Company) as of Dec. 31, 2003 and income statement and cash flow statements for the year then ended according to Independent Auditing Standards for Chinese CPA and have presented unqualified auditor’s report with DSB (S) Z (04) on Mar. 5, 2004. According to requirements in Circular on Standardizing Listed Companies’ Capital Relationships with Related Parties, External Guarantees and Other Several Problems promulgated by CSRC and State-owned Assets Supervision and Administration Commission of the State Council, the Company has prepared Investigated Form of Capital Occupation of the Company (hereinafter referred to as Investigation Form) ended Dec. 31, 2003 listed in the appendix of this letter. It is the Company’s responsibility to truly prepare and disclose to outsiders the Investigation Form and ensure its truthfulness, legality and completeness. We have verified the materials carried in the Investigation Form and accounting materials rechecked when we are auditing Financial Report 2003 of the Company and relevant contents in Financial Report after audited, no difference is found in all material aspects. Except for implementing auditing procedures related to related transactions implemented in auditing to Accounting Statements in 2003 to the Company, we have not implement extra auditing procedures to materials carried in Investigation Form. This letter is only used for the Company to submit particulars on capital occupation of controlling shareholders and other related parties in 2003 to CSRC and can not be used for other purposes without written agreements. Appendix (I) Investigation Form of Capital Occupation of China Merchants Shekou Holdings Co., Ltd. Capital Name of Related Amount Accounting Balance at Remarks (with occupation related relationships subjects year-end price/priceless) parties Purchasing China Controlling 29,200 Other 29,000 Priceless land use Merchants shareholder payables right Shekou - 20 - Industrial Zone Co., Ltd. 30% of China Controlling 1,847 Other 1,847 Priceless equity Merchants shareholder payables transfer Shekou Industrial Zone Co., Ltd. 30% of China The same 12,006 Other 12,006 Priceless equity Merchants controlling payables transfer Logistics shareholder Group Co., Ltd. (II) Special explanations and independent opinions of independent directors on the Company’s accumulative and current exterior guarantees According to the spirits in Circular on Standardizing Listed Companies’ Capital Relationships with Related Parties, External Guarantees and Other Several Problems, based on the attitude of being earnest and responsible, we have examined the exterior guarantees of the Company and now explain the relevant situations as follows: Strictly according to provisions in Articles of Association of the Company and etc., the Company standardized the exterior guarantees and controlled the risks in exterior guarantees. In the report period, the Company ever provided guarantee amounting to RMB 3,933,400 for Shenzhen Keluo Storage Industrial Co., Ltd., a share-holding company of the Company, in compliance with proportion of shares holding. On Sept. 17, 2003, the Company stopped this guarantee. Besides, there was no other guarantee provided by the Company for those companies who are not controlling subsidiaries of the Company. The Company’s guarantees for controlling subsidiaries belong to the need of production, operation and reasonable usage of capital; moreover, the guarantee and decision-making procedures are legal and reasonable, not harming the interests of the Company and its shareholders especially small and medium shareholders. Section IX. Report of the Supervisory Committee I. The Supervisory Committee of the Company has patiently performed its duty according to Company Law and Article of Association and other relevant regulation. In the report period, the Supervisory Committee totally held five meetings, attended all meetings of the Board of Directors as non-voting delegates, participated in the discussion about the significant decision-making issues of the Company, examined the periodic report of the Company. The Supervisory Committee supervised over the procedures of holding and decision-making of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board of Directors, duty performance by senior executives as well as the performance of the management system of the Company, legal operation and scientific decision-making of the Board of Directors and ensured the normative operation of the Company’s financing according to relevant laws and regulations. In the report period, the meetings held by the Supervisory Committee of the Company are as follows: (I) The 4th meeting of the 4th Supervisory Committee was held on March 14, 2003 and the meeting mainly examined Report of the Supervisory Committee in 2002 Annual Report (Draft). The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated March 18, 2003. (II) The 5th meeting of the 4th Supervisory Committee was held on Apr. 10, 2003 and the meeting mainly discussed the related transaction that the Company respectively purchased 45% and 5% equity of Zhangzhou CMB Real Estate Co., Ltd. held by China Merchants Zhangzhou Development Zone Co., Ltd. and China Merchants Zhangzhou Development Zone Public Utility Co., Ltd. and expressed independent opinions on it. The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated Apr. 15, 2003. (III) The 6th meeting of the 4th Supervisory Committee was held on Apr. 17, 2003 and the meeting examined and approved the 1st Quarterly Report of 2003 of the Company. - 21 - The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated Apr. 19, 2003. (IV) The 7th meeting of the 4th Supervisory Committee was held on June 16, 2003 and the meeting examined and approved Proposal on Changing Financing Way into Allotment Share of the Company and Proposal on Change of Supervisor. The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated June 18, 2003. (V) The 8th meeting of the 4th Supervisory Committee was held on July 23, 2003 and the meeting examined and approved 2003 Semi-annual Report and Summary. The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated July 25, 2003. (VI) The 9th meeting of the 4th Supervisory Committee was held on Oct. 20, 2003 and the meeting examined and approved the 3rd Quarterly Report of 2003. The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated Oct. 22, 2003. (VII) The 10th meeting of the 4th Supervisory Committee was held on Nov. 25, 2003 and the meeting examined and approved the following proposals: 1. Proposal on transferring 10% equity of CMP held by the Company to CMSIZ 2. Proposal on transferring 65% equity of CMP held by the Company to CML 3. Proposal on transferring land use right of CMSIZ to CMRE 4. Proposal on continuing to lease assets to China Merchants Harbor (Shenzhen) Co., Ltd. The resolution was disclosed on Securities Times, China Securities and Ta Kung Pao dated Nov. 27, 2003. II. The Supervisory Committee expressed independent opinions on the following matters (I) Operation according to law The Company established legal person administration structure and more perfect internal control system according to relevant laws, regulations and Article of Association. The procedures of decision-making of the Company are in compliant with the laws and regulations and there existed no actions of breaking the laws, regulations and Article of Association and harmful to the Company’s interest in terms of implementation of the Company’s duty by the directors and managers. (II) Financial inspection Deloitte Touche Tohmatsu Certified Public Accountants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. audited 2003 financial statements of the Company respectively and all issued the auditor’s reports with standard non-reservation opinion. In the opinion of the Supervisory Committee, the financial statements of the Company as of Dec. 31, 2003 factually and objectively reflected the financial situation and operation result of the Company. (III) Application of raised funds In the report period, the Company executed share allotment and the actual raised capital was RMB 339,901,009. The Supervisory Committee supervised over the collection and use of the raised capital and the colleted capital has been put into use of the items that were promised in Allotment Share Explanation. By the end of the report period, the invested items are carried through according to the planned progress. (IV) Purchase or sales of assets and correlative transactions In the report year, the trading prices for purchase or sales of assets were reasonable. Neither inside trading has been found, nor there occurred damage of the interests and rights of some shareholders or loss of the Company’s assets. The Company conducted relevant corrective transactions strictly according to the legal procedures required by the government authority and didn’t damage the listed company’s interest. Section X. Significant Events I. Material lawsuits and arbitration (I) In March 2000, Guangdong Conghua Agricultural Production Materials Co. Ltd. (hereinafter referred to as Conghua Agricultural Materials) lodged a complaint to the Company and the Company’s subsidiary, HK Ruijia Investment Industrial Co., Ltd. and Sinochem Corporation. On Dec. 27, 2002, Guangdong Province Shenzhen Intermediate People’s Court made judgement that would require the Company to repay RMB 13,766,090 and its interest and the Company has paid in 2003. (II) In Nov. 2003, Shenzhen Intermediate People’s Court made the judgement of the first trial for the case of original water dissension between Shenzhen Water Group Co., Ltd. (SZWG) and Shenzhen China Merchants Water Supply Co., Ltd. (CMWS) and judged CMWS to refund RMB 20,250,560 to SZWG. CMWS has appealed to the case and the lawsuit is in process. CMWS has withdrawn estimated liabilities amounting to RMB 20,250,560 based on the civil judgement of Shenzhen Intermediate People’s Court. - 22 - II. Significant acquisition, sales of assets and merger and consolidation In the report period, the Company disclosed the event of transferring 75% equity of CMP. The income from core business of CMP in 2002 was RMB 2,352,668,907, taking by 61.04% of income from core business in the audited consolidated statements of 2002 of the Company amounting to RMB 3,854,153,934 and it was over 50% and belonged to significant sale of assets. In addition, because CMSIZ is the controlling shareholder of the Company and CML is the share-controlling subsidiary of the CMSIZ, this significant sale of assets was related transaction. (I) Brief information and progress On Nov. 25, 2003, the 12th meeting of the 4th Board of the Company examined and approved Proposal on Transferring 10% Equity of CMP Held by the Company to CMSIZ and Proposal on Transferring 65% Equity of CMP Held by the Company to CML and agreed to transfer 10% and 65% equity of CMP held by the Company respectively to CMSIZ and CML. The price of this equity transfer was based on 12.7 times of audited net profit of CMP in 2002 and was negotiated and assured by the two parties. After being audited by Deloitte Touche Tohmatsu Certified Public Accountants Ltd., the net profit of CMP in 2002 was RMB 48,479,475. Calculating as 12.7 times, the price of 10% and 65% equity of CMP transferred by the Company was respectively RMB 61,568,934 and RMB 400,198,070. All transfer payment was paid in cash. On Feb. 6, 2004, the Company held the 1st Temporary Shareholders’ Meeting of 2004, which examined and approved the above proposals. Ended as at the disclosure date of this report, the Company has received all payment of equity transfer and relevant change of industrial and commercial has been finished. (II) Influence on the durative of business and stability of management of the Company To realize the continuous and rapid development of the Company, the Company made the middle term development stratagem based on its own competition advantage and the industry’s development foreground: continue to perfect the business structure with growth and stability, attract and spirit up the excellent persons, continuously add land reserve with good quality, obtain full capital support from more channels, exploit to the whole country step by step, extend and strengthen core business as the core of development of real estate step by step. The capital motion of transferring equity of CMP by the Company is the important step of implementing development stratagem of specialization of industry and strength. By transferring equity of CMP, the Company can obtain a large amount of capital that supplies powerful capital guarantee for the extending of business of real estate and meanwhile, the industry span of the Company has shrank in some degree, the future core business more stood out and the strength in the fields of development and operation of real estate and so on further strengthened. (III) Influence on financial situation and operation result of the Company In 2001, 2002 and 2003, the liquidity ratio was respectively 1.74, 1.42 and 1.54. The liquidity ratio of the Company maintained stable level as a whole and the ability of paying debt in short-term is still strong. The liabilities/assets ratio in consolidated statement was respectively 49.39%, 48.82% and 43.88%. The statement amount of the parent company was 27.05%, 21.52% and 26.79%. So, the ability of paying debt in long term is strong and the risk of paying debt is lower. After transfer of equity of CMP, the liabilities/assets ratio of the Company will descend in some degree and financial situation will further improve. By equity transfer, the Company obtained a large amount of cash flow-in that can meet the capital need for enlarging the core business of real estate on one hand and can improve the ability of paying debt of the Company, ability of anti-risk and descend the financial risk on the other hand. The core business from petrochemical business is higher, taking by 52.37% of income from core business of the Company. But on profit contribution, petrochemical business takes lower proportion in consolidated profit of the Company and the proportion in profit of the Company from 2001 to 2003 was respectively 17.59%, 15.04% and 10.96%. So, transfer of equity of CMP has some influence on the income from core business of the Company, but because CMP took lower proportion in profit of the Company, it has not large influence on the profit of the Company. III. Significant related transaction (I) Related transaction caused by transfer of assets and equity 1. Purchase 50% equity of China Merchants Zhangzhou CMB Real Estate Development Co., Ltd. and increase investment for it The Company held the 7th meeting of the 4th Board on Apr. 10, 2003, that approved the proposal and agreed that the Company purchased 45% and 5% equity of Zhangzhou CMB Real Estate Co., Ltd. (hereinafter referred to as CMB Real Estate Company) held by CM Zhangzhou Development Zone Co., - 23 - Ltd. (hereinafter referred to as Zhangzhou Development Zone) and CM Zhangzhou Development Zone Public Utility Co., Ltd. (hereinafter referred to as Public Utility Company). After the transfer, the Company and Zhangzhou Development Zone respectively added investment amounting to RMB 15 million to CMB Real Estate Company in cash. After increasing investment, the registered capital of CMB Real Estate Company was RMB 50 million and it changed the name into Zhangzhou CM Real Estate Co., Ltd.. CMG holds 71.05% equity of Zhangzhou Development Zone and the actual controller of the Company is CMG, so there exists associated relationship between Zhangzhou Development Zone and the Company. Public Utility Company is the state-owned public institution of the Management Committee of Zhangzhou Development Zone. Director of the Management Committee and legal representative of Zhangzhou Development Zone are Mr. Fu Yuning. So, there exists associated relationship between Zhangzhou Development Zone and Public Utility Company and Zhangzhou Development Zone has associated relationship with the Company. So, the above equity transfer belongs to related transaction. The price of the related transaction referred to validation report of net assets issued by Shenzhen Nanfang Minhe Certified Public Accountants, assets assessment report issued by Zhongtongcheng Assets Assessment Co., Ltd. and the auditor’s report issued by Zhangzhou Zhongcheng Certified Public Accountants Ltd. (the basic date of the reports is Nov. 30. 2002) and the total amount of transfer is RMB 9,599,200. Ended as at July 11, 2003, the above equity transfer, increasing investment to CMB Real Estate Company and the change of its name have been finished and the procedure of change of industrial and commercial also has been completed. At present, the name of CMB Real Estate Company has been changed into Zhangzhou CM Real Estate Co., Ltd. and its registered capital has been increased from RMB 20 million and RMB 50 million. Purchasing 50% equity of CMB Real Estate Company made the Company successfully participate by share CMB Real Estate Company and it made CMB Real Estate Company and the Company have complementary advantages and strengthened the market competition ability of CMB Real Estate Company and settled base for the Company’s entering the real estate market of Fujian Province. 2. CMRE’s purchasing land use right of CMSIZ totaling 268,444.67 sq.m. On Nov. 25, 2003, the 12th meeting of the 4th Board and the 10th meeting of the Supervisory Committee of the Company examined and approved Proposal on CMRE’s Purchasing Land Use Right of CMSIZ. On Nov. 25, 2003, CMRE signed Transfer Agreement of Land Use Right with CMSIZ and will purchase land use right of CMSIZ totaling 268,444.67 sq.m. and the transfer amount is RMB 292 million. On Dec. 27, 2003, the Company held the 2nd Temporary Shareholders’ Meeting in 2003 that examined and approved Proposal on CMRE’s Purchasing Land Use Right of CMSIZ. Ended as at the disclosure date of the report, CMRE paid all transfer amount in cash. CMSIZ is the biggest shareholder of the Company and the Company holds 95% equity of CMRE and is the controlling shareholder of CMRE, so the above transfer of land use right belongs to related transaction. The price of the above transfer of land use right is based on the land price standard stated in Public Notice of Shenzhen Layout & Land Resource Bureau on Published Market Land Price Standard in 2002 of Shenzhen Special Economic Zone (Joint Communique of Shenzhen People’s Government No. 29 in 2002) and was negotiated and ensured by the two parties. There are mainly Jingshan Villa operated by CMRE, Warmart Marketplace, several office buildings and other lease property with good quality on the land involved in the related transaction. Because property right of objects on land is separated from land use right, CMRE must pay land use expense to CMSIZ. After completion of the transaction, CMRE will own the completed property right of objects on land and never pay relevant land use right to CMSIZ (The left land totally 911.44 million sq.m. belongs to temporary use land and need to be paid land use expense amounting to RMB 7,151,200). Meanwhile, after CMRE obtained the above land use right, land use right is confirmed as lease development product (inventory) and its cost amounting to RMB 292 million is amortized according to the left year-limit of land use right of every property and it will benefit for reduction of the operation cost of the Company. After completion of this transaction, cash assets of the Company decreases RMB 292 million and inventory increases RMB 292 million and assets structure has no significant change. Calculating based on the situation of assets and liabilities by the end of 2002, after the transaction, the liabilities/assets ratio and liquidity ratio of the Company have no change, quick ratio has a little drop, so the transaction has no - 24 - clear influence on the financial situation of the Company. 3. Lease assets to CM Harbor (Shenzhen) Co., Ltd. On Nov. 25, 2003, the 12th meeting of the 4th Board and the 10th meeting of the 4th Supervisory Committee examined and approved proposal on continuing to lease assets to CM Harbor (Shenzhen) Co., Ltd.. On Nov. 25, 2003, the Company signed Assets Lease Contract with CM Harbor (Shenzhen) Co., Ltd. (hereinafter referred to as CMH) and the Company will lease 92 assets that is relevant with harbor business including office building, warehouse, dorm, road, construction in progress, guide sign and other harbor equipments to CMH and the rent is RMB 884,156.56 every month. CMSIZ is the biggest shareholder of the Company, CM International Co., Ltd. totally holds 100% equity of CMH in direct and indirect way and the principal shareholder of CMSIZ and CMH is CMG, so the above assets lease belongs to related transaction. The price of the transaction considered the integrated cost, market need, market price and so on of the leased assets, referred to depreciation of assets and relevant tax. Relevant land use expense, property management expense, repair expense, labor expense and so on are undertaken by CMH. The transaction is continuing of the last assets lease and descends the cost of operation and management of the Company and benefit for the long-term development of the Company. 4. Transfer 30% equity of Shenzhen China Merchants Logistics Co., Ltd. On May 30, 2003, the Company, CML and Shenzhen Anda Marines Co., Ltd. signed contract of equity transfer and transferred 30% equity of Shenzhen China Merchants Logistics Co., Ltd. held by the Company to CML and Shenzhen Anda Marine Co., Ltd., among of it, 20% for CML and 10% for Anda Marines. The price of equity transfer is based on the assessment value of net profit dated Sep. 30, 2002, the basic date of assessment of Shenzhen China Merchants Logistics Co., Ltd. and the transfer price is respectively RMB 2,619,980 and RMB 1,309,990. The trade is settled in cash. In Aug. 2003, Shenzhen China Merchants Logistics Co., Ltd. finished procedure of change of industrial and commercial register. (II) Current of credit and debt and guarantee of the Company and related parties (including the subsidiaries not in consolidated scope) 1. Ended as at Dec. 31, 2003, CMSIZ provided guarantee amounting to RMB 202.97 million for the Company. 2. Ended as at Dec. 31, 2003, the Company should pay RMB 5,067,000 to its related company, Shenzhen CM Innovation Co., Ltd.. 3. Ended as at Dec. 31, 2003, the Company should pay RMB 308,472,600 to its controlling shareholder, CMSIZ. 4. Ended as at Dec. 31, 2003, the Company should pay RMB 120,059,400 to its related company, CML. The above events have no significant influence on the Company. (III) Other related transaction 1.CMWS started to provide the Company’s control shareholder, CMSIZ, and its controlled subsidiaries with water for living and production as early as its establishment before being the subsidiary of the Company. All water supplies in Shekou Industrial Zone were undertaken by CMWS at the absolute public market price. 2.CMPS started to provide the Company’s control shareholder, CMSIZ, and its subsidiaries with power for living and production as early as its establishment before being the subsidiary of the Company. All power supplies in Shekou Industrial Zone were undertaken by CMPS at the absolute public market price. 3.Related transaction of land using Facilities, equipments and offices of the Company’s power and water supply business as well as most rented property of the Company were located in Shekou, major bases of the business of storage and operation of petrochemical oil and gas were also within the Shekou Industrial Zone, so the Company and its subsidiaries above-mentioned started to lease the land from CMSIZ since their establishment. In the year 2003, land use fee of the Company and its controlled subsidiaries totaled RMB 16,661,608. IV. Material contract and the implementation (I) The Company did not entrust, contract or lease assets of other companies in the report period. (II) Significant guarantee According to Notification on Problems of Standardizing Capital Current of Listed Companies and Related Parties and Guarantee of Listed Companies for External Parties (ZJF [2003] NO. 56), in the report period, the Company checked its capital current with related parties and its guarantee for external - 25 - parties by themselves. The controlling shareholder of the Company and other related parties have no behaviors of occupying capital of the Company and the Company has never provided capital to the controlling shareholders and other related parties for use directly and indirectly. All guarantee of the Company for external parties are guarantee for the share-controlling subsidiaries or guarantee the share-controlling subsidiaries provided for its subsidiaries. Details is in the following list (unit: ’0000) Relationship of Proportion in net Name of guaranteed guaranteed Guarantee company Guarantee amount assets of the companies companies and the Company Company Share-controlling CMRE The Company 12,198.95 3.91% subsidiary of the Company Share-controlling Shekou Xinhua CMRE 896.41 0.29% subsidiary of Industrial Co., Ltd. CMRE Total 13,092.36 4.20% (III) The Company had no entrusted financing in the report period. (IV) Other significant contracts in the report period 1. The Company signed circling loan contract of 60 million USD or equivalent to HKD with the bank group whose lead bank was Holand Commercial Bank Shanghai Branch and the loan term was from Aug. 24, 2003 to Aug. 24, 2004. 2. CMRE, a subsidiary of the Company, singed Credit Extension Contract with Bank of China for RMB 450 million commencing from Dec. 31, 2002 to Dec. 30, 2005. 3. CMRE, a subsidiary of the Company, singed Credit Extension Contract with Merchants Bank for RMB 450 million commencing from Sep. 10, 2003 to Sep. 10, 2006. 4. CMRE, a subsidiary of the Company, singed Credit Extension Contract with Industrial and Commercial Bank for RMB 800 million commencing from July 18, 2003 to July 17, 2005. 5. CMRE, a subsidiary of the Company, singed Credit Extension Contract with Agriculture Bank for RMB 200 million commencing from July 13, 2001 to July 12, 2004. 6. CMRE, a subsidiary of the Company, singed Credit Extension Contract with Shenzhen Development Bank for RMB 400 million commencing from Sep. 13, 2002 to Sep. 12, 2004. 7. CMRE, a subsidiary of the Company, singed Credit Extension Contract with Minsheng Bank for RMB 200 million commencing from Sep. 26, 2003 to Sep. 25, 2004. The Company provided guarantees for the above Credit Extension Contracts signed by CMRE and the banks. Except above contracts, the Company had no contracts involving amount over 10% of net assets of the Company. V. Commitment CMSIZ, the control shareholder of the Company, promised not to engage in any business or activities possibly competing with the Company in terms of business, new commodities and new technology in any forms (including but not limited to direct operation, indirect operation, joint investment). It also promised to urge its wholly or partially (over 50% equity) owned subsidiaries and actually controlled affiliates to follow the promise. In the report period, the control shareholder strictly implemented such commitment. VI. Engagement and Disengagement of Certified Public Accountants The Company engaged Deloitte Touche Tohmatsu Certified Public Accountants ltd. as domestic auditors and Deloitte Touche Tohmatsu Certified Public Accountants as overseas auditors of the Company from Nov. 30, 2001. They have provided the audit service for the Company for 3 years. In the report period, the Company should pay audit expense amounting to RMB 0.9 million to Deloitte Touche Tohmatsu Certified Public Accountants ltd. and HKD 1.38 million to Deloitte Touche Tohmatsu Certified Public Accountants for 2003. VII. Neither the Company, nor its Board or directors were criticized or punished by relevant securities authorities in the report period. VIII. Other significant matters (I) Change of shares held by the principal shareholder In the report period, the controlling shareholder of the Company, CMSIZ, purchased Hong Kong Panorama Investment Ltd., Foxtrol International Ltd. and Orienture Investment Ltd. and indirectly held - 26 - 239,388,525 shares of the Company. Ended as of the report period, CMSIZ directly and indirectly holds 46.42% equity of the Company. On Sep. 13, 2003, CMSIZ disclosed Report of Change of Shares Held by Shareholders on the equity change. On Oct. 21, 2003 and Nov. 19, 2003, the Company early or late published Suggestive Public Notice on CMSIZ’ Applying for Releasing Offer Purchase to CSRC and Public Notice on CSRC’s Releasing Duty of Purchasing Shares of the Company in Offer of the Principal shareholder CMSIZ. The disclosure newspapers of the above information are China Securities, Securities Times and Ta Kung Pao. (II) Important land reserve On Sep. 26, 2003, the Company’s subsidiary, CMRE, participated in inviting public bidding of use right of state-owned land held by Shanghai Songjiang District House & Land Management Bureau and obtained the use right of Land No. 1 in Huting North Road, Songjiang District, Shanghai totally 134,634 sq.m. as the bidding price amounting to RMB 161.56 million. On Oct. 16, 2003, the Company signed Agreement of Allocation and Compensation of Land for Use of Virescence and Separation District in Liuquan Village with Beijing South Pole Stat Investment Management Co., Ltd. on the land totally 234,664 sq.m. and the compensation expense the Company should need to pay is totally RMB 315.68 million. In Jan. 2004, Beijing Municipal Government promulgated Supplemental Provision on Stopping Agreement Transfer of State-owned Land Use Right in Operating Items and the land used in this project is still under verification of relevant deparments. On Oct. 17, 2003, the Company’s subsidiary, CMRE, attended the public sale of land use right that Shenzhen New Asia Industrial Investment Co., Ltd. entrusted Shenzhen Land Trade Center to hold and obtained the use right of land totally 150,443 sq.m. in Center Town, Longgang District, Shenzhen, whose land serial number was G01022-0003, and the constructions and attached objects on land as RMB 174.50 million. On Dec. 31, 2003, the Company’s subsidiary, CMRE, attended the public sale of Land A012-0068 in Jiangang Mountain, Baoan District in the way of joint competitive bidding with Shenzhen OCT Real Estate Co., Ltd. and the investment proportion of the two parties was 5:5 and finally obtained the land with acre of 213,183 sq.m. as RMB 580 million. On Dec. 23, 2003, the Company’s subsidiary, CMRE, obtained Land 2003-049 in Feie Ling, Panyu District, Guangzhou, that was hung out shingle for sale by means of competitive bidding and the acre of land for use was 835,533 sq.m. (including the acre of supporting land totally 92,000 sq.m.) and the trade price was RMB 668.80 million. This project is jointly developed by the Company and other companies by means of jointly establishing joint venture and relevant condition shall be timely disclosed while joint venture’s establishment. Section XI. Financial Report (Refer to attachment) Section XII. Documents for Reference 1. Financial Statements with signatures and seals of the legal representative, Chief Accountant and person in charge of accounting affairs. 2. Original of the Auditors’ Report with seal of Certified Public Accountant and signatures of certified public accountants. 3. Original of all documents and announcements publicly disclosed in the newspapers designated by CSRC in 2003. 4. English version of 2003 Annual Report. Board of Directors of China Merchants Shekou Holdings Co., Ltd. March 9, 2004 - 27 - AUDITORS' REPORT TO THE SHAREHOLDERS OF CHINA MERCHANTS SHEKOU HOLDINGS COMPANY, LIMITED 招商局蛇口控股股份有限公司 (A joint stock company with limited liability established in The People's Republic of China) We have audited the accompanying balance sheet of China Merchants Shekou Holdings Company, Limited as of December 31, 2003 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these 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 the 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 financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2003 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. Deloitte Touche Tohmatsu March 5, 2004 - 28 - CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2003 NOTES 2003 2002 Rmb Rmb Revenue 3 4,751,795,645 3,805,477,315 Cost of sales (4,102,298,506) ____________ (3,276,355,782) ____________ Gross profit 649,497,139 529,121,533 Other operating income 5 15,770,259 10,026,221 Dividend income from available-for-sale investments 5,980,118 4,081,679 Interest income and foreign exchange gains 4,677,187 8,295,115 Distribution costs (21,235,128) (19,559,953) Administrative expenses (118,749,482) (111,493,230) Other operating expenses 6 (76,772,792) ____________ (70,888,124) ____________ Profit from operations 7 459,167,301 349,583,241 Interest expenses and other finance costs 8 (5,088,038) (11,105,927) Share of results of associates 4,499,139 3,416,702 Loss on disposal of associates (580,478) (2,051,414) Amortisation of goodwill of associates - ____________ (249,737) ____________ Profit before tax 457,997,924 339,592,865 Income tax 9 (105,774,284) ____________ (68,637,698) ____________ Profit after tax 352,223,640 270,955,167 Minority interest (26,849,908) ____________ (23,609,987) ____________ Net profit for the year 325,373,732 ____________ 247,345,180 ____________ Basic earnings per share (restated) 11 0.67 cents ____________ 0.52 cents ____________ - 29 - CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2003 NOTES 2003 2002 Rmb Rmb ASSETS Non-current assets Property, plant and equipment 12 422,613,416 440,507,871 Construction in progress 13 19,214,103 38,623,829 Investment properties 14 1,416,611,756 1,105,684,275 Goodwill 15 759,647,757 808,037,055 Negative goodwill 16 (62,783,638) (66,760,423) Land use rights 17 17,244,562 16,444,654 Investments in associates 19 54,267,115 33,277,724 Interests in a property development project 20 20,014,427 - Available-for-sale investments 21 31,689,195 ____________ 30,181,680 ____________ 2,678,518,693 ____________ 2,405,996,665 ____________ Current assets Inventories 22 108,573,497 66,198,918 Completed properties for sale 396,114,760 220,242,811 Properties under development 23 1,501,561,637 1,598,758,488 Trade and other receivables 24 546,591,726 347,101,786 Amounts due from associates 2,938,545 4,165,439 Bank balances and cash 24 695,034,863 ____________ 608,134,674 ____________ 3,250,815,028 ____________ 2,844,602,116 ____________ Total assets 5,929,333,721 ____________ 5,250,598,781 ____________ - 30 - NOTES 2003 2002 Rmb Rmb EQUITY AND LIABILITIES Capital and reserves Share capital 25 515,685,560 476,396,000 Reserves 26 2,517,131,714 ____________ 1,947,381,467 ____________ 3,032,817,274 ____________ 2,423,777,467 ____________ Minority interests 225,736,181 ____________ 200,962,243 ____________ Non-current liabilities Bank loans - due after one year 27 45,462,725 281,561,556 Rental received in advance 28 6,990,000 7,660,000 Deferred tax liabilities 29 37,195,980 ____________ 27,558,521 ____________ 89,648,705 ____________ 316,780,077 ____________ Current liabilities Trade and other payables 30 1,332,908,273 1,180,406,154 Provision for litigation claims 31 21,850,560 17,790,566 Receipts in advance and deposit received 453,262,880 584,827,120 Amounts due to associates 2,577,732 2,938,647 Tax liabilities 89,418,928 48,201,620 Bank loans - due within one year 27 681,113,188 ____________ 474,914,887 ____________ 2,581,131,561 ____________ 2,309,078,994 ____________ Total equity and liabilities 5,929,333,721 ____________ 5,250,598,781 ____________ The financial statements on pages 2 to 35 were approved and authorised for issue by the board of directors on March 5, 2004 and are signed on its behalf by: ______________________________ ______________________________ DIRECTOR DIRECTOR - 31 - CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2003 Statutory Discretionary Statutory Share Share surplus surplus public Capital Oth capital premium reserve reserve welfare fund surplus reser Rmb Rmb Rmb Rmb Rmb Rmb Rm Balance at January 1, 2002 476,396,000 1,075,150,683 217,528,507 212,559,063 78,631,937 66,373,525 4,244 Exchange differences arising on translation of overseas operations not recognised in the income statement - - - - - - Net profit for the year - - - - - - Transfer to (from) reserves - - 30,835,559 - 19,266,541 - Dividends - ___________ - ____________ - ___________ - ___________ - ___________ - __________ ______ Balance at December 31, 2002 and January 1, 2003 476,396,000 1,075,150,683 248,364,066 212,559,063 97,898,478 66,373,525 4,244 Exchange differences arising on translation of overseas operations not recognised in the income statement - - - - - - Rights issue of shares 39,289,560 311,566,211 - - - - Share issue expenses - (10,954,762) - - - - Net profit for the year - - - - - - Transfer to (from) reserves - - 11,888,458 (72,439,025) 10,613,256 - Dividends - ___________ - ____________ - ___________ - ___________ - ___________ - __________ ______ Balance at December 31, 2003 515,685,560 ___________ 1,375,762,132 ____________ 260,252,524 ___________ 140,120,038 ___________ ___________ 108,511,734 66,373,525 __________ 4,244 ______ CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2003 2003 2002 Rmb Rmb OPERATING ACTIVITIES Profit from operations 459,167,301 349,583,241 Adjustments for: Amortisation of goodwill 52,907,142 49,214,936 Depreciation of property, plant and equipment 52,500,486 51,752,893 Depreciation of investment properties 66,903,432 53,985,470 Depreciation of land use rights 670,092 654,703 Dividends received from available-for-sale investments (5,980,118) (4,081,679) Impairment loss on property, plant and equipment 143,218 465,163 Reversal of impairment losses on property, plant and equipment (463,750) (3,009,259) Reversal of impairment loss on goodwill (4,360,108) - Impairment loss on land use rights - 529,060 Interest income (4,434,917) (7,229,439) Net loss on disposal of property, plant and equipment 99,142 2,906,930 Release of negative goodwill (3,976,785) ____________ (3,871,170) ____________ Operating profit before working capital changes 613,175,135 490,900,849 (Increase) decrease in inventories (41,657,321) 91,852,532 Decrease in completed properties for sale 1,121,016,075 359,285,080 Increase in properties under development (1,198,777,720) (808,894,488) Increase in trade and other receivables (198,058,965) (5,775,403) Decrease (increase) in amounts due from associates 1,226,894 (3,875,968) Decrease in rental received in advance (670,000) (1,110,800) (Decrease) increase in trade and other payables (275,931,179) 343,542,806 Increase in provision for litigation claims 4,059,994 5,990,566 (Decrease) increase in receipts in advance and deposits received (131,564,240) 445,181,854 Decrease in amounts due to associates (360,915) ____________ (11,015,814) ____________ Cash (used in) generated from operations (107,542,242) 906,081,214 Income tax paid (54,919,517) (44,200,025) Interest expenses and other finance costs paid (29,979,935) ____________ (67,958,402) ____________ NET CASH (USED IN) GENERATED FROM OPERATING ACTIVITIES (192,441,694) ____________ 793,922,787 ____________ - 33 - NOTES 2003 2002 Rmb Rmb INVESTING ACTIVITIES Increase in construction in progress (36,661,064) (22,499,268) Additions of property, plant and equipment (32,299,888) (72,285,557) Acquisition of an associate (24,787,914) - Acquisition of interests in a property development project (20,014,427) - Additions of investment properties (11,499,983) (45,345,051) Acquisition of available-for-sale investments (1,507,515) (500,000) Acquisition of additional interest in a subsidiary (4,950,000) - Additions of land use rights (1,470,000) - Net partial proceeds received from proposed disposal of subsidiaries 38 137,005,162 - Dividends received from available-for-sale investments 5,980,118 4,081,679 Interest received 4,434,917 7,229,439 Proceeds from disposal of associates 3,929,970 592,700 Proceeds from disposal of property, plant and equipment 3,809,602 5,829,431 Dividends received from associates 3,787,214 5,205,576 Acquisition of a subsidiary 32 - ____________ 34,882,586 ____________ NET CASH GENERATED FROM (USED IN) INVESTING ACTIVITIES 25,756,192 ____________ (82,808,465) ____________ FINANCING New bank loans raised 2,640,595,365 2,160,000,000 Issue of shares 350,855,771 - Contribution from minority shareholders of a subsidiary 1,500,000 - Repayment of bank loans (2,670,495,895) (2,685,381,399) Dividends paid (57,167,520) (52,403,561) Share issue expenses (10,954,762) - Dividends paid to minority shareholders (747,268) ____________ (1,194,758) ____________ NET CASH GENERATED FROM (USED IN) FINANCING ACTIVITIES 253,585,691 ____________ (578,979,718) ____________ NET INCREASE IN CASH AND CASH EQUIVALENTS 86,900,189 132,134,604 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 608,134,674 ____________ 476,000,070 ____________ CASH AND CASH EQUIVALENTS AT END OF YEAR, represented by bank balances and cash 695,034,863 ____________ 608,134,674 ____________ - 34 - NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 1. GENERAL China Merchants Shekou Holdings Company, Limited is a limited liability company established in The People's Republic of China (the "PRC"). The Company is an investment holding company. The principal activities of its principal subsidiaries are set out in note 18. These financial statements are presented in Renminbi ("Rmb") since that is the currency in which the majority of the Group's transactions are denominated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries) made up to December 31 each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess (deficiency) of the cost of acquisition over (below) the fair values of the identifiable net assets acquired is recognised as goodwill (negative goodwill). The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All significant intercompany transactions and balances between group enterprises are eliminated on consolidation. - 35 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Investments in associates An associate is an enterprise over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associates, less any impairment in the value of individual investments. Any excess (deficiency) of the cost of acquisition over (below) the Group's share of the fair values of the identifiable net assets of the associates at the date of acquisition is recognised as goodwill (negative goodwill). Where a group enterprise transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group's interest in the relevant associate, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment losses. Depreciation is charged so as to write off the cost of property, plant and equipment, other than construction in progress, over their estimated useful lives, taking into consideration of their residual values ranging from 5% to 10% using the straight-line method, on the following bases: Plant and machinery, furniture, fixtures and office equipment 5 - 20 years Buildings, open yards and warehouses 10 - 50 years Ships and motor vehicles 5 - 10 years Water pipes 20 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Construction in progress Construction in progress represents properties under construction and equipment purchased prior to installation and is stated at cost including borrowing costs capitalised in accordance with the Group's accounting policy. Investment property Investment property, which is property held to earn rentals and/or for capital appreciation, is stated at cost less accumulated depreciation and any recognised impairment losses at the balance sheet date. Depreciation is charged so as to write off the cost of investment properties over their estimated useful lives, using the straight-line method, over a period of 20 years. - 36 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an asset and amortised on a straight-line basis over its estimated useful life. Goodwill arising on the acquisition of an associate or a jointly controlled entity is included within the carrying amount of the associate or jointly controlled entity. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal. - 37 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Negative goodwill Negative goodwill represents the excess of the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition over the cost of acquisition. Negative goodwill is released to income based on an analysis of the circumstances from which the balance resulted. To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised in income immediately. Negative goodwill arising on the acquisition of an associate or a jointly controlled entity is deducted from the carrying value of that associate or jointly controlled entity. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets. Land use rights Land use rights are stated at cost less depreciation and accumulated impairment losses. Depreciation is charged so as to write off the cost of land use rights, using the straight-line method, over the respective periods of the grants. Interests in property development project Interests in property development project are stated at cost less any recognised impairment losses. Investments in securities Investments in securities are recognised on a trade-date basis and are initially measured at cost. At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost, less any impairment loss recognised to reflect irrecoverable amounts. The annual amortisation of any discount or premium on the acquisition of a held-to-maturity security is aggregated with other investment income receivable over the term of the instrument so that the revenue recognised in each period represents a constant yield on the investment. Investments other than held-to-maturity debt securities are classified as either held-for-trading or available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in net profit or loss for the period. - 38 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Inventories Inventories are stated at the lower of cost and net realisable value. Cost, comprises direct materials purchase and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Costs is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Completed properties for sale Completed properties for sale are stated at the lower of cost and net realisable value. Cost is determined by apportionment of the total land and development costs attributable to unsold properties. Net realisable value is determined by reference to management estimates based on prevailing market conditions. Properties under development Properties under development are stated at cost less any recognised impairment loss. Cost includes development expenditure, professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group's accounting policy. Depreciation of these assets commences when the assets are ready for their intended use. Trade receivables Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade payables Trade payables are stated at their nominal value. Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group's obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plan. - 39 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in the outflow of economic benefits that can be reasonably estimated. - 40 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Rental received in advance Rental received in advance comprises fee received for granting of operating leases for the use of the Group's properties. The fees received are recognised as revenue over the period of the leases on a straight-line basis from the date of commencement of the leases. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in the net profit or loss in the period in which they are incurred. Government grants Value added tax refund of imported electricity charges and government grants on water charges are recognised as income over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Operating leases Rentals payable under operating leases are charged to income on a straight line basis over the term of the relevant lease. Foreign currencies Transactions in currencies other than Renminbi are initially recorded at the rates of exchange prevailing on dates of the transactions. Monetary assets and liabilities denominated in such currencies are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the year. On consolidation the assets and liabilities of the Group's Hong Kong and overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group's exchange reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. - 41 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Revenue recognition Sales of goods are recognised when goods are delivered and title has passed. Rental income from investment properties is recognised on a straight-line basis over the terms of the relevant leases. Revenue arising from the development properties for sale is recognised upon the sale of properties or the issuance of the completion certificate by the relevant government authority, whichever is later. Deposits received on properties sold prior to the date of recognition of revenue are included in the balance sheet under current liabilities. Revenue arising from the provision of water supply and electricity supply is recognised on delivery of the services to customers. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Dividend income from investments is recognised when the shareholders' rights to receive payment have been established. 3. REVENUE An analysis of the Group's revenue is as follows: 2003 2002 Rmb Rmb Sales of petrochemical products 2,531,477,609 2,350,682,237 Property development 1,391,045,788 685,371,907 Investment property 190,852,331 178,296,965 Electricity supply 566,381,231 537,136,527 Water supply 72,038,686 ____________ 53,989,679 ____________ 4,751,795,645 ____________ 3,805,477,315 ____________ - 42 - 4. SEGMENT REPORTING Segment information is presented in respect of the Group's business segments, which are determined based on the Group's management and internal reporting structure. The Group's activities are principally performed in the PRC (including Hong Kong) and the overseas segment does not have significant impact on the Group's revenue, results and assets. Inter-segment pricing is determined on prices negotiated and agreed by both parties. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise corporate assets and expenses. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year. Business segments The Group comprises the following main business segments: Trading: Sales of petrochemical products Property development: The construction and development of properties for sales Investment property: Property rental Electricity supply: Supply of electricity Water supply: Supply of water The number of employees for each of the Group's business segments was as follows: 2003 2002 Trading 922 830 Property development 436 148 Investment property 20 20 Electricity supply 94 94 Water supply 111 109 Head office and administration 19 _______ 16 _______ 1,602 _______ 1,217 _______ Segment information about these business is presented below. - 43 - CHINA MERCHANTS SHEKOU HOLDINGS COMPANY, LIMITED 招商局蛇口控股股份有限公司 4. SEGMENT REPORTING - continued Property Investment Electricity Trading development property supply Water supply 2003 2002 2003 2002 2003 2002 2003 2002 2003 Rmb Rmb Rmb Rmb Rmb Rmb Rmb Rmb Rmb Revenue External 2,531,477,609 2,350,682,237 1,391,045,788 685,371,907 190,852,331 178,296,965 566,381,231 537,136,527 72,038,686 53 Inter- segment sales - ____________ - ____________ - ____________ - ____________ 1,516,910 ____________ - ____________ 9,601,214 ___________ 9,920,740 ___________ 48,081 __________ ___ Total revenue 2,531,477,609 ____________ 2,350,682,237 ____________ 1,391,045,788 ____________ 685,371,907 ____________ 192,369,241 ____________ 178,296,965 ____________ 575,982,445 ___________ 547,057,267 ___________ 72,086,767 __________ 54 ___ Results Segment results 60,154,334 ____________ 57,691,481 ____________ 228,494,684 ____________ 161,838,920 ____________ 64,748,247 ____________ 21,029,916 ____________ 110,990,040 ___________ 125,678,160 ___________ (2,799,316) __________ 3 ___ Net unallocated income Net unallocated expenses Profit from operations Finance costs - - - - - - - - - Share of results of associates 2,119,310 353,278 444,744 3,063,424 1,935,085 - - - - Loss on disposal of associates - (2,051,414) - - (580,478) - - - - Amortisation of goodwill of associates - - - - - - - - - Income tax - - - - - - - - - Minority interests - - - - - - - - - Net profit for the year Other information Segment assets 835,089,681 695,698,478 2,308,177,326 2,195,988,786 1,720,545,364 1,493,461,298 417,204,751 422,408,421 137,734,753 98 Investments in associates 6,950,181 13,236,573 36,322,736 20,041,151 10,994,198 - - - - Unallocated assets Consolidated total assets Segment liabilities 234,309,535 320,395,750 1,112,460,952 1,103,513,910 405,974,047 286,302,098 20,803,082 25,039,168 43,080,562 19 Unallocated liabilities Consolidated total liabilities Capital expenditure 16,262,412 ____________ 24,270,436 ____________ 15,847,348 ____________ 46,027,676 ____________ 313,952,810 ____________ 45,890,028 ____________ 28,989,618 ___________ 17,023,398 ___________ 5,834,243 __________ 6 ___ Depreciation and amortisation 16,033,812 ____________ 18,202,889 ____________ 8,538,647 ____________ 11,949,556 ____________ 68,708,902 ____________ 53,985,470 ____________ 14,714,943 ___________ 10,188,662 ___________ 12,077,706 __________ 12 ___ Amortisation of goodwill 9,281,083 ____________ 10,346,567 ____________ 27,611,915 ____________ 22,854,225 ____________ - ____________ - ____________ 16,014,144 ___________ 16,014,144 ___________ - __________ ___ Release of negative goodwill - ____________ - ____________ - ____________ - ____________ - ____________ - ____________ - ___________ - ___________ (3,976,785) __________ (3 ___ Impairment losses on property, plant and equipment 143,218 ____________ 465,163 ____________ - ____________ - ____________ - ____________ - ____________ - ___________ - ___________ - __________ ___ Inter-segment sales are charged at prevailing market rates. 5. OTHER OPERATING INCOME 2003 2002 Rmb Rmb Other sundry income 7,135,933 5,492,554 Reversal of impairment loss on goodwill 4,360,108 - Release of negative goodwill 3,976,785 3,871,170 Profit on disposal of property, plant and equipment 297,433 662,497 __________ __________ 15,770,259 10,026,221 __________ __________ __________ __________ 6. OTHER OPERATING EXPENSES 2003 2002 Rmb Rmb Amortisation of goodwill 52,907,142 49,214,936 Provision for litigation claims 21,850,560 13,536,061 Other sundry expenses 1,361,783 820,837 Loss on disposal of property, plant and equipment 396,575 3,569,427 Impairment loss on property, plant and equipment 143,218 465,163 Customs duty and value added tax relating to prior years 113,514 3,281,700 __________ __________ 76,772,792 70,888,124 __________ __________ __________ __________ 7. PROFIT FROM OPERATIONS 2003 2002 Rmb Rmb Profit from operations has been arrived at after charging (crediting): Depreciation 120,074,010 106,393,067 Value added tax refund of imported electricity charges (32,249,341) (33,161,389) ___________ ___________ ___________ ___________ Interest income 4,434,917 7,229,439 Foreign exchange gains 242,270 1,065,676 ___________ ___________ - 45 - 4,677,187 8,295,115 ___________ ___________ ___________ ___________ Staff costs: Wages and salaries 76,105,062 63,343,505 Retirement costs 4,421,904 4,071,762 Other staff costs 7,313,310 11,445,774 ___________ ___________ 87,840,276 78,861,041 ___________ ___________ ___________ ___________ - 46 - 8. INTEREST EXPENSES AND OTHER FINANCE COSTS 2003 2002 Rmb Rmb Interest on bank loans and other borrowings 29,515,646 67,765,995 Less: interest capitalised in the cost of qualifying assets (25,785,206) (57,358,476) __________ __________ Interest expenses 3,730,440 10,407,519 Foreign exchange losses 893,309 506,001 Other finance costs 464,289 192,407 __________ __________ 5,088,038 11,105,927 __________ __________ __________ __________ Interest capitalised in the cost of qualifying assets during the year arose on specific borrowing for expenditure on such assets. 9. INCOME TAX 2003 2002 Rmb Rmb Current tax: - PRC 99,225,690 71,206,802 Overprovision in prior years: - Overseas (3,088,865) (389,758) ___________ __________ 96,136,825 70,817,044 Deferred tax (note 29): - Current year charge (credit) 9,637,459 (2,179,346) ___________ __________ 105,774,284 68,637,698 ___________ __________ ___________ __________ The income tax rates applicable to the entities in the Group are as follows: The Company and its subsidiaries in the PRC 15% A subsidiary in Singapore 26% - 47 - 9. INCOME TAX - continued The following is a reconciliation of income tax calculated at the applicable tax rates: 2003 2002 Rmb Rmb Profit before tax 457,997,924 339,592,865 ___________ ___________ ___________ ___________ Income tax computed by applying tax rate of 15% 68,699,689 50,938,930 Effect on share of results of associates (674,871) (752,791) Effect of non-deductible expenses 39,001,567 19,095,337 Effect of non-taxable income (1,250,534) (588,597) Effect of different tax rates in other jurisdictions (1,567) (55,181) ___________ ___________ Income tax 105,774,284 68,637,698 ___________ ___________ ___________ ___________ 10. DIVIDENDS During 2003, a dividend of Rmb12 cents (2002: Rmb11 cents) per share was paid to shareholders. In respect of the current year, the directors propose that a dividend of Rmb10 cents per share and a bonus issue of two new shares of Rmb1 each credited as fully paid for every ten shares held by the shareholders. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The total estimated cash dividend to be paid is Rmb52 million. 11. BASIC EARNINGS PER SHARE The calculation of basic earnings per share is based on net profit for the year of Rmb325,373,732 (2002: Rmb247,345,180) and on the weighted average of 483,185,300 (2002: 479,562,598) shares in issue during the year. The weighted average number of shares for the purpose of basic earnings per share has been adjusted for the effect of the rights issue as set out in note 25. - 48 - No diluted earnings per share is presented since there are no dilutive potential ordinary shares in existence during the years ended December 31, 2003 and December 31, 2002. - 49 - 12. PROPERTY, PLANT AND EQUIPMENT Plant and machinery, furniture, Buildings, fixtures open yards Ships and and office and motor Water equipment warehouses vehicles pipes Total Rmb Rmb Rmb Rmb Rmb COST At January 1, 2003 232,226,462 261,682,384 59,825,244 166,188,094 719,922,184 Additions 16,994,746 10,748,859 4,556,283 - 32,299,888 Transfer from construction in progress 47,936,862 5,794,305 - 1,622,365 55,353,532 Transfer to investment properties - (70,361,507) - - (70,361,507) Disposals (2,594,566) (1,985,421) (2,227,030) (81,022) (6,888,039) ___________ ___________ __________ ___________ ___________ At December 31, 2003 294,563,504 205,878,620 62,154,497 167,729,437 730,326,058 ___________ ___________ __________ ___________ ___________ ACCUMULATED DEPRECIATION AND IMPAIRMENT At January 1, 2003 107,602,258 79,916,092 30,070,191 61,825,772 279,414,313 Charge for the year 26,238,474 14,326,447 6,999,568 4,935,997 52,500,486 Impairment losses 10,500 44,281 88,437 - 143,218 Reversal of impairment losses - - (463,750) - (463,750) Transfer to investment properties - (20,902,330) - - (20,902,330) Eliminated on disposals (1,076,124) (155,713) (1,747,458) - (2,979,295) ___________ ___________ __________ ___________ ___________ At December 31, 2003 132,775,108 73,228,777 34,946,988 66,761,769 307,712,642 ___________ ___________ __________ ___________ ___________ CARRYING AMOUNT At December 31, 2003 161,788,396 132,649,843 27,207,509 100,967,668 422,613,416 ___________ ___________ __________ ___________ ___________ ___________ ___________ __________ ___________ ___________ At December 31, 2002 124,624,204 181,766,292 29,755,053 104,362,322 440,507,871 ___________ ___________ __________ ___________ ___________ ___________ ___________ __________ ___________ ___________ - 50 - The Group has pledged certain of its properties with an aggregate net book value of approximately Rmb12 million (2002: Rmb12 million) to banks as security for bank loans. As part of the process of establishing the Company as a joint stock company in 1992, property, plant and equipment was valued by Zhong Hua (Shekou) Certified Public Accountants as at April 30, 1992. Pursuant to the approval document being issued by the Shenzhen Municipal Government Office on January 27, 1993, this valuation has been reflected in these financial statements as the deemed cost base of the assets of the Company upon its formation. Buildings, open yards and warehouses of Rmb49 million (2002: Rmb77 million) were under the process of obtaining land use right certificate as of December 31, 2003. Because of technical obsolescence of certain property, plant and equipment, the directors consider that there had been an impairment loss on property, plant and equipment in respect of the trading segment. These assets were scrapped and an impairment loss in the amount of their previous carrying amount of Rmb143,218 (2002: Rmb465,163) was recognised. - 51 - 13. CONSTRUCTION IN PROGRESS Buildings Plant and and Water machinery warehouses pipes Total Rmb Rmb Rmb Rmb COST At January 1, 2003 24,343,519 12,371,661 1,908,649 38,623,829 Additions 27,393,879 4,551,376 4,715,809 36,661,064 Transfer to property, plant and equipment (47,936,862) (5,794,305) (1,622,365) (55,353,532) Disposals - (717,258) - (717,258) __________ __________ _________ __________ At December 31, 2003 3,800,536 10,411,474 5,002,093 19,214,103 __________ __________ _________ __________ __________ __________ _________ __________ There was no significant amount of interest capitalised in construction in progress for both years. 14. INVESTMENT PROPERTIES Rmb COST At January 1, 2003 1,417,369,236 Additions 303,499,983 Transfer from property, plant and equipment 49,459,177 Transfer from properties under development 24,871,753 ____________ At December 31, 2003 1,795,200,149 ____________ ACCUMULATED DEPRECIATION At January 1, 2003 311,684,961 Charge for the year 66,903,432 ____________ At December 31, 2003 378,588,393 ____________ CARRYING AMOUNT At December 31, 2003 1,416,611,756 ____________ ____________ At December 31, 2002 1,105,684,275 ____________ ____________ - 52 - The property rental income earned by the Group from its investment properties, all of which is leased out under operating leases, amounted to approximately Rmb190 million (2002: Rmb178 million). Direct operating expenses arising on the investment properties in the period amounted to approximately Rmb107 million (2002: Rmb110 million). Investment properties of Rmb419 million (2002: Rmb378 million) are under the process of obtaining land use right certificate as of December 31, 2003. The fair values of investment properties are approximately Rmb2,221,512,000 (2002: Rmb1,910,585,000) as of the balance sheet date in accordance with directors' estimation. - 53 - 15. GOODWILL Rmb COST At January 1, 2003 981,181,175 Additions 157,736 ___________ At December 31, 2003 981,338,911 ___________ AMORTISATION AND IMPAIRMENT At January 1, 2003 173,144,120 Charge for the year 52,907,142 Reversal of impairment loss (4,360,108) ___________ At December 31, 2003 221,691,154 ___________ CARRYING AMOUNT At December 31, 2003 759,647,757 ___________ ___________ At December 31, 2002 808,037,055 ___________ ___________ Goodwill is amortised over its estimated useful life. The foreseeable life of the goodwill arising on past acquisitions ranges from 10 to 20 years. An impairment loss on goodwill relating to a subsidiary within the trading segment was made in prior year because of its unsatisfactory financial performance. During the year, the directors considered that such impairment loss of Rmb4,360,108 recognised in prior year should be reversed because of the continually satisfactory improvement in the financial performance of the subsidiary. 16. NEGATIVE GOODWILL Rmb GROSS AMOUNT At January 1, 2003 and December 31, 2003 76,043,294 __________ RELEASED TO INCOME At January 1, 2003 9,282,871 Release during the year 3,976,785 __________ - 54 - At December 31, 2003 13,259,656 __________ CARRYING AMOUNT At December 31, 2003 62,783,638 __________ __________ At December 31, 2002 66,760,423 __________ __________ The negative goodwill is released to income on a straight-line basis over the remaining weighted average useful life of 20 years of the depreciable assets acquired. - 55 - 17. LAND USE RIGHTS Rmb COST At January 1, 2003 21,345,464 Additions 1,470,000 __________ At December 31, 2003 22,815,464 __________ ACCUMULATED DEPRECIATION AMD IMPAIRMENT At January 1, 2003 4,900,810 Charge for the year 670,092 __________ At December 31, 2003 5,570,902 __________ CARRYING AMOUNT At December 31, 2003 17,244,562 __________ __________ At December 31, 2002 16,444,654 __________ __________ The land use rights represent premium paid for using the lands for a term of 30 to 70 years from the date of grant of land use rights certificates. 18. SUBSIDIARIES Details of the Company's principal subsidiaries at December 31, 2003 are as follows: Place of incorporation Proportion (or registration) of ownership Name of subsidiary and operation interest Principal activity % 深圳招商房地產有限公司 PRC 95 Property development and investment 深圳招商供電有限公司 PRC 99.75 Supply of electricity - 56 - 深圳招商石化有限公司 PRC 75 Trading of petrochemical products 深圳招商供水有限公司 PRC 99.75 Supply of water 招商港務(新加坡)有限公司 Singapore 100 Inactive 深圳黃金台實業有限公司 PRC 100 Property development and management During the year, Eureka Investment Co., Ltd., a wholly-owned subsidiary of the Company, acquired the remaining 10% issued share capital of 深圳黃金台實業有限公司 from third parties and 深圳黃金台實業有限 公司 became a wholly owned subsidiary of the Group at December 31, 2003. - 57 - 19. INVESTMENTS IN ASSOCIATES 2003 2002 Rmb Rmb Share of net assets other than goodwill 54,267,115 33,277,724 __________ __________ Goodwill, net of amortisation Carrying amount at January 1 - 1,748,158 Charge for the year - (249,737) Disposal during the year - (1,498,421) __________ __________ Carrying amount at December 31 - - __________ __________ 54,267,115 33,277,724 __________ __________ __________ __________ Details of the Group's principal associates at December 31, 2003 are as follows: Place of registration Proportion of Name of associate and operation ownership interest Principal activity % 蛇口酒店咨詢培訓服務公司 PRC 42.75 Hotel management and training services 華南液化氣船務公司 PRC 20 Shipping of petrochemical products 深圳招商物業管理有限公司 PRC 39.90 Property management 漳州招商房地產有限公司 PRC 50 Property development 20. INTERESTS IN A PROPERTY DEVELOPMENT PROJECT The amount represents the Group's 65% interest in a property development project. The Group is entitled to a proportionate share of the income received from the sales of completed properties of the development project and bears a proportionate share of the outgoings. - 58 - 21. AVAILABLE-FOR-SALE INVESTMENTS 2003 2002 Rmb Rmb At January 1 30,181,680 33,151,680 Additions 1,507,515 500,000 Disposals - (3,120,000) Transfer to investments in associates - (350,000) __________ __________ At December 31 31,689,195 30,181,680 __________ __________ __________ __________ The available-for-sale investments are unlisted investments in the PRC. The management considers the carrying value approximates their fair values as of the balance sheet date. - 59 - 22. INVENTORIES 2003 2002 Rmb Rmb Raw materials 2,407,843 2,136,357 Finished goods 105,722,934 64,057,935 Spare parts and consumerables 442,720 4,626 ___________ __________ 108,573,497 66,198,918 ___________ __________ ___________ __________ All inventories are carried at cost. 23. PROPERTIES UNDER DEVELOPMENT 2003 2002 Rmb Rmb COST At January 1 1,598,758,488 1,411,532,624 Additions during the year 1,198,777,720 808,894,488 Interest capitalised 25,785,206 57,358,476 Transfer to completed properties for sales (1,296,888,024) (467,444,677) Transfer to investment properties (24,871,753) (211,582,423) ____________ ____________ At December 31 1,501,561,637 1,598,758,488 ____________ ____________ ____________ ____________ 24. OTHER FINANCIAL ASSETS Trade and other receivables comprise: 2003 2002 Rmb Rmb Trade receivables 327,486,278 227,195,653 Other receivables and prepayments 219,105,448 119,906,133 ___________ ___________ 546,591,726 347,101,786 ___________ ___________ ___________ ___________ - 60 - The average credit period is 30 days. An allowance has been made for estimated irrecoverable receivable of Rmb22 million (2002: Rmb14 million). This allowance has been determined by reference to past default experience. The directors consider that the carrying amount of trade and other receivables approximates their fair value. Bank balances and cash comprises cash and short-term deposits held by the group treasury function. The carrying amount of these assets approximates their fair value. - 61 - 24. OTHER FINANCIAL ASSETS - continued Credit risk The Group's credit risk is primarily attributable to its trade and other receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of the current economic environment. The Group generally does not require collateral from its customers and is exposed to credit-related losses in the event of non-performance by customers. However, the Group has no significant concentration of credit risk to individual customers, with exposure spread over a large number of counterparties and customers. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings. 25. SHARE CAPITAL Registered, issued and fully paid up capital consisted of A and B shares of Rmb1 each. A share B Share Total Rmb Rmb Rmb At January 1, 2002, December 31, 2002 and January 1, 2003 287,871,950 188,524,050 476,396,000 Rights issue of shares 39,289,560 - 39,289,560 ___________ ___________ ___________ At December 31, 2003 327,161,510 188,524,050 515,685,560 ___________ ___________ ___________ ___________ ___________ ___________ Pursuant to a resolution passed at the meeting of the shareholders of the Company held on July 18, 2003, the Company issued 39,289,560 new shares of Rmb1 each in the Company at Rmb8.93 per share to the then existing qualifying shareholders by way of 3 rights share for every 10 existing share then held. All shares issued rank pari passu with the then existing shares in all respects. The net proceeds of the rights issue of approximate Rmb339.9 million are used to finance certain properties development projects of the Group. - 62 - 26. RESERVES (a) Statutory surplus reserve According to the current PRC company law and the Company's articles of association, the Company is required to transfer between 10% of its profit after tax to the statutory surplus reserve until the surplus reserve balance reaches 50% of the registered capital. For the purpose of calculating the transfer to this reserve, the profit after tax shall be the amount determined under PRC accounting standards. The transfer to this reserve must be made before the distribution of dividends to shareholders. Statutory surplus reserve can be used to make good previous years' losses, if any, and for capitalisation issues provided that the balance after such issue is not less than 25% of the registered capital. (b) Discretionary surplus reserve The transfer to this reserve is subject to the approval by shareholders at general meetings. Its usage is similar to that of statutory surplus reserve. (c) Statutory public welfare fund According to the current PRC company law and the Company's articles of association, the Company is required to transfer between 5% of its profit after tax to the statutory public welfare fund. For the purpose of calculating the transfer to this reserve, the profit after tax shall be the amount determined under PRC accounting standards. The transfer to this reserve must be made before the distribution of dividends to shareholders. The statutory public welfare fund can only be used for the collective welfare of the Company's employees such as the construction of staff quarters. The reserve forms part of the shareholders' equity as individual employees can only use these facilities, the titles of which will remain with the Company. (d) The amounts transferred to the statutory surplus reserve and statutory public welfare fund for the year ended December 31, 2003 are to be approved at the Company's annual general meeting. (e) Capital surplus As stated in note 12, property, plant and equipment were valued on April 30, 1992 for the purpose of establishing of the Company as a joint stock company. Capital surplus represents the corresponding surplus arising from this valuation which has been reflected as the deemed cost base of the assets of the Company upon its formation. (f) In accordance with the Company's articles of association, the net income for the purpose of appropriation will be deemed to be the lesser of the amounts determined in accordance with PRC accounting standards and regulations and IFRS. - 63 - (g) The Company's distributable reserve computed under PRC accounting standards and regulations as at December 31, 2003 included in the retained earnings amounted to approximately Rmb592 million. - 64 - 27. BANK LOANS 2003 2002 Rmb Rmb Bank loans - unsecured 721,954,876 749,382,900 - secured 4,621,037 7,093,543 ___________ ___________ 726,575,913 756,476,443 ___________ ___________ ___________ ___________ The borrowings are repayable as follows: On demand or within one year 681,113,188 474,914,887 In the second year 541,812 175,000,000 In the third to fifth years inclusive 44,920,913 106,561,556 ___________ ___________ 726,575,913 756,476,443 Less: Amount due for settlement within 12 months (shown under current liabilities) (681,113,188) (474,914,887) ___________ ___________ Amount due for settlement after 12 months 45,462,725 281,561,556 ___________ ___________ ___________ ___________ Over 90% of the unsecured bank loans of Rmb721,954,876 (2002: Rmb749,382,900) bear interest at 1% to 6% (2002: 5% to 6%) per annum which approximate to prevailing market rates. Secured bank loans bear interest at the bank prevailing prime rate plus 1% per annum and are repayable in equal monthly instalments by June 2006. It is secured by a legal mortgage over the leasehold properties of a subsidiary with a carrying amount of approximately Rmb12 million (2002: Rmb12 million). The carrying amounts of secured bank loans approximate fair value because they bear interest at floating rates. The carrying amounts of unsecured bank loans approximate to their fair value. The Group's total bank loans outstanding at December 31 are denominated in the following currencies: 2003 2002 United States of America dollars 86% - Rmb - 94% Hong Kong dollars 13% 5% Singapore dollars 1% 1% _______ _______ Total 100% 100% - 65 - _______ _______ _______ _______ - 66 - 28. RENTAL RECEIVED IN ADVANCE 2003 2002 Rmb Rmb At January 1 7,660,000 8,770,800 Release to income (670,000) (1,110,800) _________ __________ At December 31 6,990,000 7,660,000 _________ __________ _________ __________ 29. DEFERRED TAX The movement for the year in the Group's deferred tax liabilities was as follows: 2003 2002 Rmb Rmb At January 1 27,558,521 29,737,867 Charge for the year 9,637,459 - Write-back during the year - (2,179,346) __________ _________ At December 31 37,195,980 27,558,521 __________ _________ __________ _________ Deferred tax liabilities recognised by the Group are mainly attributable to the temporary differences on property, plant and equipment. There is no significant unprovided deferred tax for the year or at the balance sheet date. 30. OTHER FINANCIAL LIABILITIES Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period is 60 days. The directors consider that the carrying amount of trade payables approximates to their fair value. 31. PROVISION FOR LITIGATION CLAIMS 2003 2002 - 67 - Rmb Rmb At January 1 17,790,566 11,800,000 Provided for the year 21,850,560 13,536,061 Payment for the year (17,790,566) (7,545,495) __________ __________ At December 31 21,850,560 17,790,566 __________ __________ __________ __________ During 2003, claims for compensation have been brought by third parties against the Group relating to the delay in processing of certain building ownership certificate and the improper procurement of water supply from 深圳 市水務(集團)有限公司 , which have been confiscated by the District court in Shenzhen, amounting to approximately Rmb1.6 million and Rmb20.2 million, respectively. The Group is now appealing to the High Court. The outcome of the litigations has yet to be finalised. The Group, after seeking advices from solicitors, have made a provision of approximately Rmb21.8 million. - 68 - 31. PROVISION FOR LITIGATION CLAIMS - continued During 2002, the outcome of litigations in respect of claims for compensation brought by third parties against the Group relating to certain fertilizer materials, which had been confiscated by the Customs in Shekou, PRC, had been finalised. The Group has to pay compensations amounting to approximately Rmb25 million and the amount was fully paid during 2003. 32. ACQUISITION OF A SUBSIDIARY There was no acquisition of subsidiary in 2003. On January 1, 2002, the Group acquired an additional 25.56% interest in an associate 蛇口興華實業股份有限公 司 ("興華"). The Company adopted January 1, 2002 as the acquisition date on which 興華 became a subsidiary of the Group. The acquisition was accounted for using the purchase method of accounting. Net assets acquired Rmb Property, plant and equipment 3,163,320 Investments in associates 1,317,222 Inventories 83,797,180 Trade and other receivables 20,326,338 Bank balances and cash 34,882,586 Bank loans (15,000,000) Trade and other payables (48,271,109) Tax liabilities (533,444) Minority interests (27,752,123) __________ Total consideration 51,929,970 __________ __________ Satisfied by: Other receivables 13,227,768 Investments in associates 38,702,202 __________ 51,929,970 __________ __________ Net cash inflow arising on acquisition: Bank balance and cash acquired 34,882,586 - 69 - __________ __________ - 70 - 33. CONTINGENT LIABILITIES 2003 2002 Rmb Rmb Bills of exchange discounted with recourse 14,526,000 243,864,000 Guarantees given to banks in respect of: - mortgages entered into by customers 1,080,018,000 1,064,178,000 - banking facilities utilised by an investee company - 39,213,000 ____________ ____________ 1,094,544,000 1,347,255,000 ____________ ____________ ____________ ____________ 34. CAPITAL COMMITMENTS 2003 2002 Rmb Rmb Contracted for but not provided in the financial statements in respect of: - acquisition of property, plant and equipment 90,945,000 7,970,000 - construction of properties under development 1,678,961,000 270,765,000 ____________ ___________ 1,769,906,000 278,735,000 ____________ ___________ ____________ ___________ 35. OPERATING LEASE ARRANGEMENTS The Group as lessee: 2003 2002 Rmb Rmb Minimum lease payments under operating leases recognised in income for the year 25,396,959 37,279,115 __________ __________ __________ __________ At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows: 2003 2002 Rmb Rmb - 71 - Within one year 7,808,000 33,506,000 In the second to fifth years inclusive 16,054,000 4,195,000 After five years 43,837,000 7,240,000 __________ __________ 67,699,000 44,941,000 __________ __________ __________ __________ - 72 - 35. OPERATING LEASE ARRANGEMENTS - continued Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for a range of 3 to 18 years and rentals are fixed for an average of 3 years. The Group as lessor: Property rental income earned during the year was approximately Rmb190 million (2002: Rmb178 million). The Group's properties held for rental purposes are expected to generate rental yields of 14 per cent on an ongoing basis. All of the properties held have committed tenants for a range between 1 to 15 years. At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments: 2003 2002 Rmb Rmb Within one year 147,466,000 166,573,500 In the second to fifth years inclusive 144,385,000 2,666,800 After five years 78,722,000 4,996,500 ___________ ___________ 370,573,000 174,236,800 ___________ ___________ ___________ ___________ 36. RETIREMENT BENEFITS PLANS Defined contribution plans The employees of the Group in PRC are members of state-managed retirement benefit schemes operated by the PRC government. The Group is required to contribute a specified percentage of their payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions. The total cost charged to income of approximately Rmb4,422,000 (2002: Rmb4,072,000) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes. - 73 - 37. RELATED PARTY TRANSACTIONS Parties considered to be related to the Company include parties that have the ability, directly or indirectly through one or more intermediaries, to control or exercise significant influence over the financial and operating policies of the Company, or vice versa, or where the Company and the parties are subject to common control or common significant influence. Details of the related parties identified and their relationship with the Company are as follows: Name of Company Relationship with the Company China Merchants Shekou Industrial zone Co., Ltd. ("SIZ") Major shareholder 深圳市招商創業有限公司 ("招商創業") A subsidiary of SIZ 深圳安達貨運有限公司 ("深圳安達") A fellow subsidiary of SIZ 招商港務(深圳)有限公司 ("招商港務") A fellow subsidiary of SIZ 招商局漳州開發區有限公司 ("漳州開發") A fellow subsidiary of SIZ 招商局漳州開發區公用事業公司 ("漳州公用事業") A fellow subsidiary of SIZ 招商局物流集團有限公司 ("招商物流") A subsidiary of SIZ a) At December 31, 2003, a guarantee of Rmb203 million (2002: Rmb355 million) has been given by SIZ to secure bank loans of the Group. b) During 2003, the Group paid rental expenses of Rmb17 million (2002: Rmb37 million) to 招商創業. c) During 2003, the Group received rental income of Rmb11 million (2002: Rmb11 million) from 招商港務. d) At December 31, 2003, trade and other payables included amount due to SIZ of Rmb308 million (2002: nil) and amounts due to subsidiaries of SIZ of Rmb125 million (2002: Rmb79 million). All the above balances with SIZ and its subsidiaries are unsecured, non-interest bearing and have no fixed repayment terms. e) During 2003, the Group paid Rmb292 million to SIZ for the acquisition of land use rights. f) On April 11, 2003, the Company acquired 45% and 5% interest in 漳州招商房地產有限公司 from 漳 州開發 and 漳州公用事業 at a consideration of approximately Rmb8.6 million and Rmb0.9 million, respectively. g) On May 30, 2003, the Company disposed of its 20% and 10% interest in 深圳市招商物流有限公司, an associate of the Company, to 招商物流 and 深圳安達 at a consideration of approximately Rmb2.6 million and Rmb1.3 million, respectively. h) On November 25, 2003, the Company entered into a conditional agreement with SIZ and 招商物流 to dispose of its 10% and 65% interest in 深 圳 招 商 石 化 有 限 公 司 to SIZ and 招 商 物 流 at a consideration of approximately Rmb400 million and Rmb62 million, respectively. The transaction was - 74 - approved by the shareholders in the General Meeting held on February 6, 2004. - 75 - 37. RELATED PARTY TRANSACTIONS - continued The directors are of the opinion that these transactions were concluded based on terms negotiated and agreed with both parties and were entered into in accordance with the relevant agreements. In addition to the above, remuneration paid to directors during the year was Rmb0.78 million (2002: Rmb0.82 million). 38. POST BALANCE SHEET EVENT On November 25, 2003, the Company entered into a conditional agreement with SIZ and 招商物流 to dispose of its 10% and 65% interest in 深圳招商石化有限公司 to SIZ and 招商物流 at a consideration of approximately Rmb400 million and Rmb62 million, respectively, subject to the approval by the shareholders in the General Meeting held on February 6, 2004. The transaction was approved by the shareholders in the above meeting. - 76 -