杭汽轮Ｂ(200771)2003年年度报告（英文版）

HANGZHOU STEAM TURBINE CO., LTD. ANNUAL REPORT 2003 Important Declaration The Board of Directors of the Company guarantees that there are no significant omissions, fictitious or misleading statements in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. The 15th meeting of the 2nd term Board of Directors examined the Annual Report 2003. All of the 11 directors accepted the report collectively. The Chairman Mr. Nie Zhonghai, the General Manager Mr. Yan Jianhuan, the Chief Financial Officer and Chief Accountant Mr. Bo Ronghua, and the Chief Director of Accounting Department Mr. Wu Guomei hereby declares: the Financial Statement in the report is guaranteed to be truthful and complete. This Report is written in English and Chinese. If there is any conflict exists between the two versions, the Chinese version shall prevail. The Board of Directors of Hangzhou Steam Turbine Co., Ltd. April 15, 2004 Table of Contents Chapter I. Company Profile ......................................................................................................2 Chapter II. Financial And Business Data Summary..................................................................3 Chapter III. Change of Share Capital and Shareholders............................................................5 Chapter IV. Particulars about the Directors, Supervisors, Managements and Employees ........8 Chapter V. Management Structure ..........................................................................................10 Chapter VI. Introducing the Shareholders’ General Meeting..................................................12 Chapter VII. Report of the Board of Directors........................................................................14 Chapter VI. Report of the Supervisory Committee .................................................................28 Chapter I. Company Profile (I) Legal Name of the Company Name in Chinese: 杭州汽轮机股份有限公司 Name in English: HANGZHOU STEAM TURBINE CO., LTD Abbreviation in English: HTC (II) Registered Address and Office Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Post Code: 310022 Website: http://www.htc.net.cn (III) Legal Representative: Mr. Nie Zhonghai (IV) The General Manager: Mr. Yan Jianhua (V) Secretary of the Board: Mr. He Jianhang Tel: (0571)85780198 Fax: (0571)85780433 E-mail: he@htc.net.cn Contact address: Securities Office, Hangzhou Steam Turbine Co., Ltd., 357 Shiqiao Rd., Hangzhou City, Zhejiang Security Affair Representative: Mr. Bo Ronghua Tel:(0571)85780422 Fax:(0571)85780433 E-mail: brh@htc.net.cn (VI) Shares Listed in: Shenzhen Stock Exchange Stock Abbreviation: Hangqilun B Stock Code: 200771 (VII) Presses Assigned by National Security Supervisory Committee for Information Disclosure: Press media: Securities Times, Hong Kong Commercial Daily Website: http://www.cninfo.com.cn (VIII) Report prepared and ready for inquire at: Securities Office, Hangzhou Steam Turbine Co., Ltd. (IX) The primary business range of the Company is: designing, manufacturing, selling and service providing of steam turbine and its supplementary equipments, elements and accessories. (X) Supplementary information: 1. Primary business registration of the company is on April 23, 1998 at Zhejiang Provincial Business Administration. With the authorization of the 1st Provisional Shareholders’ General Meeting 1998 held on September 15, 1998, the company changed its property of business into “Sino-foreign joint public company”. (For details about this event please refer to the announcement on Sept. 16th, 1998 issues of Security Times and Hong Kong Commercial Daily titled “The Public Notice of the 1st Provisional Shareholders’ General Meeting 1998” The date of business registration renewed was December 18th, 1998 and at Zhejiang Provincial Business Administration. 2. Business license No. Qi-gu-ze-zong-fu-zi 002150. 3. Tax registration No. 330165704202620 4. Consignee of the non-negotiable stocks: The 140,000,000 non-negotiable state-owned stocks of the company were consigned to: China Securities Depository & Clearing Corporation Ltd. Shenzhen Branch. 5. Public accountants invited: Overseas public accountant: PriceWaterHouseCoopers CPA. Address: 12/F Shui On Plaza, 333 Huai Hai Zhong Road, Shanghai 200021, PRC Telephone: (021) 6386 3388 Fax: (021) 6386 3300 Domestic public accountant: Zhejiang Orient CPA. Address: No. 563 Qingtai Street, Hangzhou. Telephone: （0571）87807184 Fax:（0571）87819700 Chapter II. Financial And Business Data Summary (I) Major business data (in RMB) No. Subjects Amount 1 Total profit 70,276,850.57 2 Net profit 44,002,529.98 3 Net profit after deducting of irregular gain/loss 40,899,956.88 4 Major business profit 171,091,763.79 5 Other business profit 1,139,600.12 6 Operation profit 68,468,734.60 7 Investment gains -835,316.66 8 Allowance income 2,923,070.10 9 Net balance of non-business income/expense -279,637.47 10 Net cash flow from business operation 223,689,202.06 11 Net increase/decrease of cash and cash equivalents 114,546,561.70 12 Net profit on IAS 48,626,712.33 [Note 1] Subjects of net profit after deducting of irregular gain/loss and amount involved. (in RMB) No. Subjects Amount 1 Non-business income 220,727.73 2 Non-business expenses 500,365.20 3 Over inventory of current assets 3,508,479.88 4 Short inventory of current assets -273,811.60 5 Less: income tax -147,542.29 Total 3,102,573.10 [Note 2] Non-business income was primarily come from selling small amount of materials. [Note 3] The investment gains was RMB-835,316.66. Among which, with equity-method, RMB858,869.05 of loss was undertaken for Hangzhou Steam Turbine Environment Engineering Co., Ltd. which invested by the company, in year 2003; Gains from stock investment amount to RMB23,552.39 was from Zhejiang Steam Turbine Technologies Development Co., Ltd.’s investment in A share market with their own fund. [Note 4] Impact of the IAS and of other adjustments on the profit after tax and net assets. (in RMB thousand) Profit after tax Net assets Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2003 2002 2003 2002 According to China Accounting Standard 44,003 34,707 512,745 476,784 Influence of adjustments: 2,750 2,750 Discrepancy of recognition of fund carried in transferred to other gains Deferred income tax 6,772 8,411 2 -6,771 Deferred gains from recognition of fund carried -11,819 over Increasing of evaluation of houses and equipments -2,906 29,479 29,479 Gains from offsetting of account not able to by 2,140 paid Discrepancy between the depreciation reserves and -7,039 -1,247 -8,286 -1,247 evaluation of houses and equipments Discrepancy of equity investment provision 130 Recalculated according to the IAS 48,626 39,095 524,871 498,245 (II) Supplementary form of the profit statement: Prepared in accordance with “Information Disclosing Regulations No. 9, for Public Companies” issued by China Securities Supervisory Committee. Net income/asset ratio (%) Gains per share (RMB/Share) Fully diluted Weighted average Fully diluted Weighted average 2002 2002 2002 2002 2003 Adjusted Not 2003 Adjusted Not 2003 Adjusted Not 2003 Adjusted Not adjusted adjusted adjusted adjusted Profit of major 33.37 26.95 28.25 35.07 27.44 27.99 0.778 0.584 0.584 0.778 0.584 0.584 business Operation profit 13.35 11.17 11.71 14.03 11.38 11.60 0.311 0.242 0.242 0.311 0.242 0.242 Net profit 8.58 7.28 7.63 9.02 7.41 7.56 0.200 0.158 0.158 0.200 0.158 0.158 Net profit after 7.98 7.18 9.91 8.38 7.32 9.82 0.186 0.156 0.205 0.186 0.156 0.205 deducting of irregular gains/losses Note: The above adjusted data of year 2003 and 2002 have been reported in according with the revised “Enterprise Accounting Standard – Coming up issues next to the balance sheet” announced by Zhong-Cai-Kuai [2003]12 on April 14, 2003, and the “Public share placing companies information disclosure standard Q&A No.1 – irregular gains and losses” revised on Jan 15th, 2004. (III) Major accounting data and financial indices of past 3 years till the end of the report term. (in RMB) No. Indices December 31,2003 December 31,2002 December 31,2001 1 Major business income 439,936,177.99 326,027,763.80 289,160,331.88 2 Net profit 44,002,529.98 34,706,731.04 27,388,868.94 3 Gross assets 1,022,375,377.57 685,480,273.39 626,956,397.09 Adjusted Not adjusted Adjusted Not adjusted 4 Shareholders’ equity (minority shareholders excluded) 512,745,380.16 476,783,502.12 454,783,502.12 463,640,751.46 441,640,751.46 5 Gains per share (RMB/share) 0.20 0.158 0.158 0.124 0.124 6 Net asset per share (RMB/share) 2.33 2.17 2.07 2.11 2.01 7 Adjusted net asset per share (RMB/share) 2.25 2.02 1.92 1.95 1.85 8 Net cash flow generated by business operation (RMB/share) 1.02 0.36 0.36 0.23 0.23 9 Net income/asset ratio (%) 8.58 7.28 7.63 5.91 6.20 10 Gains per share, weighted average (RMB/share) 0.20 0.158 0.158 0.124 0.124 11 Gains per share, deducting irregular gain/loss (RMB/share) 0.186 0.156 0.205 0.128 0.128 [Note 1] Major business income increased by RMB113,908,400 that was 34.94% over that of the previous year. This was caused by the increasing of sales of the industrial steam turbine – the major product of the company. [Note 2] The gross profit increased by RMB26,969,100 and net profit increased by RMB9,295,800. This was caused by the terminating of the preference enterprise income tax policy for foreign invested enterprises (2-free and 3-halfs). Currently the Company is subject to the income tax rate of 26.4%. [Note 3] Gross assets increased by RMB336,895,100 that was 49.15% over that of at the beginning of year. This was caused by increasing of sales orders leading to increasing of advance payment collected. The Company’s enhancing of technical reforming that was leading to the increasing of engineering materials and constructions in progress. The increasing of not distributed profit was also one of the causation.That was caused by the increasing of accessories purchased for new orders, which increased the account payable and advances. (For details about this please refer to “Financial Statements – Notes to the Financial Statements”, notes to the Consolidated Balance Sheet items no. 15, and 24.) [Note 4] Shareholders’ equity increased by RMB35,961,900 that was 7.54% over that of the previous year. This was caused by the increasing of net profit, surplus reserves, and capital reserves. (IV) Changes of shareholders’ equity and their causation (in RMB) Subjects Capital share Capital reserves Surplus reserves Incl.: Public Profit not Total of shareholders’ welfare distributed equity Initial 220,000,000 149,740,412.69 37,149,337.24 18,574,668.62 69,893,752.19 476,783,502.12 Increased this 0 14,024,348.06 8,921,625.42 4,460,812.71 35,080,904.56 58,026,878.04 term Decreased this 0 65,000.00 22,000,000.00 22,065,000.00 term At the end of term 220,000,000 163,699,760.75 46,070,962.66 23,035,481.33 82,974,656.75 512,745,380.16 Notes: Causations of the changes 1) The increasing of surplus reserves was caused by: according to the resolutions passed by the 15th meeting of the 2nd term board of directors, statutory public reserves and public welfares were drawn at rate of 10% from the net profit of year 2003. 2) The change of profit not distributed changed because: according to the profit distribution preplan of 2002 passed by the 15th meeting of the 2nd term board of directors, upon the net profit of year 2002 - RMB44,002,529.98, after drawing of surplus reserves RMB8,921,625.42, The balance of not-distributed profit increased by RMB35,080,904.56. 3) For the causation of the increasing of capital reserves, please refer to “Financial Statements – Notes to the Financial Statements”, notes to the Consolidated Balance Sheet items No. 22. (V) Other business data and indices in the report term. Chapter III. Change of Share Capital and Shareholders (I) Change of share capital 1. Change of share capital (in shares) At Increase or decrease of the change(+，-) At End of Beginning of Share Bonus Capitalized Other Sub- Year Year allotted shares total (I) Non-current shares 1、Promoter’s shares State-owned shares 140,000,000 140,000,000 Domestic legal person shares Overseas legal person holding shares Others 2、Legal person shares invited 3、Employees’ shares 4、Preference shares or others Total of non-current shares 140,000,000 140,000,000 (II) Current shares 1 、 Renminbi common shares listed domestically 2 、 Foreign capital shares listed 80,000,000 80,000,000 domestically 3、Foreign capital shares listed abroad 4、Others Total of current shares 80,000,000 80,000,000 (III) Total shares 220,000,000 220,000,000 (II) Particulars about share placing and listing 1. The company didn’t place any stock or derivative securities during the past 3 years till the end of the report term. 2. Particulars about the primary placing of stocks of the company Hangzhou Steam Turbine Co., Ltd. (the Company) was promoted solely by Hangzhou Steam Turbine Power Group Co., Ltd. (the Group), and established by the mean of foreign shares (B shares) placing in the domestic market as a shareholding company. The Group invested in the Company with net asset of RMB199,485,800 and takes 140,000,000 state-owned shares of the Company at RMB1 each. The Company primarily issued 80,000,000 of foreign shares (B shares) in the domestic market at HKD2.14 per share by means of close placing between March 31 and April 6, 1998 (equal to RMB2.29 / share at RMB:HKD=1:1.0691). On April 28, 1998, 80,000,000 B shares were approved to be listed in Shenzhen Stock Exchange. 3. The total share capital of the company in the report term was 220,000,000 shares, including 140,000,000 of state-owned shares takes 63.64% of the total share capital, 80,000,000 of B shares takes 36.36% of the total share capital. 4. None of bonus share distributing, capitalizing, share allotting, new share placing, acquisition/merging, transferring of transferable company bonds, capital reducing, listing of employee shares, that cause the changing of capital share and/or share structure. 5. The company issued no internal employees’ shares or company employees’ shares till the end of the report term. (III) About the shareholders 1. At the end of report term, the company has totally 11787 shareholders. Among which, 1 is state-owned share holders, and 11786 are B share holders. The number of shareholders decreased by 961 than the number at September 30, 2003. 2. Top ten shareholders at the end of report term. Name of shareholders Shares held at the Shares increased Portion of Mortgage or Share term end (shares) /decreased from that the total freezing property Rank of Sept. 30, 2003 (+、 capital share -) 1 Hangzhou Steam 140,000,000 Nil 63.64 70,000,000 State-owned Turbine Power Group Co., Ltd. 2 BIN LIANG 4,721,553 Nil 2.15 N/A Current B shares 3 GT PRC FUND 2,999,973 2,999,973 1.36 N/A Current B shares 4 Shanghai-Hong Kong 1,632,390 1,632,390 0.74 N/A Current B Global Security shares 5 PICTET & CIE 1,100,000 1,100,000 0.50 N/A Current B shares 6 Zhu Rubo 913,600 913,600 0.42 N/A Current B shares 7 TOYO SECURITIES 803,600 803,600 0.37 N/A Current B ASIA shares LIMITED-A/C CLIENT 8 DRIEHAUS INTL 764,500 764,500 0.35 N/A Current B RECOVERY shares FD,L.P. GTI 25219 9 Wang Huiru 747,700 747,700 0.34 N/A Current B shares 10 Chen Yongzheng 709,311 709,311 0.32 N/A Current B shares Note: (1) Of top ten shareholders Hangzhou Steam Turbine Group Co., Ltd. holds shares on behalf of the State and the others belong to B-Share shareholders. (2) No shareholders hold 5% of the Company’s shares except for Hangzhou Turbine Power Group Co., Ltd. (3) Hangzhou Steam Turbine Group Co., Ltd. has not any related connection with any of the other 9 shareholders. It is unknown whether there is any related connection among the 9 shareholders. (4) Hangzhou Steam Turbine Group Co., Ltd. has put 70 million shares of promoter’s state-owned shares (takes 50% of the total shares it is holding in the Company, and takes 31.82% of the total share capital of the Company) into pledge to Shanghai Pudong Development Bank Hangzhou – Zhongshan Branch for the loan credit up to RMB100 million. The pledge will expire at the end of October 2005. (For details about this issue please go to “The announcement about the pledging of controlling shareholder” published on November 14, 2003 issue of Security Times.) (5) The controlling shareholder stay unchanged in the report term. (IV) Introduction to Hangzhou Turbine Power Group Co., Ltd. Hangzhou Turbine Power Group Co., Ltd. (the Group) was founded in June 1995, which is a state-owned and sole proprietorship company authorized by the Government. The Group is considered to be one of 520 leading state-owned enterprises. Registered Office of the Group: 357 Shiqiao Rd., Hangzhou City; Legal Representative: Mr. Fang Wen; Owning-companies: 10 holding companies, 10 full-capital constituent companies and 5 partially hold companies; Major Business: textile machine, paper-making machine, pump, casting, changing speed gear, heat exchanging instrument, digital and display system and their manufacturing and processing. Original material, equipment and parts for groups’ purchasing and making, providing services of water, electricity and gas for their owning enterprises. (V) Particulars about the top-10 holders of current shares. Rank Name of the shareholder Shares held at Shares increased Portion in the total the end of /decreased from that of current B shares report term Sept. 30, 2003 (+、-) (%) 1 BIN LIANG 4,721,553 Nil 5.90 2 GT PRC FUND 2,999,973 2,999,973 3.75 3 Shanghai – Hong Kong Global Security 1,632,390 1,632,390 2.04 4 PICTET & CIE 1,100,000 1,100,000 1.38 5 Zhu Rubo 913,600 913,600 1.14 6 TOYO SECURITIES ASIA 803,600 803,600 1.00 LIMITED-A/C CLIENT 7 DRIEHAUS INTL RECOVERY 764,500 764,500 0.96 FD,L.P. GTI 25219 8 Wang Huiru 747,700 747,700 0.93 9 Chen Yongzheng 709,311 709,311 0.89 10 GUOTAT JUNAN SECURIES 704,000 704,000 0.88 HONG LIMITED Note: The Company is not informed by the above top-10 shareholders whether there is any related connections among them. Chapter IV. Particulars about the Directors, Supervisors, Senior Executives and Employees (I) Current directors, supervisors and senior managements 1. Profiles of the current directors, supervisors and senior managements and their shareholding status No. Name Sex Age Position Job Term Shareholding 1 Nie zhonghai Male 46 Chairman of the Board 2003.10-2004.6 Nil 2 Wang Male 51 Vice Chairman 2001.6-2004.6 Nil Hongkang 3 Jin Fujuan Female 50 Vice Chairman 2001.6-2004.6 Nil 4 Yan Jianhua Male 45 Director, GM 2001.6-2004.6 Nil 5 Li Lie Male 55 Director, Standing Vice GM 2001.6-2004.6 Nil 6 Ye Zhong Male 35 Director, Chief Engineer 2001.6-2004.6 Nil 7 Bo Ronghua Male 52 Director, Chief Accountant 2001.6-2004.6 Nil 8 Yao Fusheng Male 71 Independent Director 2001.6-2004.6 Nil 9 Zhang Male 65 Independent Director 2002.5-2004.6 Nil Mingguang 10 Zhou Zhaoxue Male 65 Independent Director 2002.5-2004.6 Nil 11 Hua Xiaoning Male 40 Independent Director 2003.10-2004.6 Nil 12 Chu Shuilong Male 51 Chairman of supervisory 2001.6-2004.6 Nil committee 13 Shao Linna Female 49 Supervisor 2001.6-2004.6 Nil 14 Zhang Yougen Male 46 Supervisor 2001.6-2004.6 Nil 15 He Fengdi Female 53 Employee supervisor 2001.6-2004.6 Nil 16 Zhao Ying Female 47 Employee supervisor 2001.9-2004.6 Nil 17 Yu Changquan Male 46 Vice GM 2001.5-2004.6 Nil 18 Yan Jinghe Male 49 Vice GM 2001.5-2004.6 Nil 19 He Jianhang Male 46 Secretary of the Board 2001.5-2004.6 Nil Note: (1) None of the directors, supervisors or senior managements is holding the stocks of the Company (2) In according with the resolutions of the 9th meeting of the 2nd term Board of Directors held on April 14, 2003, Mr. Jiang Demu no longer take the position of director due to his age. (3) In according with the resolutions of the 11th meeting of the 2nd term Board of Directors held on June 26, 2003, Mr. Hua Xiaoning was nominated the independent director. (4) In accordance with the resolutions of the 2nd provisional board meeting of 2003 held on September 4th, 2003, Mr. Fang Wen will no longer take the position of director, Mr. Nie Zhonghai was nominated the director in the mean time. (5) In accordance with the resolutions of the 1st provisional shareholders’ general meeting of 2003 held on October 8th , 2003, Mr. Nie Zhonghai was elected director and Mr. Hua Xiaoning was elected the independent director of the Company. (6) In according with the resolutions of the 13th meeting of the 2nd term Board of Directors held on October 8th, 2003, Mr. Nie Zhonghai was elected the Chairman of Board. (7) Details about the above changing of directors and chairman and resumes of the newly engaged persons were published respectively by April 17th, 2003, June 27th, 2003, September 5th, and October 9th issues of Security Times and Hong Kong Commercial Daily titled with “Resolutions of the 9th meeting of the 2nd term Board of Directors”, “Resolutions of the 11th meeting of the 2nd term Board of Directors”, “Resolutions of the 2nd Provisional Board Meeting”, “Resolutions of the 13th meeting of the 2nd term board of Directors” and “Resolutions of the 1st provisional Shareholders’ General Meeting of 2003” respectively. 2. Particulars about the directors and supervisors who take jobs in shareholding companies No. Name Takes Job In Position Job Term 1 Nie Zhonghai Hangzhou Steam Turbine Power Chairman 2003. Group Co., Ltd. 8-2004.5 2 Wang Hangzhou Steam Turbine Power Vice Chairman, GM 2001.5-2004. Hongkang Group Co., Ltd. 5 3 Jin Fujuan Hangzhou Steam Turbine Power Vice Chairman, Chairman of the 2001.5-2004. Group Co., Ltd. workers’ union 5 4 Yan Jianhua Hangzhou Steam Turbine Power Director 2001.5-2004. Group Co., Ltd. 5 5 Ye Zhong Hangzhou Steam Turbine Power Director 2001.5-2004. Group Co., Ltd. 5 6 Chu Shuilong Hangzhou Steam Turbine Power Director, Vice GM 2001.5-2004. Group Co., Ltd. 5 7 Shao Linna Hangzhou Steam Turbine Power Chief of Accounting Department - Group Co., Ltd. 8 He Fengdi Hangzhou Steam Turbine Power Supervisor, Vice Chairman of the - Group Co., Ltd. workers’ union Note: Supervisor Me. Zhang Yougen was originally the Chief of Auditing and Inspection Office of Hangzhou Steam Turbine Power Group Co., Ltd. He was removed from the position in November 2003. Presently he is the Chief of Political Office of the Company. (II) Annual payroll of current directors, supervisors and senior managements. In RMB 10 thousand Total of salaries of directors, supervisors and senior 354 executives for year 2003 Total of the highest 3 directors in annual salary 114.00 Total of the highest 3 senior executives in annual salary 117.00 Allowance for independent directors 4 / year / person (including tax) Other allowance for independent directors No other allowances except reimbursing of their business trip expenses. Directors and supervisors not taking any salary or Supervisor Shao Linna, Zhang allowance from the company Yougen and He Fengdi are not taking any salary or allowance from the Company but from the Hangzhou Steam Turbine Power Group. Distribution of Salary Level Number of Person 36-39 5 25-33 4 12-18 2 4-5.5 5 [Note 1] The above mentioned “salary” is including basic wage, bonus, welfare, allowance, housing subsidy and other allowances. [Note 2] The Shareholders’ General Meeting held on May 20th, 2003 approved the “Proposal of increasing the allowances for independent directors” raised by the 9th meeting of the 2nd term Board of Directors, therefore the allowance for independent directors was increased from RMB20 thousand up to RMB40 thousand. For details about this event please refer to “Resolutions of the Shareholders’ General Meeting 2002” published on May 21st, 2003 issues of Security Times, Hong Kong Commercial Daily (III) Leaving of directors, supervisors and senior managements Name Original Left time Reason Resolution of the Board Meeting position in the Company Fang Wen Director, September Retired The 2nd provisional board meeting Chairman of 2003 of 2003 the Board Jiang Director April 2003 Retired The 9th meeting of the 2nd board Demu (IV) Engaging or dismissing of managers, vice managers, financial principal, secretary of the Board No managers, vice managers, financial principal, secretary of the Board been newly engaged or dismissed during the report term. (V) About the employees At the end of the year 2003, the employees of the Company were amounted to 2016. Among the employees, there are 1396 production workers, 110 sales people, 334 technicians, 25 accounting staffs, and 95 administrative people. As for the education background, 486 are holding national diploma or above (take 24.1% of the total), 298 are holding intermediate technical certificates or above (take 14.8% of the total), 80 are holding higher technical certificates (take 14.6% of the professional employees) Overall employees at the end of year 2003 increased by 5 over year 2002. There were 53 employees retired in the report term. It was totaled to 235 of retiring employees since the Company was listed in 1998 and till the end of December 2003. At the beginning of share listing, the Company has engaged an agreement with the Group on the management of retirement. Therefore there are no retired employees that need to be undertaken by the company directly. (For details about the retirement administrative charge made to the Group during the report term, please refer to “Significant associated transactions” of “Significant Events” carried in this report.) Chapter V. Management Structure (I) Comparison of the Practical Management Structure of the Company with the Requirements of China Securities Regulatory Commission 1. The Company is following closely with the “Listed Company Management Standard”, “Instructions for the Article of Association of Listed Companies” and “Standard of Shareholders’ General Meeting of Listed Company” and performed self-inspection. No major discrepancy was found so far. 2. In the report term, following with the overall arrangement of the Hangzhou Special Office of China Securities Regulatory Commission, a self-inspection was performed on “the monetary transactions and offering of guarantees due to related parties” and “status of investors relationship management of listed company”. As about the related transactions and offering of guarantees, the Company has only operative fund transaction with related parties, but not any offering of guarantees or fund adoption due to the relative parties of the Company. As about the investors relationship management, the “Investors Relationship Management Scheme (Provisional)” was adopted by the 12th meeting of the 2nd term Board of Directors. (for details please refer to August 12th, 2003 issue of Security Times). 3. In viewing of further improve the management structure, under the promotion of independent directors and the support of the municipal CCP Committee and the government, the CCP Committee of the Company was established in November 2003. The executive conducting system of “Hangzhou Steam Turbine Group” was moved into urban Hangzhou, therefore resolved the problem of distance operation between the Company and the Group. (II) Independent Directors’ Executing of Duty In the report term, the company added one independent director, that makes the number of independent directors reaches 4 and takes 36% of the total number of directors. In the spirit of responsible for the shareholders of the Company, the independent directors executed their duties in defending of the mid-small shareholders’ benefit following with the laws and regulations stated by “The Company Law”, “The Security Law”, “Management Rules of Public Companies”, and “The Instructions on Setting Independent Directors in Public Companies”. They devote themselves in understanding of the company operation by taking part in the Board meeting and Shareholders’ General Meeting. They back the Board up in making fair and scientific decisions for the company. Under the leading of independent directors, the special committees of the Board were working effectively for the report term. The Strategy Committee held 4 meeting; Nomination Committee held 2 meetings; Auditing Committee held 3 meetings; Reward and Assessment Committee held 5 meeting. Major proposals submitted to the Board were examined beforehand by the special committees. The independent directors issued independent statements for “Proposal of adjusting of the bad debt provision rate and drawing of asset impairment provisions” which been submitted to the 9th meeting of the 2nd term Board, and “Proposal of adjusting the bad debt provision standard” which been submitted to the 13th meeting of the Board. (for details of above please refer to the Independent Statements published on April 17th, 2003 and October 9th, 2003 issues of Security Times. The independent directors of Reward and Assessment Committee conducted the assessment works for the directors, supervisors and senior executives for year 2002 and 2003. Their spirit of hardworking, trustiness, and practice are setting out a sample for the other directors. (III) Particulars about the separation of business, personnel, assets, organization, and accounting with the controlling shareholder 1. Separation of business: The designing, manufacturing and marketing of industrial steam turbines were independent from that of the parent company (the Group). Some of the subsidiaries of the Group are running marketing businesses of industrial steam turbines. The purchasing of products and accessories from the Company was on ordinary prices offered to other dealers. Before June 1st, 2002, the casting company of the Group was providing roughcasts to the Company, and the supplementary machinery company of the Group was providing supplementary equipments to the Company. For the details about the transactions of steam turbines, roughcasts and supplementary equipments during the report term please refer to the “Significant Associated Transactions” carried in the chapters of “Significant Events” and “Financial Statements”. 2. Separation of personnel: For the report term, the positions of Chairman and Vice Chairman of the Company were taken by the Chairman and Vice Chairman of the Group. None of the managements takes any job in the Group. The accounting staffs take no job in the Group or other associated companies. The Company was basically independent in personnel and salary management. 3. Integrity of assets: The properties of production systems, supplementary systems and equipments, industrial properties, and non-patent technologies are basically independent out of the Group. The using of trademark and staff transportation services are contracted to the Group with agreement of associated transactions. The Company has its own systems of production, supplying and sales with no competitive relationship with the Group. For the details about the transactions of trademark using and staff transportation services please refer to “Significant Associated Transactions” carried in the chapters of “Significant Events” and “Financial Statements” 4. Independency in organization: The Company is completely independent out of the Group in organization. It has its own managing and operation system. Mid-level managements were engaged by the managerial level and subject to the economical responsibility inspection. 5. Independency in accountancy: The Company was configured with its own accounting department and standardized accounting system. The Company opened its own bank account and undertook taxes according to the law. (IV) Motivating and inspection systems for the senior managements The Company adopts “Annual Salary Assessing System” for the directors, supervisors and senior managements. The plan was first raised by the Supervisory Committee, and implemented upon the approval of the first provisional shareholders’ general meeting of 1998. It was modified for 3 times after that and put into operation upon the approval of the shareholders’ general meeting of 2000, 2001 and 2003. Upon the establishing of Reward & Assessment Committee been established, an assessment system were built under the principle of “motivation and obligation, contribution and rewarding, executive assessment and democracy assessment”. The “credit obligation assessment system” and “economical obligation assessment system” were established. The committee conducted assessment on the senior executives in the report term. For details about the “Assessment and Reward of Senior Executive” please refer to the public notice published with April 17, 2003 issues of Security Times. Chapter VI. Particulars about the Shareholders’ General Meeting The Company held three shareholders’ general meetings in the report term, the followings are the details: (I) The 2002 Shareholders’ General Meeting was held on May 20, 2003 1. Notifying, calling and holding of the meeting This meeting was decided by the 9th meeting of the 2nd term Board of Directors, and was held on May 20th, 2003. The notification was published on the April 17th, 2003 issues of Security Times and Hong Kong Commercial Daily. Due to the influence of SARS, the 1st provisional board meeting of 2003 decided to change the venue of the shareholders’ general meeting to “Old Longjing Tea House, 148 Shifeng, Longjing, Hangzhou”. This has been announced on the May 13th 2003 issues of Security Times and Hong Kong Commercial Daily. The Shareholders’ General Meeting 2003 was held at 9:00 AM of May 20th, 2003 at Old Longjing Tea House, 148 Shifeng Longjing, Hangzhou as scheduled. Totally 8 shareholders of the Company attended the meeting representing 140215300 shares of the Company and take 63.73% of the total share capital. 7 of them are B share holders representing 215300 shares takes 0. 26% of the total current B shares. The meeting was hosted by Chairman Fang Wen. 2. Resolutions adopted by the shareholders’ general meeting and publishing of the resolutions The following 9 proposals were adopted in the meeting as resolutions through registered ballots: (1) Annual Report of the Board of Directors for Year 2002 (2) Annual Report of the Supervisory Committee for Year 2002 (3) Annual Report of the General Manager for Year 2002 (4) Annual Financial Statements for Year 2002 (5) Profit distribution preplan for year 2002 (6) The proposal of adjusting the bad debt provision standard and drawing of assets impairment provision. (7) The proposal of increases the allowances for independent directors. (8) The proposal of inviting PriceWaterHouse Coopers CPA and Zhejiang Oriental CPA as the overseas and domestic auditors of the Company respectively for year 2003. (9) The proposal of reward and assessment scheme for senior executives. The resolutions of the meeting were published on May 21st 2003 issues of Security Times and Hong Kong Commercial Daily. (II) The Fist Provisional Shareholders’ General Meeting of 2003 was held on October 8th, 2003 1. Notifying, calling and holding of the meeting This meeting was decided by the 12th meeting of the 2nd term Board of Directors. Originally the meeting was scheduled for September 15, 2003. The agenda of the meeting was set to electing of additional independent directors and modify the Article of Association of the Company. The notification of the meeting was published by August 12th 2003 issues of Security Times and Hong Kong Commercial Daily. As proposed by Hangzhou Steam Turbine Power Group Co., Ltd., the controlling shareholder of the Company, and as passed in the 2nd provisional Board meeting of 2003, “Mr. Fang Wen will no longer take the position of director, and nominate Mr. Nie Zhonghai the director of the Board”. In the meantime, it was decided to add this resolution to the agenda of the 1st provisional shareholders’ general meeting of 2003. As stipulated by the “Opinions on standardization of shareholders’ general meeting for listed companies”, provisional shareholders’ general meeting is not allowed to add new agenda afterward. Therefore the Company issued at the same time “The Announcement of Cancelling the 1st Provisional Shareholders’ General Meeting” and “The Announcement of Holding the 1st Provisional Shareholders’ General Meeting Over Again” on September 5th 2003 issues of Security Times and Hong Kong Commercial Daily. The shareholders’ meeting was held at 9:00AM on October 8th, 2003 in the meeting room of Hangzhou Liuying Hotel. Totally 6 shareholders attended the meeting representing 140411300 shares and takes 63.82% of the total share capital of the Company. Among them 5 are B share holders, representing 411300 shares and takes 0.51% of the total B shares. Mr. Fang Wen, the Chairman of Board authorized Mr. Wang Hongkang, the vice Chairman to host the meeting. 2. Resolutions adopted by the shareholders’ general meeting and publishing of the resolutions The following proposals were adopted by the meeting as resolutions through registered ballots. (1) The proposal of modifying the Article of Association of the Company; (2) The proposal of replacing some of the directors of the 2nd term of Board; (3) Elect Mr. Nie Zhonghai the Chairman of the 2nd term of Board; (4) Elect Mr. Hua Xiaoning the independent director of the 2nd term of Board; The resolutions of the shareholders’ general meeting was published on October 9th, 2003 issues of Security Times and Hong Kong Commercial Daily. (III) The Second Provisional Shareholders’ General Meeting of 2003 was held on December 8th, 2003 1. Notifying, calling and holding of the meeting Holding of this meeting was decided by the 14th meeting of the 2nd term of Board. The agendas were: Proposal about the investment of RMB80 million to enforce the technical reforming and increase the productivity; Adjusting of the standard for bad debt provision. The notification of the meeting was published on October 27, 2003 issues of Security Times and Hong Kong Commercial Daily. The meeting was held in the morning at 9:00 on December 8th, 2003 in the meeting room of Hangzhou Jinxi Villas. There were 6 shareholders presented the meeting and representing 144179794 shares of the Company, takes 65.53% of the total capital share. Among them, 5 were B share holders, representing 4179794 shares and takes 5.22% of the total current B shares. The meeting was hosted by Mr. Nie Zhonghai, the Chairman of the Board. 2. Resolutions adopted by the shareholders’ general meeting and publishing of the resolutions The following 2 resolutions were adopted by the meeting through registered ballots: (1) Proposal about the investment of RMB80 million to enforce the technical reforming and increase the productivity; (2) Proposal about the adjusting of the standard for bad debt provision. The resolutions of the meeting were published by the December 9, 2003 issues of Security Times and Hong Kong Commercial Daily. Chapter VII. Report of the Board of Directors Section 7 Report of the Board of Directors I. Discussion and Analysis of Material Events In 2003, the company manufactured 124 steam turbines that total 831.8 thousand kilowatts and are worth RMB 449.177 million, where the quantity, kilowatts and value up 29.17%, 78.57% and 45.53% respectively from last year. The sales revenue reaches RMB 439.9362 million and the profit reaches RMB 70.2769 million, up 34.94% and 62.27% respectively from last year. The company hits a new high. The achievements do not come easy, considering that they are made under extremely difficult situations: havoc of SARS and limitation of power supply. In 2003, the company scored a major breakthrough at least in the following nine aspects: 1. Formulate the “Three-Year Development Plan Following the Tenth Five-Year Plan”, and identify the development thoughts. The plan is the brainchild of decision makers, managers and executives of the company who jointly formulated this plan through public demonstrations. Strategy Development Committee of the Board of Directors and managers carried out several special topic researches, and consulted extensively the opinions of leadership and mass. This plan, being revised for eight times, was finally approved by the Board of Directors. In a word, this Development Plan pools the wisdom of all the employees in the company and is the crystallization of collective wisdom. As the market rally occurs quickly and unexpectedly, the goal set originally fails to meet the market requirements. The profits goal has been achieved two years ahead of schedule, and the sales goal can be reached one year ahead of schedule. The Board of Directors is making newer, higher economic development goals through demonstrations in accordance with current market situations. 2. Seize the historic opportunities and strengthen the marketing capabilities. The marketing department of the company seized the historic opportunity when the domestic steam turbine market witnessed sales surge. While maintaining the market share in the traditional markets such as oil refining, petrochemical engineering, chemical fertilizer and metallurgy, the company grabbed a greater share in the fields such as boiler feed pump in large-scale thermal power plants, non-standard electric power generation, building materials, pharmaceuticals industry, garbage power plants in cities, and self-export. In 2003, the company secured product orders worth RMB 1650.00 million, and received RMB 770.983 million payments for goods, up 240.36% and 98.77% respectively from last year. Particularly, the company’s products entered the India market in 2002, and the company obtained the contract orders for five set of industrial driving steam turbines from the India steel plant and other companies in 2003. This is an important step in the company’s marketing in India. 3. Strengthen the management innovation and tap the production potential. Facing the dramatically increased production tasks and obvious contradiction between the production load and the capability, the company strengthened the management innovation and tapped the production potential. The production management department successfully developed the plan management software that bears the feature of the company, and carried out the “Three-Phase Plan, Node-Based Assessment” system. This made the plans in the production organization to be instructional and forward-looking, made the on-site coordination more effective and the semi-finished product be prepared in advance, and allowed the company to focus on the key issues. In this way, the company increased the production capacity by almost 50% with the staff and equipment remaining unchanged. 4. Accelerate the scientific research and enhance the innovation capacity. In 2003, the T6411 ENK40/45/60 assembling unit, the new product that the company developed and manufactured for ethane cracking air compressor with the annual output of 480 thousand tons for Daqing Petrochemical Complex, won the second prize of National Scientific and Technological Advancement. Roused by the good news, the company continued to make achievements in the technical innovation: three new products have been developed and another three products have passed the technical demonstration and enter the research phase. In 2003, the company hastened to retrofit the traditional manufacturing facilities using information technologies. The Local Area Network (LAN) is upgraded, and the computer information management has the product orders standardized from the originating point. The relationship between the batch and personalized manufacturing is harmonized, the management over the marketing and design, the design and manufacturing, the manufacturing and ordering, and the manufacturing and packing is coordinated. The information processing relationship in such aspects as contract signing, delivery, management and execution is smoothed out. All these works finally give rise to the PDM system that bears the feature of the company. The design department has the total design amount in 2003 that is one and a half times of the output in 2002, where the workload for product technology preparations for the industrial driving steam turbines amounted to three times of that in 2002, and the density of the issued tasks is exceptionally high. Though the design tasks are hard, the engineers and technicians with the industrial steam turbine research institute spared no effort in tackling the key problems. And they have completed at least 20 research topics through the year, and now are dealing with more than 30 research topics. The efficiency of quality management is enhanced to ensure that no material quality accident occurs even when the company has substantially increased the output. 5. Carry out large-scale technical innovations and keep pace with the market rally tides. In 2003, the company invested up to RMB 87.4372 million on the technical innovation, the top input for technical innovation since the company has been going public. The imported equipment necessary for Large-Scale Ethene Three-Equipment Supporting Industrial Steam Turbine Technical Innovation Project, the national key project, has been installed. The company is applying for the initialization of Technical Innovation Project of Manufacturing of Steam Turbine for Boiler Feed Pump for Supercritical Thermal Power Assembling Unit. It has been more than 20 years since the company carried out the last large-scale technical innovation and the equipment is outdated. In order to reverse this trend, the company set up Equipment Management Office in May, 2003, which is in charge of implementation of technical innovation measures. This means the company has decided to treat the technical innovation as a long-term strategy. Facts have testified the timeliness of this decision. It is just because of this decision that the first batch of key equipment enters the market in the first quarter of 2004 and keeps pace with the market rally tide. 6. Improve the responsibility system assessment and increase the transparency of allocation. In order to reform the outdated allocation system, the management of the company studied repeatedly and introduced Basic Salary + Bonus and Penalty leadership and employee assessment and allocation system. The basic salary for leadership and employees is linked to the key economic indexes of the company such as sales revenue and profits. The bonus and penalty index varies with the job responsibilities of different departments, so that the economic goals of the company are broken down and fulfilled. Furthermore, the company adopts the allocation method “assess by month, offer bonus and penalty by quarter”. Though the assessment method is yet to be improved, it increases the transparency of allocation. Turning “Post Incentives” into “Performance Linked, Instant Incentives” will be the trend in which the company’s allocation system is innovated. The company will maximize the potential of leadership and employees and promote the company’s development by improving the incentives mechanism unceasingly. 7. Improves the internal coordination mechanism and strengthen the adaptability. As the market situation changes and the company’s orders and the production capacity rapidly increase, the original internal coordination mechanism no longer meets the rapidly changing production and operation requirements. The managers decided to keep the original system of regular meeting unchanged, and add one or two brief meetings on production and operation every week with the participants including all the managers and some heads with the function offices, so as to summarize, analyze, and solve all problems occurred during the production and operation process, in an effort to pick up the speed of work process, increase the work efficiency, and promote the unconventional forward-leaping development of production and operation. 8. Adjust part of organizations to boost the administration efficiency. In 2003, the company made two major adjustments to the organizations, respectively in September and November, in order to meet the changing market situation and requirements for expanding the production capacity. The company removed the Contract Management Center and Technology Office, and assigned the contract management functions to the Production Management Office, Marketing Management Office and Integrated Management Office and allocated the technical personnel to the production department, industrial steam turbine research institute, technical inspection departments and other sectors, so as to effectively promote the coordination efficiency of the organization. The Outsourcing Office has been set up to boost the outsourcing capability of the company, increase the product output efficiency, reduce costs, and foster strategic partners. 9. Start to reform the branches and form a framework for development of branches. In 2003, the company started to reform the structure of the foundry branch and auxiliary equipment branch, and participated in the reform of the thermal power branch of the group. Reforms of the three branches have a common characteristic: shares are held by the company, where the managers control most of the shares, and the key staff participates in profit. The new company established with the brand-new concept “Human capital is the top capital” features flexible operation mechanism since the day of its birth. Setup of the three branches is also the company’s preliminary attempt to carry out Cascade Development of Production Resources, with a view to shake off the current large and all-inclusive production mode by adopting the method of professional coordinated production for parts, and gradually adopt the “Dumbbell” production management mode that is widely accepted in the international equipment manufacturing industry. II. Business of the Company 1. Principle business scope and the operation situation Principle business scope of the company: steam turbine and its supporting equipment, design and manufacturing of spares and fitting parts, sales of products manufactured by the company itself, and after services. The company manufactures the industrial steam turbines that can be divided into industrial driving steam turbine and industrial electric power generation steam turbine by the driven object. The industrial driving steam turbine is the key power equipment among various large-scale industrial units. It is mainly used to rotary machines such as compressor, blast blower, pump and presser, and are widely used in such fields as oil refining, chemical industry, chemical fertilizer, building materials, metallurgy, electric power, light industry, and environment protection.The industrial electric power generation steam turbine is mainly used to drive the electric generator and provide thermal energy at the same time, and is widely used in such fields as enterprise self-contained power stations in various industrial sectors, regional joint production project of heat and electric power, electric power station that features gas-steam turbine joint circulation, and garbage power plants in cities. In the period of reporting, the company’s principle businesses and their structure and earnings-generating capacity remain unchanged compared with those in the previous period of reporting. 2. Analysis of composition of profits from principle businesses by product type and region 1) The composition of profits from principle businesses can be divided by product type as follows: Unit: Ten thousand in RMB Product type Profit from Cost of Gross Compared with last Compared with last Compared with last principle good margin year, profit from year, cost of goods year, the gross margin businessesMa soldMajo (%) principle sold increases/decreases jor business r business businessesMajor increases/decreases by (%) income cost business income by (%) increases/decreases by (%) Industrial 40871 25061 38.68 44.19 38.71 2.42 steam turbine Foundry 404 416 -2.97 3.59 -4.15 8.32 goods Auxiliary 484 302 37.60 296.72 231.87 12.32 equipment Others 2235 1016 54.54 -40.32 -7.38 -16.17 Total 43994 26795 39.09 34.94 36.09 -0.52 Note: “Others” in the Product Type includes spares and fitting parts of the steam turbine, modification of imported steam turbine to suit domestic conditions, and upgrade and modification of steam turbine. 2) Composition of profits from the principle businesses is divided as follows: Unit: Ten thousand in RMB Region Profit from Cost of Gross Compared with Compared with last Compared with last principle good margin last year, profit year, cost of goods year, the gross businesses soldMajor (%) from principle sold Major business margin Major business businessesMajor cost increases/decreases business cost business income increases/decreases by (%) income increases/decreases by (%) by (%) Domestic 42389 25445 39.97 32.72 32.40 0.14 Overseas 1605 1350 15.87 141.72 186.62 -13.13 Total 43994 26795 39.09 34.94 36.09 -0.52 3. Businesses and Performance of Primary Holding Companies and Joint Stock Companies Unit: ten thousand in RMB Company name Business Registered Ownership Total Net capital of the Net asset asset profit company Zhejiang Steam Turbine Co., Ltd Development of 3706 3403 3160 95% 64 self-controlled and instrument-controlled technologies Hangzhou Steam Turbine Contracting of 2860 2039 2000 45% -191 Environment Protection Co., Ltd. environment protection project Hangzhou Keximeng Network technologies 432 249 1000 34.5% -211 Technologies Co., Ltd. and network operator [Note 1] In the period of reporting, the company’s income from investments on the above three companies does not reach 10% of the net profit. [Note 2] In the period of reporting, the above three holding companies and joint stock companies have the operation performance as follows: 1) Principle businesses of Zhejiang Steam Turbine Co. Ltd. include supporting self-controlled and instrument-controlled unit for steam turbine, complete set of engineering for steam turbine. In the period of reporting, the company operates with RMB 13.85 million sales revenue, with the profit totaling RMB 1.09 million and the net profit amounting to RMB 640 thousand. 2) Principle businesses of Hangzhou Steam Turbine Environment Protection Co., Ltd. include contracting of environment and water treatment project and manufacturing of environment protection equipment. In the period of reporting, the company operates with RMB 7.85 million sales revenue, with the profit totaling RMB -1.91 million and the net profit amounting to RMB –1.91 million. 3) Principle businesses of Hangzhou Keximeng Technologies Co., Ltd. include operation of the website West Lake Exposition, e-commerce, and public computer networking terminal products. In the period of reporting, the company continues to operate with loss, with the net profit RMB -2.11 million. 4.Major Suppliers and Customers Unit: Ten thousand in RMB Total Proportion (%) Purchase from top five suppliers 4,780.79 Account for 16.34% of the total purchases Sales to top five customers 17,445.15 Account for 39.65% of the total sales 4、5. Solutions to the problems and difficulties in operation With the expedite progression of the urbanization, civil operation and industrialization in our country, the consumption of electric power has mushroomed in the period the report covered. In order to quicken the construction of the power supply project in many places, a new round of heavy buying upsurge for electric power equipment came into being. This led to excellent situation that demand exceeds supply in the steam turbine marketing. The contradiction between the prosperous market requirements and the shortage of throughput becomes the most difficult common problem for all the steam turbine manufacturers. To resolve this problem, the five measures as follows are taken in our company: Firstly, to increase the strength in technical innovation. After our company obtained the official approval document for implementing the Technical Innovation Project for Homemade Relevant Industrial Stream Turbine of Ethylene Equipment with Bigger Capacity (Ethylene Three Equipments), with total amount of investment RMB12.5 billion in 2002, the project was implemented rapidly. The first batch of imported equipments had been installed and tested by the end of 2003, and could be put into production for benefit in the first quarter in 2004 one after another. Meanwhile, the project, Increasing 80 Million RMB of Technical Innovation Investment to Enlarge Producing Capability, was approved by the 2003 No.2 temporary conference of shareholders in the company. At present, its implementation is in progress. This will double its existing assembly capacity of steam turbine to meet the demands of increasing large thermal construction projects for the industrial driving steam turbines. Secondly, to seek for more outsourcing and sub-contracting cooperators. The outsourcing department is set up to seek for more outsourcing partners for the parts, striving for doubling the existing outsourcing quantity of medium and small parts in 2004, and outsourcing 80% of total quantity of medium and small parts in 2005. Thirdly, to improve the yield of assembling units and parts in various modes of capital operation. The company is now enthusiastically importing private capital to establish some joint venture subsidiary companies like the casting subsidiary, accessorial equipment China steam turbine power subsidiary, spare part subsidiary, subsidiary. The mode of producing parts in specialization and collaboration is used to increase the throughput of assembling units and key parts. Fourthly, to promote the reformation of distribution system adequately. At present, the company is preparing a reformation scheme for the distribution system with the core of Linking Performance with Income and Controlling the Cost, in order to stimulate the employees’ enthusiasm by increasing their income while increasing the output. Fifthly, to implement triple shift for key working positions. On the premise that the company fulfils various safeguard measures, triple uninterrupted shift is implemented for the key working procedures and positions to ease the producing bottleneck and increase the throughput. In the report period, our company is confronted with not only the difficult position of considerably insufficient throughput, but also the disturb of power supply limitation. In the summer of 2003, the limitation of power supply happened continuously in the downtown of Hangzhou led to a certain disadvantageous affection to our company’s producing. It is expected that Hangzhou electric network will be insufficient in all the year in 2004 other than in a season, and the most serious months is July, August and September. Therefore, the situation of power supply in 2004 is severer than that in 2003. For this purpose, the company plans to establish a diesel generating electricity system, so as to decrease the production loss result from the limitation of power supply. The project is approved by the government of Hangzhou City. 6. Description of the profit forecast The annual profit forecast of this year has never been disclosed by the company. III Investment Condition in the Report Period 1. Using of the collected capital No capital was collected in the company during the report period. The last collected capital had been used up in 2002. 2. Large project progression of non-collected capital investment and its proceeds (1) The company invested 87.4372 million RMB for the technical innovation in the report period. With the markup of 602.18%. The investment was mainly used for the Technical Innovation Project for Homemade Relevant Industrial Stream Turbine of Ethylene Equipment with Bigger Capacity (Ethylene Three Equipments). Seven sets of key equipments were imported, including German Ф130 CNC boring-milling machine, Italian Ф160 CNC boring-milling machine, Italian Ф2800 CNC vertical lathe, Switzerland CNC five-axis linkage blade machining center. These equipments were installed in the end of 2003 and put into production in the first quarter in 2004. (2) In the report period, the subsidiary company, Zhejiang Steam Turbine Co., Ltd, invested its equity capital 49,500.00 RMB to purchase 11000 shares of CITI from the Level 1 market of A share, sold at a profit of 23,552.39 RMB. (Refer to Note 2 in Statement of Merged Asset and Liabilities and Note 5 in Merged Profit and Distribution Statement of Profit in this report.) IV Financial Condition in the Report Period 1. The main financial indices in the report period (1) The change of main financial data in the report period is as follows: Unit: Ten thousand in RMB Index Dec 31, 2003 Dec 31, 2003 Variation proportion Variation reason in 2003 vs in 2002 (+,-) Total asset 102238 68,548 49.15 See Section 2 (3) in this annual report [Notes 3] Rights and 51275 47,678 7.54 See Section 2 (3) in interests of this annual report [Note 4] shareholder Profit of main 17109 12,848 33.16 Incurred by the business increase of product marketing revenue Net profit 4400 3,471 26.76 See Section 2 (3) in this annual report [Note 2] Net increasing 11455 276 4044.95 Incurred by amount of cash considerable increase of sales and cash orders and advance equivalents payment (2) Notes to the items that the data variation between the same item exceeds (or equals to) 30% in the report period are as follows: Unit: Ten thousand in RMB No. Item Ending Beginning Variation Variation reason capital capital proportion (%) 1 Monetary capital 24,886.93 13,432.28 85.28 Incurred by the increase of advance receivable of product orders 2 Short term - 4.95 -100.00 See Section 7 III 2 (2) in this annual report investment 3 Receivable bills 5,706.91 310.00 1740.94 Incurred by the increase of receivable bills of exchange of exchange in the advance receivable 4 Other receivable 3,238.39 486.03 566.30 Incurred by paying for the import duty and the land for the compensation of removal of casting auxiliary equipment in current period 5 Advance payment 4,031.20 628.34 541.56 Incurred by the increase of advance payment for the parts and components 6 Project material 1,051.18 234.76 347.77 Incurred by the increase of advance payment for the equipment in the implementation of company’s large technical innovation investment 7 Construction in 7,533.79 1,013.91 643.04 Incurred by the crease of technical progress innovation investment in the company 8 Long term - 34.33 -100 Incurred by the amortizement for the expenses to be leasehold and transferring some leasehold automobiles in current period apportioned 9 Advance 43,606.68 12,450.46 250.24 Incurred by the increase of orders due to receivable the recovery of market 10 Payable welfare 2.38 75.09 -96.83 Incurred by expense 11 Tax payable 1,869.31 867.23 115.55 Incurred by the increase of balance of enterprise tax payable in the end or period 12 Other deliverable 3.18 10.36 -69.31 See the note in Section 6, 18 (2) in the financial report 13 Other payable 351.56 745.98 -52.87 Incurred by the decrease of payable for Hangzhou Steam Turbine Group in the end of period 14 Special payable 279.00 1,193.00 -76.61 See the note in Section 6, 20 (3) in the financial report 15 Current debt 50,511.85 19,507.71 158.93 Incurred by the crease of advance summary receivable and tax deliverable 2. Description for the proceedings of accounting evaluation alternation in the company The reverse fund for bad debts in our company can apply the depreciation as per the age of the receivables (including the receivable and other receivable) balance in the end of period. In order to reinforce the company’s asset foundation, enhance the risk resistance, and represent the prudence accounting principle, the adjustment for original standard of depreciating the reverse fund of bad debts was brought forward by the 4th meeting of the audit committee of current board of directors, agreed on the 13th meeting of the second session of board of directors, and approved on the 2003 No.2 temporary conference of shareholders in the company. According to the debtor’s financial condition such as the cash flows and detailed aging schedule for the company’s receivables, the standard was adjusted as follows: Originally, depreciated by 5% for the age less than one year, and one to three years, 30% for the age above three years. At present, depreciated by 5% for the age less than one year, 10% for that between 1-2 years, 30% for that between 2-3 years, and 60% for that above three years. Compared with the original depreciation standard, calculating as per the new one would affect the net profit of the company in 2003 up to about RMB 19,972,900. For more information, refer to the Resolution notification of 13th meeting of the second session of board of directors, which was published on the Security News and Hong Kong Commercial Daily, Oct 9, 2003; Proposal for Adjusting the Depreciation Standard of Bad Debts from the company independent director; the Resolution notification of 2003 No.2 temporary shareholders, which was published on the Security Times and Hong Kong Commercial Daily, Dec 9, 2003. 3. The condition that no heavy asset loss and that incurred by related responsibility for external guarantees existed in the company within the report period V Great changes of the producing and operating environment, the macropolicy, the laws and regulations, had affected, are affecting or will affect the company financial condition and its performance greatly. Analyzed the domestic market situation, the board of director in the company was conscious of that: The marketing demands for industrial steam turbine would continue to keep prosperous with the expedite progression of the urbanization, civil operation and industrialization in our country, and with the implementation of the development strategy in our country’s 10th five-year-plan and the Three West and One East strategies (West development, Transmission of electricity from the west to the east, Transmitting natural gas from the west to the east, Revive the Northeast old industrial base). The company should cherish the favorable opportunity and strive for expanding the producing capacity, so as to meet the market demands. However, the board of director especially reminded the investors to notice that some polices like the monetary restraint maybe appear by relevant department when the country strengthened the macro-economic regulation system. The appearance of these policies certainly would affect the company operation in the two respects: One was the number of orders. The credit squeeze policy would make some projects, which were planed to start, delayed or cancelled due to lack of money, thus the bullish market would be restrained, even reversing the rapidly rising investment impulsion in a certain field, consequently, the number of orders would decreased. The other lied in the return of payment for goods. The uncertainty of customer’s capital certainly would make the press for payment more difficult, thus led to the increase of receivable amount. In addition, the increase of profit would be affected in some respects on account of the rising of raw material’s price, the increasing of labor force cost, and the technical innovation investment for expanding the producing capacity. Therefore, the board of director sincerely reminded all the investors to attach importance to the risk that they would undertake for investing the company’s stock. VI Operating plan in 2004 The scheduled producing task for the industrial steam turbine was 201/1.50 million kilowatts in 2004. The number of steam turbines and the kilowatts will increase by 62% and 81% respectively than that in 2003. So large throughput never appears in the 46 years history in our company. To fulfill the producing task in 2004, there are a great number of difficulties; here the two most difficult predictable problems are the insufficient producing capacity and the power supply limitation. However, the only thing we can do is to try our best at all costs to fulfill the scheduled throughput and meet the market demands and our customers. Except fulfilling the producing objects in 2004, we shall create conditions for future development. For all this, the company will endeavor to fulfill the following important tasks: 1. Speed the construction of diesel generating electricity system. This project shall be accomplished before the summer in 2004, so as to decrease the loss to the production resulted from the power supply limitation. 2. Speed the expanding of the final assembly workshop and the batch of technical innovation projects aimed at enlarging the producing capacity like the Steam Turbine for Boiler Feed Pump for Supercritical Thermal Power Station, so as to meet the dramatic increasing market demands for the industrial steam turbine in the major industries such as the electric power, petrochemicals and metallurgy. 3. Speed the reformation, reconstruction and relocation progress for the batch of subsidiaries such as the casting subsidiary and auxiliary equipment subsidiary. Expand the scale of producing parts in specialization and collaboration, to increase the yield of key spare parts and components. 4. Speed to seek for the parts outsourcing partners, and strive to double the parts outsourcing capacity on the existing basis. 5. Speed the development of three major new products, exploit new application filed for the industrial steam turbine, continuously consolidate and extend our company’s technical predominance in the advanced products market of domestic industrial stream turbine. 6. Reinforce to import new technologies and foreign capital, expedite the pace to open overseas market, so as to make more competitive in the international market for our company. Ⅷ Daily Work with the Board of Directors 1. Meetings and contents of resolution of the Board of Directors in the reporting period The Board of Directors held nine meetings in the reporting period, which are listed below: 1) The ninth meeting of the second session of the Board of Directors was held in the meeting room in the third floor on April 14th, 2003. The total number of directors who should attend the meeting was eleven, and the actual number was ten. Jiang Demu, a director, was absent because of business. The Chairman of Board, General Manager, General Accountant respectively gave a report about their specific work in 2002. In addition, reports about recent work and descriptions to their proposals were also given by Strategy Committee, Audit Committee and Salary & Assessment Committee.Twelve proposals were deliberated and adopted during the meeting through open vote. Independent directors who attended the meeting didn’t take part in the deliberation and approval for “Increasing the allowance of independent directors”. (1) 1.1 Deliberating and agreeing to the 2002 annual report and its summary, and making it public. (2) 1.2 Deliberating and agreeing to the 2002 annual work report of the Board of Directors. (3) 1.3 Deliberating and agreeing to the 2002 annual work report of General Manager. (4) 1.4 Deliberating and agreeing to the 2002 annual report of finance and accounting. (5) 1.5 Deliberating and agreeing to the 2002 elementary proposal of profit allocation. (6) 1.6 Deliberating and agreeing to the proposal for adjusting the standard of bad debts preparative provision and provision assets devaluation preparations. (7) 1.7 Deliberating and agreeing to employ once more PricewaterhouseCoopers Accountant’s Office and Zhejiang DongFang Accountant’s Office respectively as international and domestic audit office for the corporation. (8) 1.8 Deliberating and agreed to increase the allowance of independent directors in the corporation. (9) 1.9 Deliberated and agreed to the means of salary assessment with top management in the corporation. (10) 1.10 Deliberating and deciding to hold the 2002 conference of shareholders on May 20th, 2003. (11) 1.11 Deliberating and agreeing to the decision that Jiang Demu wouldn’t work as a director any more. (12) 1.12 Deliberating and approving the proposal of Development Plan between 2003 – 2005. (The second to the ninth proposals above should be submitted to the 2002 annual meeting of shareholders for deliberation) 2) The tenth meeting of the second session of the Board of Directors was held in the meeting room in the third floor on April 24th, 2003.The total number of directors who should attend the meeting was ten, the actual number was nine. Yao Fusheng, an independent director, was absent because of business, and authorized Zhang Mingguang, another independent director, to vote on related affairs instead of him. The meeting deliberated and passed the first quarter report in 2003 through open ballot, and made it public. 3) The 2003 No.1 temporary meeting of Board of Directors was held in the meeting room in the third floor on May 12th, 2003. The total number of directors who should attend the meeting was ten, the actual number was nine. Yao Fusheng, an independent director, was absent because of business in other city.For the reason of SARS, the address where the 2002 annual meeting of shareholders would be held needed to be changed. Finally the address was changed to ”LaoLongJinYu Garden, LongJingShiFeng No.148, Hangzhou” through open ballot. 4) The eleventh meeting of the second session of Board of Directors was held in the meeting room in the third floor on June 26th, 2003. The total number of directors who should attend the meeting was ten, and the actual number was ten. Three proposals were deliberated and passed in the meeting through the means of open ballot: (1) 1.1 The meeting approved to fund RMB 20 million to cooperate with ”KaiXin corporation” to establish a new foundry company by share. And authorized managers to make preparations for the move of subsidiary of foundry company. (2) 1.2 Deliberating and approving to invest the after-restructure ”Hangzhou Heat Energy Power Co., Ltd.” in terms of funding ratio of 51%, and authorized managers to draw out restructuring plans of the new company. (3) 1.3 Deliberating and agreeing to nominate Xiaoning Hua as a candidate of independent director, and submitting to the first extraordinary meeting of shareholders in 2003 for election. 5) The twelfth meeting of the second session of Board of Directors was held in the meeting room in the third floor on August 10th, 2003. The total number of directors who should attend the meeting was ten, and the actual number was nine. Wang Hongkang, a director, was absent because of business, and authorized Bo Ronghua, another director, to vote on related affairs instead of him. Six proposals were deliberated and passed in the meeting through the means of open ballot: (1) 1.1 Deliberating and agreeing to “The Annual Report of the First Half of 2003” and its summary, and making it public. (2) 1.2 Deliberating and approving “The corporation investors temporary regulations”. (3) 1.3 Deliberating and agreeing to make related revisions to the Act 101 in “Articles of Association” according to the actual personnel change in number of Board of Directors. And submit to the first extraordinary meeting of shareholders in 2003 for approving. (4) 1.4 Deliberating and approving to increase the total amount of profit which are concerned with the salary assessment of top management from RMB 30 million per year to RMB 40 million per year. And adjust the float awarding and publishing amount from RMB 1000 to RMB 2500 for one percent of increase or reduction. (5) 5) Deliberated and decided to hold the 2003 No.1 temporary conference of shareholders in 15th,September, deliberated and revised “Corporation regulations” and items of electing independent directors. (6) 1.6 Deliberating and approving to purchase 130 Mu of land in the development garden, Tangxi town, Yuhang district, Hangzhou city according to the price of 106,000 to 126,000 yuan per Mu in the form of advancing in cash, using for the move of subsidiaries of both foundry company and auxiliary machinery company. And authorize managers to deal with related affairs. 6) The 2003 No.2 temporary conference of Board of Directors was held in the meeting room in the third floor on September 4th, 2003. The total number of directors who should attend the meeting was ten, and the actual number was nine. Yao Fusheng, an independent director, was absent because of business, and authorized Zhang Mingguang, another independent director, to vote on related affairs instead of him. Three proposals were deliberated and passed in the meeting through the means of open ballot: (1) 6.1 Deliberating and agreeing to list “Proposal on changing directors” into the discussion topic of the 2003 No.1 temporary conference of shareholders in terms of proposal from the fourteenth meeting of the second session of Board of Directors with Hangzhou Steamer Power Group Co., Ltd., and making it public. (2) 6.2) Deliberating and agreeing to the decision that Wen Fang wouldn’t work as a director, and Nie Zhonghai was recommended as a director, which was submitted to the first extraordinary meeting of shareholders in 2003 for election. (3) 6.3) Deliberating and agreeing to sign “a vouch agreement in reverse” on the fact that Hangzhou High-Tech Investment Co., Ltd, the No.4 shareholder of Hangzhou Keximeng Technology Co., Ltd(for short “Hangzhou Keximeng”) would offer Hangzhou Keximeng a loan of 600,000 Yuan. Our corporation would take the risk of less than 207,000 yuan. A suggestion was also put forward to restructure “Hangzhou Keximeng”. 7) The thirteenth meeting of the second session of Board of Directors was held in the meeting room with Hangzhou Liu Ying Hotel on October 8th, 2003. The total number of directors who should attend the meeting was eleven, and the actual number was eleven. Two proposals were deliberated and passed in the meeting through the means of open ballot: (1) 7.1 Electing Nie Zhonghai as the new Chairman of Board of the second session of Board of Directors. (2) 7.2 Deliberating and agreeing to the proposal for adjusting the standard of bad debts provision, and submitting to the second extraordinary meeting of shareholders in 2003 for approving. 8) The fourteenth meeting of the second session of Board of Directors was held in the meeting room in the third floor on October 26th, 2003. The total number of directors who should attend the meeting was eleven, and the actual number was ten. Zhang Mingguang, an independent director, was absent because of business, and authorized Zou Zhaoxue, another independent director, to vote on related affairs instead of him. Seven proposals were deliberated and passed in the meeting through the means of open ballot: (1) 8.1 Deliberating and agreeing to the third quarter report in 2003, and making it public. (2) 8.2 Deliberating and agreeing to invest RMB 80 million on improvement of technology to increase productivity, and submitting the proposal to the second extraordinary meeting of shareholders in 2003 for approval. (3) 8.3 Deliberating and approving to fund RMB 13 million to establish Hangzhou Steamer Auxiliary Machinery Co., Ltd. by share. (4) 8.4 Deliberating and approving to fund RMB 3 million to establish Hangzhou Steamer Heat Energy Power Co., Ltd. by share. (5) 8.5 Deliberating and approving the proposal to modify “Rules on Implementation of Special Committee of Board of Directors”. (6) 8.6 Deliberating and agreeing to the member lists for all special committees and their work team members nominated by the nomination committee of Board of Directors. (7) 8.7 Deliberating and deciding to hold the second extraordinary meeting of shareholders in 2003 on December 8th, 2003. And Deliberate the proposal for “Investing RMB 80 million on improvement of technology to increase productivity”, as well as the proposal for “adjusting the standard of bad debts provision”. 9) The 2003 No.3 temporary meeting of Board of Directors would be held in the conference hall in Jinxi Garden of Hangzhou.The total number of directors who should attend the meeting was eleven, and the actual number was nine. Hua Xiaoning, an independent director, was absent because of business, and authorized Zou Zhaoxue, another independent director, to vote on related affairs instead of him. Yan Jianhua, a director, was absent because of business, and authorized Bo Ronghua, another director, to vote on related affairs instead of him. The proposal to invest RMB 250,000 to cooperate with “Hangzhou Steamer Industry Co., Ltd.” by share was deliberated and approved through the means of open ballot. 2. Details of Board of Directors’ implementing the resolution passed in the meeting of shareholders 1) Items for the meeting of shareholders’ authorization 1.1 (1) Implementing Details about adjusting the standard of bad debts provision and preparations of provision assets devaluation for the first time: the standard of bad debts provision would be modified from the original one that “the due amount balance with different aging information, including due amount and other due amount, was to be provided by 5% for those below one year and 1 to 3 years, by 15% for those above 3 years” to “ “still by 5% for those below one year and between 1 to 3 years, by 30% for those above 3 years” under the approving of the 2002 annual meeting of shareholders.Calculated in terms of the adjusted standard of bad debts preparations provision, net profit was reduced by RMB 6,908,969.98 in 2002. In addition, the corporation provision two preparations of assets devaluation for further consolidating enterprise assets under the proposal of Audit Committee of Board of Directors. Firstly, according to Act No.16 of international accountant regulations(real estate、factory squares、 buildings、equipments should be completely evaluated every 3 to 5 years) the corporation totally provision fixed assets RMB 9,284,605.62 with those which par value was less than market value under evaluation of Zhejing Dongfang Assets Evaluation Co., Ltd. Secondly, because there’s no hope to make profit from loss for Hangzhou Keximeng Technologies Co., Ltd. in a short time, the corporation has also made preparations of provision devaluation for the long-term investment in the third quarter accounting report in 2003 in order to maintain investor’s benefits. The devaluation affected the net profit of 2002 by RMB 1,585,500. The above adjustment of the standard of bad debts provision and the provision of two assets devaluation preparations affected the total net profit of 2002 by RMB 17,779,000. (2) Implementing Details about adjusting the standard of bad debts provision and preparations of provision assets devaluation for the second time: the standard of bad debts provision would be modified from the original one that “the due amount balance with different aging information, including due amount and other due amount, was to be provided still by 5% for those below one year and between 1 to 3 years, by 30% for those above 3 years” tobe depreciated by 5% for the age less than one year, 10% for that between 1-2 years, 30% for that between 2-3 years, and 60% for that above three years. According to the new standard of provision, the company has provided for the bad debts of 2003, which reduce the net profit by RMB 19.9729 million with the comparison to the old standard . The board of direct hold that the old standard was formed with the comparatively low market situation and poor capital credibility of users. The independent director give three proposals for the company in Independent advice: (1) Strengthen the management of required funds, reduce the loss of bad debts as much as possible, and digest the loss owing to upward adjustment of standard by further development of production to increase the benefit. (2) After this adjustment, our company should keep the stability of the policy. (3) At the same time of adjustment, our company should consider the policy of uprating the dividend to offer the general holders more practical return. The board of direct has positively taken and implemented the above proposals.Take the recovery of funds for example, our company enhances the incentive policy for required funds up to three or more years, the amount of recovered funds is 98.77% higher than that of last year. In the distribution of dividend ,it will also be two times as high as last year’s. (3) About the implementation of “invest RMB 80 million or so to increase the investment and promote the productivity.Our company is applying to some relevant state agencies for the project with the name “Technical Innovation of Super-critical Power Station Feed Pump Steam Turbine”. The project has selected 16 sets of numeric control key process equipment, 4 of them must be imported and 12 home produced. Until the end of February,2004, eight sets of equipment have won the bid and the supply contract (two imported in them) was signed. Moreover, two have installed in the factory. By repeated demonstrations of experts, the old equipment lectotype programs are adjusted individually, adding to the increase of equipment price and the influence of exchange rate, it is predicted that the overall investment may be more than RMB 0.1 billion. (2) About the implementation of the program for profit distribution and public funds to shares, within the reporting period. Within the reporting period, there is no program for public funds to shares. The company states the announcement of “bonus and dividend distribution in 2002” in Security News and Hong Kong Commercial Daily, and carry out the decision by the shareholders conference about profit distribution. With the permission of the annual meeting of shareholders in 2002,based on the cardinal number of 0.22 billion overall shares at the end of 2002, every 10 shares is allotted RMB 1.00 (including the duty), the total amount of cash and bonus is 22 millions, and the remained undistributed profit of 47.8938 thousands are turned to the next year. The dividends for B shares are allotted by reduced HK dollars, the exchange rate is calculated in accordance with the middle price (1 HK to 1.0610￥) issued by PBC on 21,5,2003, the first weekday after the annual meeting of shareholders in 2002. The objects of dividend allotment are the overall holders of B shares who register in the SZ branch office of China security registration and settlement Limited Company, before the deadline of the closing of SZ Security Exchange House on the afternoon of June 17, 2003. The last trading day for B shares is June 17, 2003, and the ex-dividend day is June 18, 2003.The holders of B shares can draw the dividends at the trusted agency or bank as of June 23, 2003.The holders of state shares are allotted by the company directly. About the implementation of program for offering the shares and increasing the issue of new shares. Within the reporting period, the company hasn’t propose or carry out any program for offering the shares and increasing the issue of new shares. VIII. Preliminary Proposal for Profit Distribution or Public Funds to Shares in 2003 1. Preliminary proposal for profit distribution. In accordance with the Articles of Association of the Company, the “net profit” adopted in the profit distribution will be basing on the lower one of the financial results audited by the overseas auditor and the domestic auditor. Therefore the 2003 Financial Statement issued by Zhejiang Oriental Certified Public Accountant is prevail, and the net profit of the year is RMB44,002,529.98, with drawing of statutory reserves of RMB4,460,812.71 (RMB4,400,253.00 for the parent company), and drawing of statutory public welfare fund of RMB4,460,812.71 (RMB4,400,253.00 for the parent company), plus the profit of RMB47,893,752.19 practically not distributed in the previous year, the profit distributable is amounted to RMB82,974,656.75. The Board of Directors proposes: basing on the total capital share of 220,000,000 shares at the end of year 2003, RMB2.00 (tax included) will be distributed as cash dividend upon each 10 shares. Dividend for B share holders will be translated to and distributed in Hong Kong Dollar at the middle exchange rate between HKD and RMB published by the People’s Bank of China at the 1st bank day next to the date when the profit distribution plan was adopted by the Shareholders’ General Meeting 2003. The profit distributed in this time is amounted to RMB44,000,000.00. The retained RMB38,974,656.75 of profit practically not distributed will be carried over to the next fiscal year. The above preliminary proposal plan is subject to the approval in the 2003 annual meeting of shareholders. 2. No capitalization of reserves will be performed for year 2003. IX. Miscellaneous 1. According to the regulations in the Notice about standardizing the capital intercourse between the listed company and the connected parties &several problems about the listed company offer external collateral, check on the condition that the holding shareholders and other connected parties occupy the company capital. (1) The special explanation from the Zhejiang Dongfang Accountant’s Office ZJEAOR[2004]NUMBE To: the shareholders in Hangzhou Steam Turbine Co. Ltd.: We accept the trust to audit the condition that the 2003 holding shareholders in HZST Co. Ltd. (ST Ltd for short) and other connected parties occupy the company capital.It is the liability for the manage authority of ST. Ltd. to offer authentic、legal and complete materials. Our liability is to state special suggestions on the above particulars.We conduct the audit according to the Guideline about independent audit for Registered Accountant ,and during this period ,we carry out the necessary procedures of inspecting the account records randomly under the practical situation in ST Ltd. According to the requirements in the Notice about standardizing the capital intercourse between the listed company and the connected parties &several problems about the listed company offer external collateral issued with [2003] No.: 56 by China Stock Monitor and Management Committee & The state-owned assets Monitor and Management Committee of The State Department, special explanations noticed in our audit work about 2003 ST Co Ltd. capital occupation by the holding shareholders & connected parties are given as follows: Table about the capital occupation by the 2003 holding shareholders in ST Ltd and other connected parties In RMB Ten Throusand Relation between the Real cash Corresponde Real cash Accumulat Accumulat Occup party amount at Occup The party occupying the nt items in amount at ed amount ed amount y occupying the ation capital account the end of for debit for credit patter the capital beginning reason report term side side ns &the listed of term company Tentat Transa Other ive ction 2.09 2.09 Hangzhou Steam Turbine Holding receivables receiv interc Power Group shareholders ables ourse Account Purch Produ 1,026.11 1,459.49 2,360.08 2,793.46 receivable ase ction Southern Sales Company of Subsidiary to Account Purch Produ Hangzhou Steam Turbine the holding 389.29 477.18 273.44 361.33 receivable ase ction Power Group shareholders Light and chemical industry Subsidiary to and metals operation Account Purch Produ the holding 6.08 14.08 8.00 department of Hangzhou receivable ase ction shareholders Steam Turbine Power Group Tentat Transa Other ive ction Hangzhou Steam Turbine 1.97 3.30 12.17 13.50 Joint stock receivables receiv interc Environment Protection Co., ables ourse company Ltd. Account Purch Produ 3.00 132.90 129.90 receivable ase ction Tentat Transa Subsidiary to Hangzhou Steam Turbine and Other ive ction the holding 0.29 0.29 Vehicle Sales Service Co., Ltd. receivables receiv interc shareholders ables ourse Appendix Relation between the Real cash Corresponde Real cash Accumulat Accumulat Occup party amount at Occup The party occupying the nt items in amount at ed amount ed amount y occupying the ation capital account the end of for debit for credit patter the capital beginning reason report term side side ns &the listed of term company Tentat Transa Other ive ction 0.01 0.01 Hangzhou Heat Energy Subsidiary to receivables receiv interc the holding ables ourse Power Co., Ltd. shareholders Account Purch Produ 259.15 221.68 520.13 482.66 receivable ase ction Tentat Transa Subsidiary to Hangzhou Machinery School, Other ive ction the holding 0.23 0.07 0.30 4th receivables receiv interc shareholders ables ourse Tentat Transa Subsidiary to Hangzhou Southern Gear Other ive ction the holding 0.16 0.16 Speed Reducer Co. Ltd. receivables receiv interc shareholders ables ourse Payme nts made Advance 174.60 419.60 245.00 Sales by payment progre ss cash Tentat Transa Subsidiary to Hangzhou Nanhua Wood Other ive ction the holding 0.05 0.01 0.06 Model Box Factory receivables receiv interc shareholders ables ourse Tentat Transa Subsidiary to Hangzhou Nanling Steam Other ive ction the holding 0.47 3.46 3.70 6.69 Turbine Fitting Parts Factory receivables receiv interc shareholders ables ourse This report is only for CSMC and its internal departments & Stock Exchange, not be used for other purposes. There is no responsibility for the RA and his AO in case of misusing the report. Zhejiang DongFang Accountant’s Office CRA. HangZhou,·China CRA April 13, 2003 （2）公司独立董事的专项说明：(2)Special explanation from the independent directors: According to the Notice about standardizing the capital intercourse between the listed company and the connected parties &several problems about the listed company offer external collateral (“Notice” for short), after carefully checking on the implementation and accumulation and capital occupation by the holding shareholders and connected parties, now some relevant particulars are given as follows: Until the end of reporting period, except for the legal operational capital intercourse between the company and the holding shareholders& connected parties, there is no evident suggesting that the company capital is occupied by the holding shareholders & connected parties. Nor is there external collateral offered by the company.(to the holding shareholders and other connected parties holding less than 50%shares,or any illegal body and individual. Suggest that modify the Articles of Association according to the third article of the second rule to standardize the examination and approval procedure for external collateral. Independent directors: Zhang Ming guang, Yao Fusheng, Zou Zhaoxue, Hua Xiaoning (signatures) April 13, 2003 2. Within the period of reporting, the newspapers appointed by our company to disclose the information are still Stock News and HK Business. Chapter VIII. Report of the Supervisory Committee (I) The situation of the Supervisory Committee word within the period of report During the report term, the Supervisory Committee held three meetings, the details are as following: 1. The 8th meeting of the 2nd term Board of Directors was held in the meeting room on the second floor April 14, 2003, the required supervisor of this meeting is five, actual arrival is four people, the employee supervisor are absent for the reason of work and entrust the employee supervisor zhao ying to vote on the each topic reviewed at the meeting, The secretary of board of directors of company has attended this meeting, the 2002 work report of the Supervisory Committee presented by zhu shuilong have been listened at the meeting and adopt sign in the vote to approve 4 proposals, （1） The company 2002 annual report and summary, agreement to announcement; （2） The company 2002 work report of the Supervisory Committee and present the 2002 annual shareholders' meeting reviewing; （3） The Supervisory Committee independent suggestion about the company’s operation following the law and the agreement to the announcement; （4） Notice on holding company's 2002 annual shareholders' meeting; And agree to the announcement 2. The 9th meeting of the 2nd term Board of Directors was held in the meeting room on the second floor April 24, 2003, the required supervisor of this meeting is five, actual arrival is five people, 3. The 10th meeting of the 2nd term Board of Directors was held in the meeting room on the second floor August 10, 2003, the required supervisor of this meeting is five, actual arrival is five people, the secretary of board of directors has attended this meeting and the way of sign in the vote was adopted in the meeting to approve 4 proposals: （1） "Company's 2003 semi-annual reports " and summary and agree to announce. The board of supervisors speaks highly of the business achievement created by the company manager' s layer within the first half of the year and hope managers to take effective measure in " expanding production capacity " in order to meet the market demand increasing with day by day. （2） " The method of investor's relation management (provisional ) of the company "; the meeting make the agreement to this " method ", and hope that the relevant functional department of the company can do a good job of investor's management according to relevant requests of China's Securities Regulatory Commission and Shen Zhen Stock Exchange; （3） Regarding the proposal of adjusting the examining index of company senior executive's salary; （4） The enhancement of index connected with profit in salary examination among senior administrant staff are approved in the meeting; this adjustment has strengthened encouragement and restraint to company's senior executive as well as to protect the interests of investors, the development of the company. (II) The Supervisory Committee Independent Statement After supervising of the situation about company operation and business decision in 2003, the Supervisory Committee publish the independent suggestion as following: 1. The operation situation of company according to the law (1) In report term, the board of supervisors of the company attended the shareholders' meeting and all previous directorate meeting as a nonvoting delegate according to the law and supervised the procedure of shareholders' meeting , proposal item , implementation of resolution ,etc., think : Board of directors and manager's stratum of the company can operate according to " company law " , " corporation constitution” , " the company management criterion " , make the great decision in accordance with the science, legal procedure, effective implement to guarantee the operation abiding by laws (2) The Supervisory Committee has not found any behavior and phenomenon that the company's director , general manager and other senior executives broke out the law, code, corporation constitution or do anything harmful to interests of company and of infringing the stockholder's equity while fulfilling the their duty; (3) The company sets up considerably perfect inner operating management system, consequently, there are laws to abide by and regulations to track in making the company policy , performing, supervising , administration behaviour; (4) The board of supervisors thinks : The Supervisory Committee and manager stratum are facing the new situation in short supply to the products comparing the increasing demand and can take counter-measure in time to expand production capacity actively, the difficulties caused by SARS and " operate a switch and ration the power supply " at the same time, which show the professional spirit and the strong ability of company policy-making stratum, manager stratum when facing the change of market, 2. Check the company financial situation (1) The board of supervisors has listened to the report of the relevant department of the company on company's financial situation and production as well as consulted the relevant information , has not found the unusual situation (2) PriceWaterHouseCoopers CPAs Company and Zhejiang orient CPAs Company make the standard non-interpretative explanation and audit report without reserved opinion, the board of supervisors thinks that this audit report has reflected financial situation of the company and management performance objectively, truly (3) In the 2003 annual financial report, the company adjusted the criterion of the allowance for bad debts, which change the previous ratio of “ Collecting the balance of the account receivables based on the different account age at the end of term( including the account receivable and other receivable) from 5% within three years and 30% when more than three years to the 10% within two years, 30% between one year and two years and 60% when more than three years. The Supervisory Committee think that the elevation of the ratio of the allowance for bad debts in 2002 and 2003 was some cautious financial measure under the prerequisite of furthering details analysis and based on the change of market pattern, whose purpose is to strengthen the capital ground of company and the abilities to prevent the risk, to contribute to the standing development of company and the interests of small shareholder; the company independent release the “independent suggestion” to agree with the adjustment. The procedure of discussion this proposal was normal , transparent and passed by the 2003 2nd term temporary shareholders’ meeting. 3. The fund previously raised has been use up in 2002, during the report term there is no new financing situation; 4. There was no such situation to happen that the company purchased and sell the assets in the report term; 5. Rationality and fairness of company's related trade The Supervisory Committee has checked the relevant business materials of company and verify that all related business proceed fairly , openly according to " related trade contract " signed before. The Supervisory Committee think that the Board of directors and manager's stratum can fulfil the obligation of truthfulness conscientiously , the related business can go on according to relevant agreements strictly , the price is rational, the procedure is legal, the situation of damaging the stockholder's equity or leading to the losses of company assets has not occurred, 6. Suggestion for the audit report of CPAs company PriceWaterHouseCoopers CPAs Company and Zhejiang orient CPAs Company make the standard non-interpretative explanation and audit report without reserved opinion, The Supervisory Committee had no other items to need proving, in the report term, the company has not predicted the profit and had no other items to need proving, Chapter IX. Significant Events (I) During the report term, there is no big law suits or arbitration cases. (II) During the report term, there is no purchase, sell of capital or attraction of capital to make a union. (III) During the report term, the key relevant transactions: 1. Relevant transactions arising from purchasing commodity, supplying labor: (1) Several branches subsidiary to “Hang Steam Turbine Group” engaging in selling industry Steam Turbine purchased the Steam Turbines and its accessories from our company at the factory price. During the report term, the relevant transaction amount is RMB 45,026,691.52. (2) The power such as water, electricity are supplied by “Hang Steam Turbine Group”, with the fixed price stipulated by “State market price plus management charges”. During the report term, the relevant transaction amount is RMB 11,928,619.03. (3) The staff logistic assurance, transportation fee, training charges and securities, land lease business are signed in the contract with “Hang Steam Turbine Group”. The price is confirmed with the principle of referring to market price and finalizing through negotiation. The amount is paid by lump sum every year per the agreement. During the report term, the transaction amount is RMB 10,462,262.02. (4) The basic endowment insurance, supplementary endowment, basic medical care, unemployment insurance, and work injury insurance, magazine, newspaper subscription charges are paid by “Hang Steam Turbine Group” on behalf. During the report term, our company pay the said expenses to “Hang Steam Turbine Group” at RMB 22,328,333.54. The total of the above-mentioned transactions amounts to RMB 89,745,906.11. Please refer to commentary 9 “Relevant relations and other transactions” in the accounting report for details. Since our company is in the same boat with “Hang Steam Turbine Group”, in order to reduce cost and realize the sources share, the said transaction is of necessity that will be continued. 2. During report term, there is no stock ownership transfer between our company and its relevant relations. 3. Credits, liabilities and assurance items with the relevant relations: (1) During the report term, there is credit and liabilities transaction when “Hang Steam Turbine Group” and its subsidiary branches are selling the Steam Turbine products. “Hang Steam Turbine Group” owed payment at RMB 10,261,077.02 that occupies 4.89% of payment receivables by end of term; our company owed “Hang Steam Turbine Group” at RMB 601,634.40 that occupies 17.11% of other payables by end of term. Please refer to Notes 4 “ relevant relation’s balance payable and receivable” in Commentary 8 “relevant relations and its transactions” in the accounting report for details. (2) During report term, there is no credit assurance between the company and the relevant relations. (IV) Other key related transactions. Except for the captioned relevant transactions, there is no key relevant transaction during the report term. (V) Key contract and its fulfillment (1) During the report term, the company does not entrust, contract and lease the capital of other company, and vice versa. (2) During the report term, there is no capital or credit assurance in the company. (3) During the report term, the company does not entrust others to manage the cash capital and no such plan in future. (4) During the report term, the company has no other key contract that may affect the capital to fulfill. (VI) Promises of the company or shareholder holding more than 5% shares during the report term or till report term. The company and its shareholder “Hang Steam Turbine Group” does not make any important promises during the report term or till report term. (VII) Public Certified Accountants the company hired and fired During the report term, the company employ PriceWaterHouseCoopers Zhongtian Certified Public Accountants to afford auditing service for the abroad fiscal report, and continue the employment of Zhejiang Oriental Certified Public Accountants to afford auditing service for the hom fiscal report of the company. During the report term, the wages for the two auditing organizations are as follows Accountants Year 2003 Remarks PriceWaterHouseCoopers RMB 340,000 Business trip Zhongtian Certified Public expenses not Accountants undertaken Zhejiang Oriental Certified RMB 120,000 Business trip Public Accountants expenses undertaken Total RMB 460,000 Zhejiang Oriental Certified Public Accountants provides auditing service for the company since 1999 for the home fiscal report. Up to 2003, he has serviced 5 years. PriceWaterHouseCoopers Zhongtian Certified Public Accountants provides auditing service for the company since 2002 for the abroad fiscal report. Up to 2003, he has serviced 2 years. (VIII) During report term, the company, board of directors and directors has not been checked, administratively penalized, or accused and blamed publicly by the securities bourse. Nor did the China Securities Supervision Committee and its Hangzhou officer submit remedy report after inspection. (IX) Key cases listed in Term 17 of (trial edition), and Term 62 of and key cases occurred after report term till report issuing. (1) Invest to construct “Hangzhou Steam Turbine Casting Co.,Ltd.” Company has issued notice to “Invest to construct Hangzhou Steam Turbine Casting Co.,Ltd.” in on Oct. 22, 2003 (Notice No.: L2003-27). In the 11th of 2nd session of meeting of board of directors, it is approved to invest RMB 20,000,000 to establish Hangzhou Steam Turbine Casting Co.,Ltd. with Hangzhou Kaixin Casting Co.,Ltd. Hangzhou Steam Turbine Casting Co.,Ltd. was approved to set up by Hangzhou Administration Bureau of Industry and Commerce on Mar. 1, 2004. The registered capital is RMB 22,000,000, of which the company invested RMB 11,220,000 that contributes 51%, and natural person Yang Lian Rong (who is actual holder of Hangzhou Kaixin Casting Co.,Ltd.) invested RMB 10,780,000 that contributes 49%. Both parties invested in cash. The address of the company is Tangxi Industry Zone, Yuhang District, Hangzhou. The legal person of the company is Bo Rong Hua. The original notice claims that the management team of the company (about 3-5 persons, selected from current management members of the subsidiary casting company and “Hangzhou Kaixin Casting Co.,Ltd) predicted to invest RMB 660,000, which occupies 3% of registered capital. Through amicable negotiation with Yang Lian Rong, the management team will join the shares after the company’s capital and shares are enlarged. As the land use right of newly built factory can only get approval by end of February in 2004, the original notice claimed the casting branch company shall complete the moving work by end of 2004. Now it can not be realized, but will be put off about 8-12 months. (2) Invest to construct Hangzhou Steam Turbine Thermo Power Co.,Ltd. (now named as Hangzhou Zhongneng Steam Turbine Power Co.,Ltd.) The company has issued notice of resolution of 14th board directors meeting in 2nd session in on Oct. 28, 2003. (Notice No.: L2003-28). The board of directors approves to invest RMB 3,000,000 to set up Hangzhou Steam Turbine Thermo Power Co.,Ltd. The company was originally planned to set up on the foundation of “Hangzhou Thermo Power Co.,Ltd.”, and shares controlled by the company, joined by the technology and management caliber of Hangzhou Thermo Power Co.,Ltd. The reformed company was approved to set up by Hangzhou Administration Bureau of Industry and Commerce on Feb. 27, 2004. The company is named as “Hangzhou Zhongneng Steam Turbine Power Co.,Ltd.” The registered capital is RMB 10,000,000, of which the company invested RMB 5,100,000 that contributes 51%, and 12 natural persons Li Xi Ming, Xian Jin Fa (who are technology and management calibers of Hangzhou Thermo Power Co.,Ltd.) invested RMB 4,900,000 that contributes 49%. Both parties invested in cash. The address of the company is No. 357, Shiqiao Road, Hangzhou. The legal person of the company is Li Lie. Business scope is design and manufacture of Steam Turbine and its accessories, medium or small generator project contract and technology consulting. Because at the reforming project of the company, the designed register capital is RMB 5,000,000, therefore the board of directors made out the solution to invest RMB 3,000 to set up the company. For the purpose of new business scope, the registered capital is set as RMB 10,000,000. In view of the shareholder controlling position, the company’s investment amount is altered to be RMB 5,100,000. (3) Shareholder’s mortgage of stock ownership The company has issued the Notice Regarding to Stock Ownership’s Mortgage of shareholders. The company received the Stock Mortgage Registration Certificate of China Securities Registration Settlement Company, Shenzhen Branch. The mortgagor is the controlling shareholder Hangzhou Steam Turbine Power Group Co.,Ltd. The mortgaged shares nature is “State shares of issuer”. The securities quantity is 70,000,000 shares (occupy 50% of the owned shares of the company, and 31.82% of total company shares). The frozen term is from Nov. 4, 2003 till the pawnee and the mortgagor proceed registration off procedure in China Securities Registration Settlement Co.,Ltd., Shenzhen Branch. The said pawnees are Shanghai Pudong Development Co.,Ltd., Hangzhou Branch, Zhongshan Sub-branch. The pawnee and mortagtor agreed that during the mortgage period from Nov. 2003 to Oct. 2005, the pawnee shall provide credit loans to mortgagor no more than RMB 1 billion. The signed by both parties was notarized by Hangzhou Notary Office. (4) Join shares in Hangzhou Steam Turbine Nanling Co.,Ltd. (now named as Hangzhou Steam Turbine Industry Co.,Ltd.) The company issued the temporary resolution notice of 3rd session meeting of board of directors of 2003 in on Dec. 9, 2003. (Notice No.: L2003-32). The board of directors approves to invest RMB 250,000 to join the shares of Hangzhou Steam Turbine Nanling Co.,Ltd. Hangzhou Steam Turbine Nanling Co.,Ltd. (now named as Hangzhou Steam Turbine Industry Co.,Ltd.) was reformed to be a liability company held by the natural person in correspondence to the notice concerning of Enhand the State Owned Corporation Reform” issued by Hangzhou Municipal Government. The head company Hangzhou Steam Turbine Power Co.,Ltd. integrate and reunite its subsidiary organizations “Staff Training Center”, “Administration Center” “Staff Dinning Hall” and “Staff Hospital” and other supporting capital such as “Work Union” to set up Hangzhou Steam Turbine Nanling Co.,Ltd. with principle of dividing major industry and minor industry. After the reformation, the company’s main service object are the staff of the company, such as provide education and training, dormitory, environment greening, medical care and sanitary service. As the company is a marketed joint venture company limited. The investment service area is restricted by the policy. Therefore, the company does not join the shares finally and the investment amount RMB 250,000 was returned on Feb. 23, 2004. (X) Index of company information released in the report term Announcement Announcement Announcement Title Newspaper published No. Date Temporary 2003.01.14 Announcement of performance “Security Times” 6th 2003-01 result about the significant edition related business Temporary 2003.04.17 “Security Times” 2003-02 Announcement of 9th meeting 49th edition of the 2nd term Board of “Hong Kong Directors Commercial Daily” B3 edition Temporary 2003.04.17 Announcement of holding 2002 “Security Times” the 2003-03 shareholders meeting 49th edition “Hong Kong Commercial Daily” B3 edition Temporary 2003.04.17 The method of examining the “Security Times” the 2003-04 company senior executive's 49th edition salary (draft) Temporary 2003.04.17 Resolution announcement of “Security Times” the 2003-05 8th meeting of the 2nd term 49th edition Board of Directors Temporary 2003.04.17 Independent suggestion of the “Security Times” the 2003-06 Supervisory Committee about 49th edition the company operation in accordance with the law in 2002 Temporary 2003.04.17 “Security Times” the 2003-07 Independent director suggestion 49th edition about the adjustment of ratio of the allowance for bad debts and assets depreciation Temporary 2003.04.28 Resolution announcement of “Security Times” the 2003-08 10th meeting of the 2nd term 23rd edition Board of Directors “Hong Kong Commercial Daily” A8 edition Temporary 2003.04.28 Resolution announcement of “Security Times” the 2003-09 9th meeting of the 2nd term 23rd edition “Hong Board of Directors Kong Commercial Daily” A8 edition Temporary 2003.05.14 “Security Times” the 2003-10 Resolution announcement about 2nd edition the change of the address to “Hong Kong hold the shareholder meeting Commercial Daily” C7 edition Temporary 2003.05.21 “Security Times” the 2003-11 Resolution announcement about 25th edition “Hong the shareholders meeting Kong Commercial Daily”B8 edition Temporary 2003.06.12 Announcement to dispatch the “Security Times” the 2003-12 interests in 2002 6th edition “Hong Kong Commercial Daily”the A6 edition Temporary 2003.06.27 “Security Times”the 2003-13 Resolution announcement of 26th edition 11th meeting of the 2nd term Board of Directors Temporary 2003.06.27 The nominated independent “Security Times”the 2003-14 director statement 26th edition Temporary 2003.06.27 “Security Times” the 2003-15 The director candidate statement 26th edition Temporary 2003.08.12 “Security Times” the 2003-16 Announcement to hold the 1st 17th edition Temporary shareholders “Hong Kong meeting Commercial Daily” the B10 edition Temporary 2003.08.12 “Security Times” the 2003-17 Resolution announcement of 17th edition 12th meeting of the 2nd term “Hong Kong Board of Directors Commercial Daily” the B10 edition Temporary 2003.08.12 Resolution announcement of “Security Times” the 2003-18 10th meeting of the 2nd term 17th edition Board of Supervisor “Hong Kong Commercial Daily” the B10 edition Temporary 2003.08.12 The method of investor's “Security Times” the 2003-19 relation management 17th edition (provisional ) of the company " Temporary 2003.09.05 “Security Times”the 2003-20 Resolution announcement of 2nd edition the 2nd temporary Board of director In 2003 Temporary 2003.09.05 “Security Times” the 2003-21 Announcement of canceling 2nd edition the 1st term temporary “Hong Kong shareholders meeting in 2003 Commercial Daily” the B6 edition Temporary 2003.09.05 “Security Times” the 2003-22 Announcement of reholding the 2nd edition 1st term temporary shareholders “Hong Kong meeting in 2003 Commercial Daily” the B6 edition Temporary 2003.10.09 “Security Times” the 2003-23 Resolution announcement about 12th edition the 3rd temporary Board of “Hong Kong Directors meeting in 2003 Commercial Daily” the B7 edition Temporary 2003.10.09 “Security Times” the 2003-24 Resolution announcement of 12th edition 13th meeting of the 2nd term Board of Directors Temporary 2003.10.09 “Security Times”12th 2003-25 Independent director suggestion edition about the criterion of the allowance for bad debts Temporary 2003.10.15 “Security Times” the 2003-26 Notified announcement about 9th edition the risk of unusual fluctuation in the stock exchange Temporary 2003.10.22 Announcement of investing to “Security Times” the 2003-27 construct “Hangzhou Steam 32nd edition Turbine Casting Co.,Ltd.” Temporary 2003.10.28 “Security Times” the 2003-28 Resolution announcement of 51st edition 14th “Hong Kong meeting of the 2nd term Board of Commercial Daily” Directors the A7 edition Temporary 2003.10.28 “Security Times” the nd 2003-29 Announcement to hold the 2 51st edition temporary shareholders meeting “Hong Kong Commercial Daily” the A7 edition Temporary 2003.11.14 Announcement about items of “Security Times” the 2003-30 the shareholders’ hypothecation 10th edition Temporary 2003.12.09 “Security Times” the 2003-31 Resolution announcement about 11th edition the 2nd temporary shareholders meeting in 2003 Temporary 2003.12.09 “Security Times” the 2003-32 Resolution announcement about 11thedition the 3rd temporary Board of Directors meeting Chapter X. Documents For Reference 1. Financial report with signatures of legal person, general accountant, and finance director. 2. Original audit report sealed and signed by Certified Public Accounts. 3. All original documents and notices released in the newspapers appointed by China Securities Regulatory Commission during report term. All captioned original documents are reserved in the securities office of the company. At the request of China Securities Regulatory Commission, or Exchange Bourse to provide, or the request to check by all shareholders of the company pursuant to the rules or regulations of the company, the company shall offer cooperation to provide. Chairman of Board: Nie Zhou Hai (signature) Hangzhou Steam Turbine Co., Ltd. Apr. 15, 2004 AUDITORS’ REPORT To the shareholders of Hangzhou Steam Turbine Company Limited (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying balance sheet of Hangzhou Steam Turbine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related income and cash flow statements for the year then ended. These financial statements set out on pages 2 to 26 are the responsibility of the Company’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 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 31 December 2003 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. 13 April 2004 HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in Renminbi thousands except earnings per share data) Notes 2003 2002 Sales 439,041 325,374 Cost of sales (274,095) (197,982) Gross profit 164,946 127,392 Other operating profit/(loss) 6 8,698 (10,128) Distribution expenses (11,657) (8,243) Administrative expenses (93,974) (69,059) Operating profit 4 68,013 39,962 Finance income, net 7 974 1,264 Share of result of associates (859) (1,815) Group profit before tax 68,128 39,411 Income tax 8 (19,470) (258) Group profit after tax 48,658 39,153 Minority interest 19 (32) (58) Net profit 48,626 39,095 Earnings per share 10 - Basic RMB 0.22 RMB 0.18 - Diluted Not applicable Not applicable The accompanying notes form an integral part of these consolidated financial statements. - - -2 - HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003 (All amounts in Renminbi thousands) Notes 2003 2002 ASSETS Non-current assets Property, plant and equipment 11 170,103 173,542 Construction in progress 12 85,850 10,163 Leasehold land 13 55,216 56,477 Investments in associates 14 9,192 10,051 Other non-current assets - 342 Deferred tax assets 20 2 - 320,363 250,575 Current assets Inventories 15 176,516 138,046 Receivables and prepayments 16 295,957 181,671 Cash and cash equivalents 248,869 134,323 721,342 454,040 Total assets 1,041,705 704,615 EQUITY AND LIABILITIES Capital and reserves Share capital 17 220,000 220,000 Reserves 18 200,542 186,731 Retained earnings 104,329 91,514 524,871 498,245 Minority interests 19 1,722 1,690 LIABILITIES Non-current liabilities Deferred tax liabilities 20 - 6,770 Other non-current liabilities 21 2,790 11,930 Deferred income 22 9,069 - 11,859 18,700 Current liabilities Trade and other payables 23 487,361 181,701 Current tax liabilities 15,892 4,279 503,253 185,980 Total liabilities 515,112 204,680 Total equity and liabilities 1,041,705 704,615 These consolidated financial statements have been approved for issue by the Board of Directors of Hangzhou Steam Turbine Company Limited on 13 April 2004. The accompanying notes form an integral part of these consolidated financial statements. - - -3 - HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in Renminbi thousands) Share Share Revaluation Other Statutory To capital premium surplus surplus reserves rese (Note 17) (Note 18) Balance at 1 January 2002 220,000 96,762 27,311 1,250 30,452 155 Net profit for 2002 - - - - - Appropriation to reserves - - - - 6,698 6, Gain on debts waived - - - 306 - 3 Dividends - - - - - Revaluation for property, plant and equipment - gross - - 32,385 - - 32 Revaluation for property, plant and equipment – tax (Note 20) - - (8,433) - - (       Balance at 31 December 2002 220,000 96,762 51,263 1,556 37,150 18 Net profit for 2003 - - - - - Appropriation to reserves - - - - 8,921 Dividends - - - - - Government grant transfer in - - - 2,750 - Gain on debts waived - - - 2,140 -       Balance at 31 December 2003 220,000 96,762 51,263 6,446 46,071 20 The accompanying notes are an integral part to these consolidated financial statements. - - -4 - HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in Renminbi thousands) Note 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 24 239,293 86,237 Income tax paid (14,629) (7,090) Net cash generated from operating activities 224,664 79,147 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (91,996) (39,765) Purchase of leasehold land - (18,357) Purchase of short-term investments (56) (611) Disposal of short-term investments 129 1,093 Proceeds from sale of property, plant and equipment 687 185 Disposal of land use right 76 - Disposal of other non-current assets - 65 Interest received 1,182 1,377 Net cash used in investing activities (89,978) (56,013) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (22,000) (22,000) Proceeds from other non-current liabilities 1,860 1,630 Net cash used in financing activities (20,140) (20,370) Net increase in cash and cash equivalents 114,546 2,764 Cash and cash equivalents at beginning of year 134,323 131,559 Cash and cash equivalents at end of year 248,869 134,323 The accompanying notes form an integral part of these consolidated financial statements. - - -5 - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 1 GENERAL INFORMATION Hangzhou Steam Turbine Company Limited (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) by way of the reorganisation of certain assets and liabilities in relation to the industrial steam turbine production business of Hangzhou Steam Turbine & Power Group Company Limited (“HSTG”), the promoter, and an offering of Domestically Listed Foreign Currency Ordinary Shares (“B Shares”) to foreign investors. Pursuant to a reorganisation based on audited financial statements prepared under generally accepted accounting principles in the PRC (“PRC GAAP”) and valuation by a PRC Valuer, Hangzhou Assets Revaluation Office, HSTG contributed net assets amounting to RMB199,485,673 in exchange for 140,000,000 state-owned shares of the Company with a par value of RMB1 each. The Company was incorporated on 23 April 1998 with share capital of RMB140,000,000, divided into 140,000,000 state-owned shares with a par value of RMB 1 each. The ultimate parent company of the Company is HSTG, a state-owned enterprise incorporated in the PRC. Pursuant to approval document [1998] No. 8 issued by the Securities Administration Committee of the State Council dated 1 March 1998, the Company issued 80,000,000 B Shares with a par value of RMB 1 each at a price of RMB2.26 (the "IPO"). Net proceeds from the IPO amounted to approximately RMB168,330,000. The B Shares were listed on the Shenzhen Stock Exchange on 28 April 1998. On 2 December 1998, pursuant to approval document [1998] No. 745 issued by the Ministry of Foreign Trade and Economic Co-operation of the PRC, the Company was transformed into a foreign invested joint stock limited company. The Company and its subsidiary (hereinafter collectively referred to as the “Group”) are principally engaged in the design, manufacture and sale of industrial steam turbines and other kinds of industrial equipment. The registered office of the Company is located at No.357 Shi Qiao Road, Hangzhou, Zhe Jiang Province, PRC. 2 ACCOUNTING POLICIES (a) Basis of preparation These consolidated financial statements have been prepared based on the management accounts of the Company and its subsidiary. Those management accounts are prepared in accordance with the PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”), which differ in certain respects from International Financial Reporting Standards (“IFRS”). These consolidated financial statements have incorporated adjustments made to the Statutory Accounts in order to conform to IFRS including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. These consolidated financial statements are prepared under the historical cost convention, except that certain property, plant and equipment are carried at re-valued amounts. - - -6 - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (b) Group accounting (1) Subsidiaries Subsidiaries are those companies in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date on which control ceases. All material inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost can not be recovered. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Group’s share of the post-acquisition profits or losses of associates is recognized in the consolidated income statement and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. (c) Foreign currency translation The Group companies maintain their books and records in Renminbi, the measurement currency. Transactions in foreign currencies are translated into Renminbi at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. (d) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost or valuation less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognized as expense in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. - - -7 - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (d) Property, plant and equipment and depreciation (continued) Valuation by independent valuers is performed periodically. Any increase in valuation is credited to the revaluation surplus in shareholders’ equity; any decrease is firstly offset against any increase on earlier valuation recorded in revaluation surplus in respect of the same asset and is thereafter charged to the consolidated income statement. Increase in revaluation directly related to a previous revaluation decrease of the same asset that was recognized as an expense is credited to income to the extent that it offsets the previously recorded decrease. Depreciation is calculated using the straight-line method to write off the cost or revalued amount, after taking into account the estimated residual value, of each asset over its expected useful life. The expected useful lives are as follows: Buildings 40 years Machinery and equipment 14-18 years Motor vehicles and office equipment 5-10 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are sold or retired, their cost or revalued amounts and accumulated depreciation and accumulated impairment losses are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated income statement. The relevant portion of the revaluation surplus realised in respect of previous valuation is realised from revaluation surplus directly to retained earnings. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. (e) Construction in progress Construction in progress represents plant and properties under construction and equipment under installation and is stated at cost. Cost includes construction, installation, testing and other direct costs, financing costs and exchange differences that are attributable to the assets. Construction in progress is not depreciated until such time as the asset has been substantially completed and reaches the expected usable condition. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. (f) Leasehold land Leases of land acquired are classified as operating leases. The pre-paid lease payments are amortized over the lease period (fifty years) on a straight-line basis. - - -8 - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (g) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs to completion and selling expenses. (h) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for doubtful debts is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (i) Cash and cash equivalents Cash and cash equivalents are carried in the consolidated balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturity of three months or less. (j) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used to determine deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. (k) Government grants Grants from the government are recognised where there is a reasonable assurance that the grants will be received and the Group will comply with all attached conditions. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected lives of the related assets. (l) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group’s local staff are to be made monthly to a government agency based on 34% of the total salary, subject to a certain ceiling, of which 27% is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these defined contributions on an accrual basis. (m) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is - - -9 - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) recognised as a separate asset but only when the receipt of the reimbursement is virtually certain. 2 ACCOUNTING POLICIES (continued) (n) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables and payables, balances with related companies, investments and other non-current liabilities. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies found in Note 2. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Group companies have a legally enforceable right to offset and intend to settle either on a net basis or to realize the asset and settle the liability simultaneously. (o) Revenue recognition Revenue comprises the invoiced value for the sale of goods net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. (p) Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. (q) Impairment of long-lived assets Property, plant and equipment and investments in associates are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. (r) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products of services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. (s) Comparatives Where necessary, the comparative figures have been reclassified to conform with changes in presentation in the current year. - - 10 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 3 FINANCIAL RISK MANAGEMENT (1) Financial risk factors The Group’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risks Cash is placed with reputable banks. The majority of the Group’s trade receivables relate to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. As of 31 December 2003, no single customer accounted for greater than 10% of total revenues for the year or trade receivables. (ii) Liquidity risks The Group’s policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current requirements in operations. (iii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets or liabilities. (iv) Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. (2) Fair value estimation The carrying amounts of cash and cash equivalents, trade and other receivables, trade and payables and balances with related companies approximate their fair values because of the short maturity of these instruments. - - 11 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 4 OPERATING PROFIT The following items have been included in arriving at operating profit: 2003 2002 Depreciation on property, plant and equipment (Note 11) 18,947 13,751 (Gains)/losses on sale of property, plant and equipment (126) 311 Costs of inventories recognised as expense 220,828 168,786 Staff costs (Note 5) 91,272 67,143 Included in “Administrative expenses” - Increase in provision for doubtful debts (Note 16) 22,340 8,078 - Decrease in provision for inventory obsolescence (Note 15) (2,782) (1,300) - Amortisation of leasehold land (Note 13) 1,185 910 - Amortisation of other non-current assets 342 92 5 STAFF COSTS 2003 2002 Salaries and wages 62,473 44,942 Contribution to defined contribution pension schemes 13,153 10,790 Others 15,646 11,411 91,272 67,143 Average number of full time employees during the year 2,005 1,849 6 OTHER OPERATING PROFIT/(LOSS) 2003 2002 Decrease in valuation on property, plant and equipment (Note 11) - (12,191) Amoritsation of deferred income 2,750 - Waived debts 2,140 - Subsidy income 2,923 1,525 Others 885 538 8,698 (10,128) - - 12 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 7 FINANCE INCOME, NET 2003 2002 Interest income 1,182 1,377 Net foreign exchange transaction losses - (46) Others (208) (67) Finance income, net 974 1,264 8 TAX (a) Income tax 2003 2002 Current tax 26,242 8,544 Share of associates (Note 14) - 125 Deferred tax (Note 20) (6,772) (8,411) 19,470 258 The Company was transformed into a foreign invested joint stock limited company as approved by the Ministry of Foreign Trade and Economic Co-operation of the PRC (See Note 1). According to relevant PRC tax laws and regulations, foreign invested enterprises are subject to full exemption from income tax for two years and a 50% reduction in the next three years starting from the first profit making year after offsetting available tax losses carried forward from prior years. In addition, foreign invested enterprises which are located in the Coastal Open Economic Zone are subject to a preferential enterprise income tax rate of 24% and a local income tax at the rate of 2.4% on their profits. Hangzhou belongs to the Coastal Open Economic Zone. Pursuant to the approval document Hang Guo Shui Wai [1999] No. 257 issued by the Hangzhou State Tax Bureau, the Company is entitled to preferential tax treatment, with full exemption from income tax for the period from 23 April 1998 to 31 December 1998 and for the year ended 31 December 1999; and a 50% reduction for the next three years ended 31 December 2002, when the applicable income tax rate for the above tax reduction years is 13.2%. According to the relevant income tax law applicable to foreign invested enterprises in Zhe Jiang Province, foreign invested enterprises are subject to exemption from local income tax if certified as an Advanced Technology Enterprise by the governmental authority in Zhe Jiang Province. The Company has been certified as an Advanced Technology Enterprise by the Ministry of Foreign Trade and Economic Co-operation of Zhe Jiang Province. Accordingly, pursuant to the approval document Hang Guo Shui Zheng Fen [2001] No. 354 issued by the Hangzhou State Tax Bureau, the Company is entitled to local income tax exemption for the years from 2000 to 2002. Therefore, for the year ended 31 December 2003, the applicable income tax rate was 26.4% (2002: 12%). The Company’s subsidiary and associates are subject to income tax at 33%. - - 13 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 8 TAX (continued) (a) Income tax (continued) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the Company as follows: 2003 2002 Profit before tax 68,128 39,411 Tax calculated at the standard tax rate of 26.4% (2002: 26.4%) 17,986 10,405 Income and expense items which are not taxable or deductible for tax purposes 1,412 1,482 Effect of tax holidays - (6,443) Effect of difference in income tax rate applied to timing difference - (5,586) Effect of different tax rates for consolidated subsidiary 72 400 Tax charge 19,470 258 (b) Turnover tax Pursuant to the “Provisional Regulations on VAT of the PRC”, the Company is subject to VAT at the rate of 17% and City and County Maintenance and Construction Tax (“CMCT”) and Education Surcharge calculated at 7% and 4% respectively of the VAT payable. An input credit is available whereby VAT previously paid on purchase of semi-finished products or raw materials etc. can be used to offset the VAT on sales to determine the net VAT payable. 9 DIVIDEND The Board of Directors of the Company recommended a dividend in respect of 2003 of RMB 0.2 per share amounting to a total dividend of RMB 44,000,000. The proposal on dividend is subject to approval by the shareholders in the Company’s Annual General Meeting to be held in year 2004. These consolidated financial statements do not reflect this dividend payable and the dividend will not be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2003. The dividends declared in respect of 2002 and 2001 were, respectively, RMB22,000,000 and RMB22,000,000. In accordance with relevant regulations of the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the Statutory Accounts and the consolidated financial statements prepared in accordance with IFRS. As of 31 December 2003, the retained earnings before final dividends reported in the Statutory Accounts were approximately RMB82,975,000 (2002: approximately RMB69,894,000). - - 14 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 10 EARNINGS PER SHARE The calculation of basic earnings per share is based on the consolidated net profit for the year ended 31 December 2003 of approximately RMB48,626,000 (2002: approximately RMB39,095,000), divided by the weighted average number of shares in issue during the year of 220,000,000 shares (2002: 220,000,000 shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year end. 11 PROPERTY, PLANT AND EQUIPMENT Motor Machinery vehicles and and office Buildings equipment equipment Total RMB’000 RMB’000 RMB’000 RMB’000 Valuation At 1 January 2002 104,607 223,114 33,725 361,446 Additions 20,348 8,491 2,416 31,255 Transfers (Note 12) - 7,854 887 8,741 Disposals - (2,820) (1,608) (4,428) Valuation increase/(decrease) 10,517 11,522 (1,868) 20,171 At 31 December 2002 135,472 248,161 33,552 417,185 Additions - 403 1,434 1,837 Transfers (Note 12) - 13,069 1,430 14,499 Disposals (1,416) (515) (1,167) (3,098) At 31 December 2003 134,056 261,118 35,249 430,423 Representing: At cost 348 12,069 3,397 15,814 At valuation 133,708 249,049 31,852 414,609 At 31 December 2003 134,056 261,118 35,249 430,423 Accumulated depreciation and impairment losses At 1 January 2002 48,248 161,588 23,988 233,824 Depreciation charged for the year 2,961 9,074 1,716 13,751 Disposals - (2,573) (1,359) (3,932) At 31 December 2002 51,209 168,089 24,345 243,643 Depreciation charged for the year 2,980 13,999 1,968 18,947 Disposals (642) (556) (1,072) (2,270) At 31 December 2003 53,547 181,532 25,241 260,320 Net book value - - 15 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) At 31 December 2003 80,509 79,586 10,008 170,103 At 31 December 2002 84,263 80,072 9,207 173,542 11 PROPERTY, PLANT AND EQUIPMENT (continued) The Company’s property, plant and equipment injected by HSTG as its capital contribution were revalued by Hangzhou Assets Revaluation Office, independent professional valuers, on 30 April 1997 on a replacement cost basis, because market values were not available. The revaluation surplus amounting to approximately RMB38,080,000 was recorded in revaluation surplus. In accordance with the accounting policy as disclosed in Note 2(d), an independent valuation on the property, plant and equipment was performed by Zhejiang Oriental Assets Valuation Co., Ltd. on 30 September 2002 on a replacement cost basis. The net revaluation surplus was approximately RMB20,171,000, among which, amount of approximately RMB 32,362,000 was credited to revaluation surplus and approximately RMB12,191,000 was charged to Other operating loss in consolidated income statement. The cost of the property, plant and equipment, acquired since the above mentioned revaluation on 30 September 2002, approximates their fair value. Had the property, plant and equipment been carried at cost less accumulated depreciation, the carrying amounts of each class of asset as of year end would have been as follows: 2003 2002 Motor vehicles Machinery and office Buildings and equipment equipment Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 67,919 155,310 37,117 260,346 247,132 Accumulated depreciation (8,410) (90,530) (25,358) (124,298) (113,566) 59,509 64,780 11,759 136,048 133,566 The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount as of 31 December 2003. 12 CONSTRUCTION IN PROGRESS 2003 2002 At beginning of year 10,163 11,489 Additions during the year 90,186 7,392 Valuation increase - 23 Transfer to fixed assets (Note 11) (14,499) (8,741) At end of year 85,850 10,163 - - 16 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 13 LEASEHOLD LAND 2003 2002 Cost At beginning of year 59,275 40,918 Addition - 18,357 Disposal (83) - At end of year 59,192 59,275 Accumulated amortization At beginning of year 2,798 1,888 Charge for the year 1,185 910 Disposal (7) - At end of year 3,976 2,798 Net book value at end of year At end of year 55,216 56,477 At beginning of year 56,477 39,030 14 INVESTMENTS IN ASSOCIATES 2003 2002 At beginning of year 10,051 11,991 Share of results before tax (1,586) (229) Share of tax (Note 8) - (125) Share of results after tax 8,465 11,637 Reversal/(provision) of impairment 727 (1,586) At end of year 9,192 10,051 - - 17 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 15 INVENTORIES 2003 2002 Raw materials (at cost) 44,520 36,995 Work in progress (at cost) 89,441 65,823 Finished goods (at cost) 45,146 40,601 179,107 143,419 Less: provision for obsolescence (2,591) (5,373) Net book value 176,516 138,046 16 RECEIVABLES AND PREPAYMENTS 2003 2002 Trade and notes receivables 252,172 176,505 Prepayments and other receivables 70,863 13,986 Receivables from HSTG (Note 28(3)) 8,455 5,519 Receivables from associates (Note 28(3)) 50 33 Receivables from other related parties (Note 28(3)) 8,298 7,169 Less: provision for doubtful debts (43,881) (21,541) 295,957 181,671 17 SHARE CAPITAL 2003 2002 Number of shares Number of shares ‘000 Amount ‘000 Amount Authorised, issued and fully paid Unlisted shares of Rmb 1 each: State-owned shares 140,000 140,000 140,000 140,000 Listed shares of Rmb 1 each: Domestically listed foreign currency ordinary shares (B Shares) 80,000 80,000 80,000 80,000 220,000 220,000 220,000 220,000 State-owned shares and B Shares ranked pari passu in all respects with each other. - - 18 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 18 RESERVES - STATUTORY RESERVES Statutory reserve includes statutory reserve fund and statutory welfare fund. According to the Articles of Association of the Company, 10% of its profit for the year computed in accordance with the PRC accounting regulations (after offsetting any prior years' losses) should be appropriated to the statutory reserve fund. When the balance of such fund reaches 50 % of the Company's registered share capital, any further appropriation is optional. The statutory reserve fund can be utilised to offset prior years' losses or for issue of bonus shares. However, the fund shall be maintained at a minimum of 25% of the registered share capital after any such issue. According to the Articles of Association of the Company, 5% to 10% of its profit for the year computed in accordance with the PRC accounting regulations should be appropriated to the statutory welfare fund. The fund shall be utilised for the collective benefits of the workforce, including the provision of staff quarters or housing. No other distribution shall be made from the fund other than upon liquidation of the Company. For the year ended 31 December 2003, the directors of the Company proposed that 10% and 10% (2002: 10% and 10%) of the net profit as reported in the Statutory Accounts be appropriated to each of the statutory reserve fund and the statutory welfare fund, totalling approximately RMB8,921,000 (2002: approximately RMB6,698,000). The resolution is subject to approval by the shareholders in the Annual General Meeting to be held in year 2004. 19 MINORITY INTEREST 2003 2002 At beginning of year 1,690 1,632 Share of net profit of a subsidiary 32 58 At end of year 1,722 1,690 - - 19 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 20 DEFERRED TAX LIABILITIES/(ASSETS) 2003 2002 At beginning of year 6,770 6,748 Charged to consolidated income statement (Note 8) (6,772) (8,411) Charged to equity – for revaluation on property, plant and equipment - 8,433 At end of year (2) 6,770 Charged to consolidated At beginning income of year statement At end of year Deferred tax assets Provision for doubtful debts (5,683) (5,897) (11,580) Provision for obsolescence (1,419) 735 (684) Revaluation loss of property, plant and equipment (3,138) 322 (2,816) (10,240) (4,840) (15,080) Deferred tax liabilities Revaluation surplus of property, plant and equipment 17,010 (1,932) 15,078 Net 6,770 (6,772) (2) 21 OTHER NON-CURRENT LIABILITIES 2003 2002 At beginning of year 11,930 10,300 Recognized government grants 1,860 1,630 Government grants transferred out to deferred income (Note 22) (11,000) - At end of year 2,790 11,930 As of 31 December 2003, the Group had long-term borrowings granted by a governmental authority amounting to approximately RMB2,790,000 (2002: approximately RMB11,930,000). Such long-term borrowings were unsecured, interest free and had no fixed terms of repayment. - - 20 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 22 DEFERRED INCOME 2003 2002 At beginning of year - - Transfer in from government grants (Note 21) 11,000 - Other transfer in 819 - Amortisation to current year income (2,750) - At end of year 9,069 - After completion and inspection of government granted projects, government grants related to the projects has been transferred to deferred income and are credited to the income statement on a straight line basis over the expected lives of the assets related to the projects. 23 TRADE AND OTHER PAYABLES 2003 2002 Accounts payable and other payable 48,976 52,282 Amounts due to other related parties (Note 28(3)) 45,461 6,824 Amounts due to associates (Note 28(3)) 54 - Advance from customers and other payable 392,870 122,595 487,361 181,701 - - 21 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 24 CASH GENERATED FROM OPERATIONS 2003 2002 Net profit 48,626 39,095 Adjustments for: Minority interest (Note 19) 32 58 Income tax (Note 8) 19,470 258 Depreciation of property, plant and equipment (Note 11) 18,947 13,751 Amortisation of leasehold land (Note 13) 1,185 910 Amortisation of other non-current assets 342 92 Interest income (Note 7) (1,182) (1,377) Increase in provision for doubtful debts (Note 16) 22,340 8,078 Decrease in provision for inventory obsolescence (Note 15) (2,782) (1,300) Share of results of associates (Note 14) 1,586 229 Impairment of investments in associates (Note 14) (727) 1,586 Short-term investment gains (24) (509) Fixed assets revaluation decrease loss (Note 11) - 12,191 Loss on sale of property, plant and equipment (Note 4) (126) 311 Loss on disposal of other non-current assets - 321 Operating income before working capital changes 107,687 73,694 Increase in inventories (35,688) (24,359) (Increase)/decrease in receivables and prepayments (136,676) (4,993) Increase in payables and accruals 305,901 41,895 Decrease in other non-current liabilities (1,930) - Cash generated from operations 239,293 86,237 25 CONTINGENCIES As of 31 December 2003, the Group had no contingent liabilities (2002: Nil). 26 CAPITAL COMMITMENTS As of 31 December 2003, the Group had capital commitments for purchase of equipment amounting to approximately RMB30,092,000 (2002: approximately RMB14,024,000). 27 SEGMENT INFORMATION No segment information is presented as the Group operates in one business segment of industrial steam turbines industry and in one geographical segment in the PRC. - - 22 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 28 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (1) Related party agreements effective from the date of incorporation of the Company For the year ended 31 December 2003, the Company had the following related party transactions, pursuant to several agreements signed with the parent company-HSTG on 8 October 1997 and effective from the date of its incorporation. Details are as follows: (a) Service agreements Pursuant to several service agreements, HSTG provides the Company with facilities and services such as social services, property management, staff training, transportation and computer service. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2003, the Company incurred service fees of approximately RMB 9,083,000 in accordance with the service agreements (2002: approximately RMB 8,956,000). (b) Supply agreements Pursuant to several supply agreements, HSTG supplies the Company with certain raw materials (mainly iron and steel), spare parts, energy and communication facilities. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2003, the Company purchased raw materials, spare parts, energy, transportation and communication facilities amounting to approximately RMB 11,929,000 from HSTG (2002: approximately RMB 35,413,000). (c) Trademark agreement Pursuant to the trademark agreement, HSTG has licensed the Company to use its registered trademark for an annual fee of RMB700,000. For the year ended 31 December 2003, the Company paid the trademark fee of RMB 700,000 to HSTG (2002: RMB 700,000). - - 23 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 28 RELATED PARTY TRANSACTIONS (CONTINUED) (2) Other related party transactions 2003 2002 Sales of goods to HSTG 29,217 34,402 Sales of goods to subsidiaries of HSTG 14,353 22,202 Sales of goods to associates 1,456 3,205 Purchases of goods from subsidiaries of HSTG 8,996 5,470 Purchases of goods from associates 791 - Payment of land use right rental to HSTG 678 - Payments of social benefits as pension, medical benefit, etc. and magazine fee via HSTG 22,328 18,846 The above related party transactions were carried out based on commercial terms and conditions and market prices. (3) As of 31 December, the Group had the following material balances with related parties: 2003 2002 Due from related parties: - HSTG 8,455 5,519 - Subsidiaries of HSTG 8,298 7,169 - Associates 50 33 16,803 12,721 Due to related parties: - Subsidiaries of HSTG 45,461 6,824 - Associates 54 - 45,515 6,824 All the balances with related parties were unsecured, interest free and had no fixed terms of repayment. (4) Emoluments of the Board of Directors (a) Directors’ total remuneration approximated RMB2,338,000 (2002: approximately RMB1,456,000). (b) No loans have been granted to Directors. - - 24 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 29 SUBSIDIARIES AND ASSOCIATES As of 31 December 2003, the Company had the following subsidiary: Percentage of equity interest held Place of Registered Name incorporation Direct Indirect capital Principal activities Zhe Jiang Steam Hangzhou, 95% - 31,600,000 Design, manufacture Turbine Kit System the PRC and sale of industrial Technology equipment and kit Development Co., Ltd. systems. There was no change in the percentage of equity interest held in the subsidiary in 2003 or 2002. As of 31 December 2003, the Company had the following associates: Percentage of equity interest held Place of Registered Name incorporation Direct Indirect capital Principal activities Hangzhou Cocim Hangzhou, 34.5% - 10,000,000 Provision of services relating Technology Co., Ltd. the PRC to computers and peripheral equipment, computer information network engineering and E-commerce Hangzhou Steam Turbine Hangzhou, 45% - 20,000,000 Design, manufacture, Environmental the PRC installation and sale of Engineering Co., environmental protection Ltd. equipment and engineering There were no changes in the percentages of equity interest held in the associates in 2003 or 2002. 30 SUBSEQUENT EVENTS (1) Pursuant to the resolution of the board of directors’ meeting dated 13 April 2004, the Company declared final dividends to all shareholders in respect of 2003 of RMB0.2 per share (2002: RMB0.1 per share). The total amount of cash dividends proposed was therefore RMB 44,000,000 (2002: RMB 22,000,000). The resolution is subject to approval by shareholders in the Annual General Meeting. (2) The Company contributed RMB 5,100,000 to establish Hangzhou Zhongneng Steam Turbine Power Company Limited (“Hangzhou Zhongneng”), which was approved to be established by Hangzhou Administration for Industry and Commerce on 27 February 2004 with registered capital of RMB 10,000,000. The Company owns 51% of the shareholders’ equity of Hangzhou Zhongneng. (3) The Company contributed RMB 11,220,000 to establish Hangzhou Steam Turbine Foundry and Forging Company Limited (“Foundry and Forging”), which was approved to be established by Hangzhou Administration for Industry and Commerce on 1 March 2004 with registered capital of RMB 22,000,000. The Company owns 51% of the shareholders’ equity of Foundry and Forging. - - 25 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 31 IMPACT OF IAS ADJUSTMENTS ON NET INCOME FOR THE YEARS AND NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if these standards had been applied consistently throughout the years. This basis of accounting differs from that used in the Statutory Accounts of the Group. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of 31 December 31 December 2003 2002 2003 2002 As reported in the Statutory Accounts 44,003 34,707 512,746 476,784 Impact of adjustments: - Deferred tax assets 4,840 7,824 15,080 10,240 - Deferred tax liabilities 1,932 587 (15,078) (17,010) - Valuation surplus/(loss) of property, plant and equipment and difference of depreciation due to revaluation and disposal of property, plant and equipment (7,039) (4,154) 21,192 28,231 - EIT refund of associate - 131 - - - Debts exemption gains 2,140 - - - - Defer income caused by government grant 2,750 - (9,069) - As restated in the IFRS consolidated financial statements 48,626 39,095 524,871 498,245 - - 26 - - HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20032 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 27