张裕Ａ(000869)张裕Ｂ2003年年度报告（英文版）

YANTAI CHANGYU PIONEER WINE COMPANY LIMITED 2003 Annual Report 2004.04.13 Important The Directors of the Company collectively and individually accept full responsibility for the truthfulness, accuracy and completeness of the information contained in this report and confirm that to the best of their knowledge and belief there are no unfaithful facts, significant omissions or misleading statements. Mr. Sun Liqiang (the Chairman of the Company), Mr. Zhou Hongjiang (the General Manager of the Company) and Mr. Jiang Jianxun (Chief Accountant) assure the truthfulness and completeness of the financial report in the annual report. The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. Unless otherwise indicated, the financial data in the Chinese version is cited from Chinese auditor’s report, while the financial data in the English version is cited from the international auditor’s report. 2 Content I. KEY COMPANY DATA OF RECORD …………………………………………..….5 II. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION…….…..6 1. Summary of Financial Information for the reporting Period……..6 2. Differences in Net Profit under the PRC Financial Reporting Standards and International Financial Reporting Standards…..…6 3. Principal Accounting and Financial Information for the Preceding Three Years of the reporting period…………………………………..…..6 4. Changes of Shareholders’ Equity in the Reporting Period……..….7 III. CHANGES IN SHARE CAPITAL AND SHAREHOLDERS ……………......7 1. Changes in share capital…………………….………………….…….………7 2. Shareholders introduction………………………………………………..….8 3. Holding shareholders introduction………………………......…………..8 4. Brief introduction for the top 10 listed shareholders……………….8 IV. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF….9 1. The basic information of Directors, Supervisors and Senior Management……………………………………………………………………….9 2. Information of directors, supervisors who hold posts in shareholder’s company………………………………………………………..9 3. Annual rewards information…………….................…………………..10 4. Change of directors, supervisors and senior management ….….10 5. Staff of the Company…………………………………………………...…….10 Ⅴ. THE COMPANY RECTIFYING STRUCTURE…………………..…….……….11 1. Current Rectifying Structure Situation of the Company …….…..11 2. Duty of the independent Directors ……………………..………..……..12 3. Information for Personnel, Assets, Finance, Institution and Business Associated with Holding Shareholders………………..….12 4. Performance Evaluation and Encourage to Senior Management……………………………………………………………….…….12 Ⅵ. BRIEF SUMMARY OF THE SHAREHOLDER’S MEETING…………….…..13 Ⅶ. BOARD OF DIRECTIOR’S REPORT…………………….……………………..14 1. Business condition…………………………………..………………………..14 2. Investment of the company…………………………………………..……16 3. Financial situation of the company…………………………...…………17 3 4. The influence of great change of operation environment and macro-policy….…………………………………………………………………17 5. Business plan of 2004………………………………………………………..18 6. Matters on the work of Board of Directors…………………………...19 7. Company’s profit distribution plan………………………….…………..20 8. Other disclosed information……………………………….…..…………..20 Ⅷ. BOARD OF SUPERVISORS’ REPORT……………………………….…………21 1. Meeting of the Board of Supervisors………………………….…………21 2. Report of Board of Supervisors………………………………..………….21 Ⅸ. MATERIAL EVENTS…………………………………………………..……………22 1. The material litigation and arbitration…………………………………..22 2. The purchase, sale or and annexation of assets………………….….22 3. Related party transaction…………………………………….………………22 4. Material contract and its Executing……………………………….………22 5. Events the company undertook…………………….………...……………23 6. Appointment of Certified Public Accountants…...…………..……….23 7. Examination and administrative punishment by CSRC, criticism notification, public censure by stock exchange………………………23 8. Other material events………………………………….………………………23 Ⅹ. FINANCIAL REPORT……………………………………………..……………….23 Ⅺ. DOCUMENTS AVAILABLE FOR INSPECTION………………………………57 4 I. KEY COMPANY DATA OF RECORD 1. Legal Name in Chinese: 烟台张裕葡萄酿酒股份有限公司 Legal Name in English: Yantai Changyu Pioneer Wine Company Limited 2. Legal Representative: Sun Liqiang 3. Secretary to the Board of Directors: Qu Weimin Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633658 Facsimile: 0086-535-6633639 E-Mail: quwm@changyu.com.cn 4. Authorized Representative of the Securities Affairs: Li Tingguo Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633656 Facsimile: 0086-535-6633639 E-Mail: stock@changyu.com.cn 5. Registered Address: 56, Dama Road, Yantai City, Shandong Province, the PRC Office Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Postal Code: 264000 Web Site: http://www.changyu.com.cn E-Mail: webmaster@changyu.com.cn 6. Publications: The newspapers in which the Company’s information is disclosed: “China Securities Newspaper” and “Securities Times” in the PRC “Hong Kong Commercial Daily” outside the PRC Web Site for carrying the report: http://www.cninfo.com.cn Annual Report kept at: Securities Department of the Company 7. Place of listing of the Shares: Shenzhen Stock Exchange Abbreviation of the Shares: Changyu A, Changyu B Code Number of the Shares: 000869, 200869 8. Other information of the Company: • The first registration date: September 18, 1997 • The original place of registration: the Business Administration Bureau of Shandong Province • The registration amendment date: August 14, 2003 • The registration amendment place: the Business Administration Bureau of Shandong Province • The business license number: 3700001806012 • The registration number of revenue: 37060216500338-1、370601267100035 • The International accountant appointed by the Company: Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited • The office address of the International accountant appointed by the Company: 12th Floor, Ruian Plaza, No.333, Huaihai Middle Road, Shanghai • The Chinese accountant appointed by the Company: Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited • The office address of the Chinese accountant appointed by the Company: 12th Floor, Ruian Plaza, No.333, Huaihai Middle Road, Shanghai 5 II.SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION 1. Summary of Financial Information for the reporting Period Unit：RMB’000 Item Amount Total Profit 245,740 Net Profit 165,292 Profits on main operations 565,411 Profits on other operations -678 Operation profit 234,480 Investment earnings 0 Subsidy income 0 Net of non-operating income and expenses 0 Net cash flows from operating activities 310,855 Net increase in cash and cash equivalents -7,713 2. Differences in Net Profit under the PRC Accounting Standards and International Accounting Standards The net profit of the Company in 2003 was RMB 151,253,825 as audited by Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited according to the PRC Accounting Standards and RMB 165,291,935 after adjusted by Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited according to the International Accounting Standards. Major differences in using the International Accounting Standards and the PRC Accounting Standards were as follows: RMB Net profit as stated under the International Accounting Standards 165,291,935 Impact to the net profit as stated under the International Accounting Standards: ―― fixed assets depreciation (626,314) ―― investment benefit in short term 844,000 -- Deferred tax 13,820,424 Net profit as stated under the PRC Accounting Standards 151,253,825 3. Principal Accounting and Financial Information for the Preceding Three Years of the reporting period Unit：RMB’000 Item 2003.1-12 2002.1-12 2 001.1-12 Income on main operations 1,053,559 859,987 824,84 Net Profit 165,292 115,909 163,849 Total assets 1,983,421 1,858,898 1,669,721 Total shareholders’ equity (minor 1,433,437 shareholders’ equity excluded) 1,604,951 1,491,659 Earnings per Share Overall sharing 0.53 0.37 0.63 Weighted average Net assets value per Share 5.14 5.74 5.51 Return on shareholders’ equity (%) Overall sharing 10.30 7.77 11.43 Weighted average Net cash flows per Share from 0.996 0.526 0.20 operating activities 6 4. Changes of Shareholders’ Equity in the Reporting Period Unit：RMB’000 Item Capital stock Reserve Fund Total shareholders’ equity At the beginning of the period 260,000 1,231,659 1,491,659 Increases in this period 52,000 61,292 113,292 Decrease in this period 0 At the end of the period 312,000 1,292,951 1,604,951 Increasing Capital Stock Increases in Reason for variation with Public Fund of Capital net profits III. CHANGES IN SHARE CAPITAL AND SUBSTANTIAL SHAREHOLDERS 1. Changes in Share Capital (1). The share capital structure is as follows: Unit: share Amount before Change Amount after this this change (+ -) change Allot Distribute Transfer other Issue Sub new bonus capital to share additional others total share share capital share Non-listed shares 1.Promoter’s Shares 140,000,000 28,000,000 168,000,000 including: State Shares 140,000,000 28,000,000 168,000,000 Shares held by domestic legal persons Shares held by foreign legal persons 2.Shares offered to legal persons 3.Shares offered to employees 4.Preferred Shares or others Assigned and rationed Share Total non-listed 140,000,000 28,000,000 168,000,000 Shares Listed Shares Shares listed in the 32,000,000 6,400,000 38,400,000 PRC (A Shares) Domestic Shares 88,000,000 17,600,000 105,600,000 listed (B Shares) Shares listed Overseas others Total listed shares 120,000,000 24,000,000 144,000,000 Total number of 260,000,000 52,000,000 312,000,000 Share issued (2). Information about issuance and listing of stocks ①The company did not issue new stocks within the three year period before the end of this statement. ②During this statement period, the company completed the “2002 Plan for Profit Distribution and Conversion of Public Capital Fund to Equivalent Shares” adopted at the 2002 Shareholders Meeting. Based on 260,000,000 shares at the end of 2002 and in the proportion of increasing 2 shares to each 10 shares held, transferring a total of 52,000,000 shares out of the public fund of capital. After the conversion, the total shares of this company were increased to 312,000,000 shares from the original 260,000,000 shares, with the shareholding structure unchanged. 7 2. Shareholders introduction As of 31st December 2003, the Company had 32,774 shareholders including 21,399 shareholders with A shares and 11,375 shareholders with B Shares. The respective shareholding of the top 10 shareholders of the Company were as follows: Name of Shareholders Increase or Number of Percentage Type of Lien or frozen The character of reduce shares hold (%) Shares shares the shareholders Yantai Changyu Group 28,000,000 168,000,000 53.8 Non-listed 0 State owned Company Limited Shares Deutsche bank ag 3,663,385 3,663,385 1.17 Listed shares B shares London 0 HSBC China 2,999,886 2,999,886 0.96 Listed shares B shares Momentum Fund 0 Shanghai Hongkong 2,627,713 2,627,713 0.84 Listed shares 0 B shares Wanguo Securities NBP/FRUCTILUX 2,588,364 2,588,364 0.83 Listed shares B shares SICAV 0 GT PRC FUND 2,499,983 2,499,983 0.80 Listed shares 0 B shares FIRST ASIA Listed shares B shares INVESTMENTS 354,502 2,127,493 0.68 0 VENTURES LTD XIA YU 411,691 2,120,148 0.68 Listed shares 0 B shares CHEN ZU DE 316,371 1,898,227 0.61 Listed shares 0 B shares SKANDIA GLOBAL 1,705,920 1,705,920 0.55 Listed shares B shares FUNDS PLC 0 The explanation for the relationship and In the top 10 shareholders, Yantai Changyu Group Company Limited has no action of the top 10 shareholders associated relationship with the other 9 listed shareholders, and the relationship between the other shareholders is unknown. 3. Holding shareholders introduction During the reporting period, the holding shareholder of the Company has not changed and still is Yantai Changyu Group Company Limited, the only legal person holding more than 5% (including 5%) of the Company’s Shares, whose shareholder is Yantai State Assets Administrative Bureau. The Company was established in 1994, as a sole state-owned limited company, its registered capital was 50 million Yuan. The legal representative of the Group Company is Mr.Sun Li-qiang, the business scope of the Group Company includes the management and administration of authorized state assets, Chinese medicine, glass products, mineral water Chinese liquor, and canteens serving the Company’s employees. During the reporting period, the number of the Company’s Shares held by the Group Company increased 28,000,000 shares and reached 168,000,000 shares which is 53.8% of the stock share total and also was not subject to any lien or frozen or under any legal disputes. 4. Brief introduction for the top 10 listed shareholders Name of the shareholders Number of shares hold The character of the shareholders DEUTSCHE BANK AG LONDON 3,663,385 B shares HSBC CHINA MOMENTUM FUND 2,999,886 B shares SHANGHAI KONGKONG WANGUO B shares SECRUTIES 2,627,713 NBP/FRUCTILUX SICAV 2,588,364 B shares GT PRC FUND 2,499,983 B shares FIRST ASIA INVESTMENTS VENTURES B shares LTD 2,127,493 XIA YU 2,120,148 B shares CHEN ZU DE 1,898,227 B shares SKANDIA GLOBAL FUNDS PLC 1,705,920 B shares CROWNBLE ENTERPRISES LIMITED 1,602,614 B shares The explanation for the relationship and The relationship between the top 10 listed shareholders is action of the top 10 shareholders unknown. 8 IV. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF 1. The basic information of Directors, Supervisors and Senior Management NAME POST SEX AGE Term for Post Shares Shares Reason for hold at the hold at change beginning the ends of 2002 of 2002 Sun Liq-iang Chairman to the M 56 2003.9.24—2006.09.25 0 0 Board of Directors Zhou Hong-jiang Vice-chairman to M 39 2003.9.24—2006.09.25 0 0 the Board of Directors and general manager Fu Ming-zhi Director M 50 2003.9.24—2006.09.25 0 0 Leng Bin Director M 41 2003.9.24—2006.09.25 0 0 Qu Wei-min Director, M 46 2003.9.24—2006.09.25 0 0 Vice-general manager and Secretary to the Board of Directors Li Jian-jun Vice general M 44 2003.9.24—2006.09.25 0 0 manager Geng Zhao-lin Independent M 61 2003.9.24—2006.09.25 0 0 Director Ju Guo-yu Independent M 57 2003.9.24—2006.09.25 director Wang Shi-gang Independent M 38 2003.9.24—2006.09.25 0 0 Director Zhang Hong-xia Chairman for the F 47 2001.5.24-2004.5.23 0 0 Board of supervisors Shi Shi-chun Supervisor M 39 2001.5.24-2004.5.23 0 0 Zhen Wen-ping Supervisor F 35 2003.9.24—2004.5.23 4100 4920 Transfer other capital to share capital Yang Ming Vice-general M 45 --- 0 0 manager Li Ji-ming General Engineer M 37 --- 0 0 Jiang Hua Vice-general M 40 --- 0 0 manager Jiang Jian-xun Treasurer M 37 --- 0 0 Wang Gong-tang Counselor M 6 --- 0 0 2. Information of directors, supervisors who hold posts in shareholder’s company Name Name of shareholder Post in shareholder’s company Term for the post Paid by shareholder’s company or not Sun Li-qiang Yantai Changyu Group Chairman of the Board of 2003.2—2006.2 No Company LTD Directors and general manager Zhong Hong-jiang Yantai Changyu Group Vice chairman of the Board of 2003.2—2006.2 No Company LTD Directors Fu Ming-zhi Yantai Changyu Group Director and vice general 2003.2—2006.2 No Company LTD manager Leng Bin Yantai Changyu Group Director and chief accountant 2003.2—2006.2 No Company LTD Yang Ming Yantai Changyu Group Directors 2003.5—2006.2 No Company LTD Zhang Hong-xia Yantai Changyu Group Chief of audit department Without No Company LTD 9 3. Annual rewards information Total annual compensation amount RMB1,370,000 Total compensation amount of the top three RMB 320,000 Directors Total compensation amount of the top three RMB 290,000 senior management Allowance for independent director 20,000 for each of 3 independent directors (tax excluded) Other subsidy for independent director No Directors or supervisors who do not get All the directors, supervisors and compensation or allowance from the Company senior management of the Company get compensation from the Company. Range of rewards Number of persons RMB 100,000 to 130,000 2 RMB 80,000 to 100,000 7 RMB 60,000 to 80,000 4 RMB 20,000 to 60,000 4 4. Change of directors, supervisors and senior management The resolution adopted at the 2003 Shareholders’ Meeting held on May 21, 2003 appointed Mr. Li Jianjun is as a director of the 2nd-term board of directors, Mr. Ju Guoyu was appointed as independent director of the 2nd-term board of directors, Mr. Wang Shiliang’s application of resignation as supervisor of the 2nd-term board of supervisors because of the reason of age was accepted and the vacancy was filled by Ms. Zheng Wenping. The resolution adopted at the 2003 first Interim Shareholders’ Meeting held on September 24, 2003 appoints Mr. Sun Liqiang, Mr. Zhou Hongjiang, Mr. Fu Mingzhi, Mr. Leng Bin, Mr. Qu Weimin and Mr. Li jianjun are appointed to be directors of the 3rd-term board of directors, and Mr. Geng Zhaolin, Mr. Ju Guoyu and Mr. Wang Shigang are appointed to be independent directors of the 3rd-term board of directors. 5. Staff of the Company As to 31st December 2003, the number of the staff of the Company was 2013 including 1248 production workers, 389 sales persons, 157 technicians, 71 financial members, 148 administrative persons. Among the staff members, 263 persons were university graduates, which is 13.1% of the total employees, 183 persons were college graduates, which is 9.1% of the total employees, 231 persons were graduates of professional schools, which is 11.5% of the total employees, and 1,336 persons were Senior middle school graduates or below, which is 66.4% of the total employees. All the retired staff’s expenses were paid by social security system, not by the Company. 10 V. THE COMPANY RECTIFYING STRUCTURE 1. Current Rectifying Structure Situation of the Company Following the stipulations of the Administration Rules of the Listed Company [2002]1 issued by the China Securities Regulatory Commission and the requirements of the Listing Rules of Shenzhen Securities Exchange and the Corporate Articles of Association, at present the company basically formed a legal person rectifying structure of standardizing operation, effective system and coordinating running. (1) Concerning Shareholders and Shareholders’ meeting: The Company would make sure that all Shareholders especially small and middle Shareholders enjoy equal position with big Shareholders to use their own right. The Company kept communications effectively by multiple ways, carefully accepted the Shareholders’ visits and calls and strengthened the relationship with the investors, consulting to let Shareholders understand the production management and operation situations of the Company. The Company strictly followed the stipulations of the Standard Comments of the Listed Company Shareholders’ Meeting issued by the China Securities Regulatory Commission and the requirements of Discussing Regulation of the Shareholders’ Meeting to preside and call the Shareholders’ meetings. (2) Concerning relationship with holding shareholders: The Company was independent in aspects of personnel, assets, finance and business. The holding shareholders used their rights as contributors by law through shareholders’ meetings and not interrupted the policy making decision and production management activities; the linking trading between holding shareholders had signed relevant agreement to contract each other with fair, just and reasonable pricing and carried out relevant legal procedures without any behavior damaged the benefit of the company. During the link trading voting process, the holding shareholders had avoided. The company did not provide any assurance for the shareholder and the related side. (3) Concerning Directors and the Board of Directors: The Company engaged the Directors strictly according to the Directors’ engaging procedures stipulated in the Corporate Articles of Association; members and personnel of the Company Board of Directors accorded with the requirements of laws, regulations and Articles of Association; the Directors of the Company could attend the Board meetings and shareholding meetings with attitude of responsibility, diligence and honest, were familiar with relevant laws and regulation, and understand the rights, obligations and duties as directors; the Board of Directors set up Discussing Regulation of the Board of Directors, the Information Disclosing Managing Rules of the Company and other management regulations. (4) Concerning Supervisors and the Board of Supervisors: The supervisors of the company had the professional knowledge and experiences on law and accountant. The supervisors, with a responsible attitude to the shareholders, can seriously implement their responsibilities, and supervise the Company’s finance and the legitimate of the directors, managers and other senior personnel implementing their responsibilities. The board of supervisor presided and called the meetings strictly following the stipulation of Articles of Association and the Discussing Regulation of the Board of Supervisors. (5) Concerning performance evaluation, encouraging and restraining system: The Company had set up a just and transparent performance evaluation standard and encouraging and restraining system for the directors, supervisors and managers; and established related encouraging system which linked the reward with the company’s benefit and personal achievement. The hiring of managers was open, transparent and in accordance with relevant laws and regulations. (6) Concerning party with relevant interests: The Company could fully respect and protect the legal rights of creditors, employees, customers, consumers, communities and other parties with relevant interests and cooperated with them actively in order to keep the stable and healthy development of the Company. (7) Concerning information disclosure and transparency: The Company had made up a standard information disclosure system. It could truly, correctly, completely and timely disclose relevant information strictly according to the laws, regulations and Articles of Association. There was not any false record, misleading statement or important omission and it could ensure the same opportunities of all shareholders to get information equally. In the 2003 information disclosure examination to listed companies by Shenzhen Securities Exchange, the Company was evaluated as “Excellent Information Disclosure Company”. 11 2. The duty of the independent Directors According to the requirements of Guidance to Set Up Independent Directors System in Listed Company issued by China Securities Regulatory Commission, the Company appointed three independent directors Mr. Geng Zhaolin, Mr. Ju Guoyu and Mr. Wang Shigang during the report period, which makes the number of independent directors increased to 1/3 of the total number of directors. In this period, the two independent directors strictly carried out their own duty, attended all previous board of directors and shareholders’ meetings, provided valuable professional suggestions to the making of the great decision of the company and improved the science of the decision. At the same time, they supervised effectively the activities of the company’s finance, production and management and showed their function on perfecting the supervise system of the company. 3. Information for Personnel, Assets, Finance, Institution and Business Associated with Holding Shareholders (1). Personnel: The general manager, deputy general manager and other senior management did not assume any administrative position in the holding shareholders’ units and all took payment in the Company; the Company owned independent labor, personnel and salary management system. (2). Assets: There was a definite separation between the Company and the holding shareholders in industrial property rights and non-patent technology. As an independent legal person, the Company had complete legal person property rights, and operated its business independently according to the law; the Company did not provide any guarantee for any shareholder, personal debts, other legal person or natural person with its assets. (3). Finance: The Company had independent finance department, complete, independent and standard financial checking system and had opened an independent bank account. It independently paid taxes according to the law and paid employees’ insurance funds independently. (4). Independent institution: The Company had set up a complete organizational system. The Board of Directors and Board of Supervisors and other inside institutions operated independently and there was no subordinate relationship with the functional departments of holding shareholders. (5). Business: The Company’s business was independent to the holding shareholders. The raw materials purchasing of the Company, production and sales systems were completely independent. No existence of entrusting holding shareholders to purchase or sell on its behalf, or the same industry competition with holding shareholders. 4. Performance Evaluation and Encourage to Senior Management The company has already established the system of evaluating the achievement of senior personnel and the related encouraging system which linked the reward with the company’s benefit and personal achievement. The board of directors set up a salary and reward commission which assumed the responsibility of making and checking the policy and project of the salary and reward. Basing on the production and the operation goal, the commission took the examination to the senior personnel according to their management achievement and index, and took these as grounds of awards or penalties. 12 Ⅵ. BRIEF INTRODUCTION TO THE SHAREHOLDER’S MEETING Totally 2 shareholders’ meetings were convened by the company during the period of statements. 1. The 2003 Shareholders’ Meeting was held in the company on May 21, 2003. The notice of meeting was published in “China Securities Newspaper”, “Securities Time” and “Hongkong Commercial Newspaper” on April 19, 2003. The total attendees of shareholders or their delegates were seven, including one shareholders of state-owned stock, six shareholders or their delegates of CNY-denominated common stock listed domestically, totally representing 140,012,800 shares, accounting for 53.851% of vote shares of the company. Mr. Li Zhiqiang from Jinmao Law Office of Shanghai Municipality attended the meeting as a non-voter and issued a legal comment therein. Over the meeting, the attendees deliberated all the proposals one by one and passed the following resolutions by way of open ballot: (1). Deliberating and passing “2002 Work Report of Board of Directors”. (2). Deliberating and passing “2002 Work Report of Board of Supervisors”. (3). Deliberating and passing “2002 Yearly Report”. (4). Deliberating and passing “Report on ’02 Final Accounts and ’03 Budget”. (5). Deliberating and passing “2002 Scheme of Profit Distribution and Scheme of Changing Public Fund of Capital to Equivalent Shares”. (6). Deliberating and passing “Proposal of Investment in Tiantong Funds Management Company with Partial Surplus Capital Raised from A-share Augmentation”. (7). Deliberating and passing “Proposal on Revision of Articles of Corporation”. (8). Deliberating and passing “Proposal on Electing New Director and Appointing Independent Director”, or electing Mr. Li jianjun to be director of the 2nd-term board of directors and appointing Mr. Sui Guoyu to be independent director of the 2nd-term board of directors. (9). Deliberating and passing “Proposal on Electing New Supervisor”, or Mr. Wang Shiliang’s application of resignation as supervisor of the 2nd-term board of supervisors because of the reason of age is adopted and the vacancy is filled by Ms. Zheng Wenping. (10). Deliberating and passing “Proposal on Renewal of Contract with Auditors’ Firm”. (11). Deliberating and passing “Proposal on Cancellation of Non-performing Accounts”. (12). Deliberating and passing “Proposal on Requiring Shareholders’ Meeting to Authorize the Board of Directors to Handle Relevant Issues”. The resolution announcement of this Shareholders’ Meeting was published on 22nd May, 2003 in “China Securities Newspaper”, “Securities Time” and “Hongkong Commercial Newspaper”. 2. The First Interim Shareholders’ Meeting was held in the company on September 24, 2003. The notice of meeting was published in “China Securities Newspaper”, “Securities Time” and “Hongkong Commercial Newspaper” on August 19, 2003. The total attendees of shareholders or their delegates were twelve, including one shareholders of state-owned stock, eight shareholders or their delegates of CNY-denominated common stock listed domestically, three shareholders of foreign-currency stock listed domestically, totally representing 168,308,306 shares, accounting for 53.94% of vote shares of the company, which was in conformity to “Corporate Law of the People’s Republic of China” and the Articles of Corporation of this company. Mr. Li Zhiqiang from Jinmao Law Office of Shanghai Municipality attended the meeting as a non-voter and issued a legal comment therein. The meeting deliberated and passed the “Motion on Election of New-term Board of Directors” by way of open ballot and Mr. Sun Liqiang, Mr. Zhou Hongjiang, Mr. Fu Mingzhi, Mr. Leng Bin, Mr. Qu Weimin and Mr. Li jianjun are appointed to be directors of the 3rd-term board of directors, and Mr. Lian Zhaolin, Mr. Sui Guoyu and Mr. Wang Shigang are appointed to be independent directors of the 3rd-term board of directors. The resolution announcement of this Shareholders’ Meeting was published on 25th May, 2002 in “China Securities Newspaper”, “Securities Time” and “Hongkong Commercial Newspaper”. 13 Ⅶ. BOARD OF DIRECTIOR’S REPORT 1. Business Condition (1). Principal Business The Company is a light industrial manufacturer of which the principal business is the distilling, producing and distributing of wine, brandy, tonic wine, sparkling wine and cider using grapes and apples as materials, and its major products include dry red wine, dry white wine, XO brandy, VSOP brandy, VO Brandy, VS brandy, Tzepao Sanpien Jiu, Special Quality Sanpien Jiu, Vermouth and sparkling wine. At present, the Company’s colligated output of wine is 80,000 tons. The Company’s sales network covers 29 provinces and municipalities all over the country, and it has nearly one thousand salesmen. For the sales revenue, comprehensive wine sales volume and profit, the statistics from the information office of the General Association of China Light Industry shows that the Company took the first place respectively in the wine field in 2003. ① Sales and Profits of Principal Business Assorted by Products Type Unit：RMB More or less More or less More or less Gross Principal Principal than last year of than last year of than last year of Product Profit Ratio Sales Cost the principal the principal the gross profit (%) sales(%) cost(%) ratio(%) Wine 637,187,381 265,411,072 58.35% 19.44% 17.57% 1.18% Brandy 262,441,577 125,000,132 52.37% 23.70% 30.31% -4.42% Tonic Wine 80,262,857 34,076,413 57.54% 24.61% -6.11% 31.79% Sparkling Wine 73,667,218 63,660,075 13.58% 47.51% 78.72% -52.63% Total 1,053,559,033 488,147,692 － － － － Related party 无 无 无 无 无 无 transaction ②Sales and Profits of Principal Business Assorted by Territory Distribution Unit: Unit：RMB’000 District Principal Sales More or less than last year of the principal sales(%) The coastal region 819,570 28.27% The middle region 148,120 24.94% The western region 85,870 -16.22% Total 1,053,560 22.51% ③Operation Situations of Key Products Taking over 10% of the Company’s Sales Wine and brandy sales took 10% of the sales of the Company’s principal business, and their sales revenue, sale cost and gross profit ratio were set below: Product Name Sales (RMB) Sale Cost (RMB) Gross Profit Ratio (%) Wine 637,187,381 265,411,072 58.35% Brandy 262,441,577 125,000,132 52.37% ④ During the reporting period, the Company’s principal business and its structure did not change a lot, compared with that of the last reporting period. 14 (2) . The Major Holding and Sharing Company Registered Sharing Business Major Products Assets Net Profit Company Name Capital Ratio Scope or Services (RMB’0000) (RMB’0000) (USD’0000) To research, Dry red wine, dry Yantai produce and white wine and hangyu-Castle Wine 70% sell wine and 500 5571 1005 sparking wine of Chateau Co., LTD. sparkling Changyu-Castle wine LongfangCastel-Chan To produce Dry red wine, gyuWine Company, 49% 300 3793 340 and sell wine Dry white wine LTD. To produce Yantai Kylin Cork, aluminum and sell Packaging Co., 50% cap, PVC capsule 100 2025 93 packaging LTD. and so on. material (3). Major Suppliers and Clients Unit：RMB’000 Total purchases from the top 5 suppliers 84,330 Proportion of all purchases 18.3% Total products sold to the top 5 clients 157,550 Proportion of all products sold 13.9% (4). Problems, Difficulties and Measures Taken in Operation 2003 is our second year after entry into the WTO, the duty of the wine continued to decline, the import quantity of the wine increased and many domestic companies also increased their efforts in this field, thus the domestic wine market competition became more and more intense. Faced with this situation, the company focused on marketing, giving priority to the product structure adjustment, being energetic and striving to guarantee the steady increase of the main business index. ——Firstly, marketing resources have been reasonably optimized and our competitive edge further beefed up. The company, during the report period, put forward and has accordingly followed a train of thought entitled “One Layout and Four Adjustments” in terms of sales and marketing. A 3-level distribution network was developed to cover all the big and medium-sized cities nationwide and some county-level cities in some developed regions. And remarkable successes have been made in the aspects of raising its pillar products to better-quality grades, tapping the potential of retail consumption channels such as hotels, developing varietal wines, market investment etc. This has cast solid foundation for helping some weaker areas of our market to regain the initiative and fulfill preset yearly targets. In 2003, the company sold 4151tons of “Cabernet” wine, 72% up over the year before, and 270tons of “Chateau” wine 326% of the year 2002. What’s more, the company satisfactorily eliminated the reverse impact of off-season sales by the steady optimization of distribution outlets and structure of wine varieties, making distinct increases in sales revenue in the 2nd and 3rd quarters over the same period last year. ——Secondly, more efforts were made to restructure the workforce and pay system, and to further better the incentive and disciplinary mechanisms. During the report period, the company adopted the measures for strict evaluations of all the salesmen and sent dozens to a “Re-Training Program” in the sales system. Moreover, the company defined the scope of duty for all the staff and workers in the principle of “Fixed Persons for Fixed Positions and Fixed Salaries”. The revised method of appraisal greatly aroused the employees’ sense of urgency and invigorated the company. — — Thirdly, the corporate governance was strengthened to enhance operating quality and efficiency. During the report period, the company insisted on setting financial supervision as the focus for its in-house management, consistently worked out new managing measures and brought the comprehensive corporate governance to a new level. Better efficiency and result of capital budget were made by means of implementing overall regulation of budgetary capital, strict control of accounts receivable and inventory-related capital and advertisement investment. And cost was further reduced due to the measure of bidding for purchase of raw materials in bulk. ——Fourthly, more investment was budgeted for research and development, more attention was paid to quality control and competitiveness was strengthened. During the report period, the company developed 40 new products and undertook 5 studies on key technologies of wine 15 production that had been listed in the research projects in “Tenth Five-year Plan” of the Ministry of Science and Technology. And by now, several studies have been up to the State-level success standards, including the study on dry white wine and its oenological processes and the study on active microzyme agent and lactobacillus nutrients. The company was designated as a “Postdoctoral” research station by the Ministry of Personnel and as “Keynote Leading Business of Agricultural Industrialization of Shandong Province” by the Department of Agriculture of Shandong Province. Furthermore, approved by the competent State authorities, the company has signed up an agreement with Moldova on setting up China-Moldova Wine Technology Center, which was an encouraging step in foreign technical cooperation. As for quality control, while strictly following ISO 9002 Quality Control System in its product quality control, the company drew up an in-house criterion “Wine-making Grapes” aimed at focusing on control of raw materials of grapes so as to ensure and upgrade quality from the very beginning of production. Of 315 lots of product regularly supervised by the competent State, provincial, city departments and export authorities, all the lots passed the inspection 100%. 2. Investment of the Company (1). The Uses of the Proceeds Collected in the Reporting Period The Company made a public offering of 32 million A Shares for capital increase in October of 2000, and received net proceeds of RMB 613.46 million. The Company invested in those projects as disclosed in the Prospectus. To the end of the reporting period, RMB 509,430,000 has been invested, including RMB 31,650,000 million invested in the current reporting period, which was RMB 82,460,000 less than that of the last year, a 72.3% decrease. And the un-invested fund of RMB 104,030,000 is on deposit in the company’s bank. The progress situations of investment projects are set out below: Unit: RMB’0000 Total capital collected 61,346 Funds operation this year 3,165 All funds operation 50,943 Promissory Investment Projects Formulated Any Actual Production Comply with the Investment Changes Invested profit plan and estimated Amount or not Amount Amount amount or not ①New projects of 30,000T’s for Middle and 27,050 No 16,034 386 High grade wine Program Included: 3,650 No 2,562 unsettled Yes A.Grape growing base of 30,000 Mu B.Program for original wine fermentation of 2,950 No 3,446 unsettled Yes 10,000T’s C.Program for reforming the oak barrels and 8,300 No 3,980 unsettled No celars D.Program for producing Low-Alcohol wine 3,850 No 4,028 386 Yes with capacity of 20,000T’s E.Program for middle & high grade wine with 8,300 No 2,018 0 Yes capacity of 10,000T’s in the Western area ② The reform and enlargement for sales 9,125 No 9,176 4,053 Yes system Projects Included: 4,525 No 3,947 4,053 No A.The construction of distribution branches B.Establishment of computerized information 4,600 No 5,229 unsettled Yes managing ③ Construction of technical center at an 1,000 No 1,015 unsettled Yes national level ④Establishment of wine Chateau 3,770 No 4,211 1,005 Yes ⑤distribution branches in district city coastal 4,000 No 2,100 3,834 No ⑥ Environment protection in Fermentation 450 No 456 unsettled Yes Center ⑦ Shareholder of Tiantong Fund 2,000 2,000 0 Yes Management Company Limited ⑧ Shareholder of Shenzhen Jiadeyu 200 No 200 0 Yes Information Company ⑨Implementation of operating funds 15,751 No 15,751 unsettled Yes Total 61,346 50,943 9,278 16 By the end of the report period, most of the projects planned by the company have been completed and put into operation, which, as most of them are innovative projects of production lines or for sales links, are hard for the time being to prove their value in the short run, but shall be definitely of positive promotional function for the enhancement of whole benefits and mid/long-term development of company in the long run. The projects having made significant progress during the report period are as follows: Expansion and reforming project of marketing system. ① Construction project of distribution companies. The total investment for the project was RMB 45,250,000 and up to now the invested capital has accumulated to RMB39,470,000, of which the additional investment during the report period was RMB11,650,000, used for fixed assets like purchasing offices for the distribution companies in 8 cities of Jinan, Changsha, Taiyuan, Fuzhou, Zhengzhou, Kunming, Shenzhen and Qingdao. ② Construction project of wine chateau. The promised total investment for the project was RMB 37,700,000, actual investment was RMB42,110,000 which has kept in step with the program of the total investment and the project had come into full operation in the mid of September 2002. Over the report period, the sales of wine produced by the chateau was270tons, making sales revenue RMB 39,770,000 and profits RMB10,050,000. ③ Investment project in Tiantong Funds Management Co., Ltd. as a shareholder. It is a new investment project with the capital raised from additional issuance of Stock A, which was approved by 2002 Shareholders’ Meeting. By the end of the report period, the company had invested all RMB 20,000,000 in Tiantong Funds Management Co., Ltd. and presently, is going through the necessary formalities. Once everything is done, the company shall hold 20% shares of the total of Tiantong Funds Management Co., Ltd. (2). Investment Situations of Non-collected Capital in the Reporting Period Name Amount Schedule Income Sino-French joint venture, Langfang USD3,000,000 Put into production RMB3,400,000 Castel-Changyu Wine Co., LTD. 3. Financial Situation of the Company By the end of the report period, the total assets of company stood at RMB 1,983,421,000, 6.70% more over the beginning of the year, which mainly came from the shareholders’ equity and augmented liabilities. The shareholders’ equity was RMB 1,604,951,000, 7.60% more than the beginning of the year, mainly from the operating earnings of the company. The profit on main operations was RMB 565,411,000, 21.23% more over the year before, mainly from the increase of turnovers of main operations. The net profit realized was RMB 165,292,000, 42.60% less compared with the year before, mainly because profits on main operations increased. By the end of the report period, the net amount of cash flow yielded out of the operational activities was RMB310,855,000 and that out of those per share was RMB 0996, or RMB 0.47 more compared with the previous period, mainly because that the company had implemented the strategy of “Cash for Spot Goods” and concentrated on collecting receivables that made more cash received for the commodities sold. The asset liability ratio was 19.08, some 0.68% up over the beginning of the year. The liquidity ratio was 4.29 and the quick ratio was 3.27 (those at the beginning of the year were 4.02 and 2.84 respectively). During the report period, the overheads increased 14.11% over the year before, mainly for the advertisement and market expense. The management expense increased 20.25%, mainly for the increase of fixed assets depreciation. The financial cost raised 51.04％, mainly for the increase of interest. 4．Influences of significant changes of production and marketing environment as well as macro-policies, laws and regulations on the company For details, see Point 8 “Other Important Issues”, Part 9 in this report for the influences of reduction of customs tariff of wine on the company. 17 5． Business Plan of 2004 In the new year 2004, the company will continue to concentrate on developing the Company’s core business and maintain market share, meanwhile it will continue the investment projects outside the main business that will bring stable returns to the Company’s long-term development. The present goal of the Company is still to continuously improve the shareholders’ value through increasing the profit of each share and capital return rate. Barring unexpected situations, the Board of Directors anticipates that, with the increase of China’s economy and average personal income level, the future wine market of China will keep in stable development. But on the other side, with the decreased customs tariffs level of imported wine, the barrier of foreign wine entering China market is reduced, leading to the fiercer competition in the domestic wine market. In order to fit in this situation and to ensure stable increase in sales income and total profit, the Company will take the following actions: (1) Greater efforts were made to win a bigger share of markets and in internal management in the principle of focusing on markets. In the new year, the company will further carry out the work of “One Layout, Four Adjustments” to optimize the market setup and rational configuration of resources. It will speed up localization of operators and distributors, perfect incentive and disciplinary mechanisms, reinforce the operational effectiveness of salesmen, accelerate the construction of network of outlets, actively explore communication and cooperation with booming sales channels such as supermarket chains franchised airport shops and so on. It will seek to increase sales in locations like hotels. It will continue tapping markets for choice wines such as “Cabernet”, “Chateau”, etc., especially making market breakthroughs for brandy, champagne and health wine. It will strive for the fast development of various kinds of alcoholic beverages in harmony with each other, and endeavor to fulfill each and every sales target preset by the company. (2) The construction projects financed with the raised capital shall be accelerated to energize the growth of the company. In the new year, the company will further the work of investment project with the capital raised from additional issuance of Stock A by schedule and in a proper way, adopt more effective measures in managing the projects in operation in order to acquire better returns out of the invested capital and invigorate the company for its sustainable and steady expansion. (3) Financial supervision shall be further strengthened and various expenses shall be further rationalized for the benefits of the company. In 2004, the company shall further trim its supervisory system of budget, thoroughly practice the procedures of invitation for bid to reduce the purchasing cost of raw materials, strictly carry out the sales policy of “Cash for Spot Goods”, strengthen measures to maintain and safeguard its creditability and in managing the warehouses besides the local ones, reduce inventories and accounts receivable, enhance the efficiency of capital use, beef up control of advertisement budget, examine the outcome resulting from between investments and returns, and ensure to obtain good results. (4) Deeper reform shall be done in the labor systems, personnel and pay to vitalize the company and beef up its competitiveness. The company shall make a final touch on the scheme of “Fixed Persons for Fixed Positions and Fixed Salaries” for all of its employees in 2004, unreservedly follow the income-based distribution system of “Position-related Pay and Achievement-based Bonus”, further arouse workers’ initiative and creativity, make out stricter requirements for training and appraisal of sales representatives, technicians and managerial staff, offer the important and key positions to the competent persons who stands out of other competitors to make them feel sense of responsibility and urgency, reform the appointment mechanism to managerial staff, promote the reform to fill the vacancies for medium-level and high-ranking seats by open invitations to the society in order to find exact roles, effectively set up new systems of personnel arrangement and pay, or the systems of free in and out, free up and down, floating salaries depending on individual achievements. 18 6. Information of routine work of the board of directors (1) Meetings and resolutions of the board of directors during the report period Six meetings of the board of directors were convened during the report period. (A) The 14th meeting of the 2nd-term board of directors was held on March 26, 2003, during which period the following proposals had been passed: (a) ‘02 Working Report of the board of directors; (b) General manager’s 2002 Working Report; (c) Resolution on ’02 Year Report and Its Excerpts; (d) Report on ’02 Fiscal Year Final Financial Accounts and ’03 Fiscal Year Budget; (e) ’02 Preliminary Plan of Profit Distribution and Preliminary Plan of Increasing Capital Stock with Public Fund of Capital; (B) The 15th meeting of the 2nd-term board of directors was held on April 17, 2003, during which period the following proposals had been passed: (a) Proposal on Report for the 1st Quarter of 2003; (b) Preliminary Plan on Revision of “Articles of Corporation”; (c) Proposal on Adding New Director and Appointment of Independent Director; (d) Preliminary Plan on Investing in Tiantong Funds Management Co., Ltd. with Partial Surplus Capital Raised from A-share Augmentation; (e) Proposal on Trust Investment in State Bonds with Self-owned Capital; (f) Proposal on Cancellation of Non-performing Accounts; (g) Proposal on Requesting Shareholders’ Meeting to Authorize the Board of Directors to Handle Relevant Issues; (h) Proposal on Renewal of Contract with Accountants Firm; (i) Relevant Issues on Convening ’02 Shareholders’ Meeting. (C) The 16th meeting of the 2nd-term board of directors was held on July 5, 2003, on which day the “Proposal on Whole Restructuring of Yantai Changyu Pioneer Wine Co., Ltd. Carton Packaging Materials Company” had been passed. (D) The 17th meeting of the 2nd-term board of directors was held on August 16, 2003, during which period the following proposals had been passed: (a) Proposal on Report for Half Year of 2003 and Its Excerpts; (b) Proposal on Half-year Profit Distribution of 2003; (c) Preliminary Plan on Election of New-term Board of Directors; (d) Proposal on Selling Partial Assets of Carton Packaging Materials Company; (e) Proposal on Temporary Buying Huaxia Return Fund with Partial Idle Self-owned Capital; (f) Proposal on Relevant Issues of Convening the 1st Interim Shareholders’ Meeting 2003. (E) The 1st meeting of the 3rd-term board of directors was held on September 24, 2003, during which period the “Proposal on Election of Chairman and Vice Chairman of the 3rd-term Board of Directors” had been passed; (F) The 2nd meeting of the 3rd-term board of directors was held on October 28, 2003, during which period the “3rd Quarter Report 2003” had been passed; (2) Information on the execution of the resolutions of shareholders’ meetings by the board of directors A) According to the resolutions made by the ’02 shareholders’ meetings, the board of directors revised the relevant clauses in the “Articles of Corporation”. B) During the report period, the board of directors had realized the “2002 Scheme of Profit Distribution and Scheme of Changing Public Fund of Capital to Equivalent Shares” or based on 260,000,000 shares of the total stock capital up to the end of 2002, and in proportion as increasing 2 shares to per 10 shares in favor of the shareholders. The notice of dividends distribution was published in “China Securities Newspaper”, “Securities Time” and “Hongkong Commercial Newspaper” on May 29, 2003. The last transaction date for both Stock A and Stock B was on June 5, 2003 and the interest-effect date was on June 6, 2003. 19 7. Company’s Profit Distribution Plan The net profit of 2003 was respectively RMB 165,291,935 and RMB 151,253,825 based on the audit performed by Pricewaterhouse Coopers Zhong Tian Certified Public Accountants Company Limited according to the International Financial Reporting Standards and the PRC Financial Reporting Standards. According to “Detailed Implementations Rules Concerning Domestic-listed Foreign Investment Shares of Joint Stock Limited Companies” and “the Articles of the Association of the Company”, appropriation of dividend is based on the lower of the Company’s retained earnings as reported in the financial statement audited by certified public accountants and drawn up according to the PRC Financial Reporting Standards and that prepared under the International Financial Reporting Standards. On the basis of the net profit of RMB 151,253,825 in 2004, after allocating 10% of such amount, i.e. RMB 15,125,382 to the statutory public reserve, and 10% of such amount, i.e. RMB 15,125,383 to the statutory public welfare fund, and plus RMB 265,510,131 of the profit undistributed at the beginning of the reporting period, the amount available for distribution in 2003 was RMB 386,513,191. After deducting RMB 52,000,000 of already implemented distribution, the left undistributed profit is RMB 334,513,191. RMB 31,200,000 was proposed to be appropriated by cash dividend to shareholders of all 312,000,000 Shares on 31st December, 2003 in the ratio of RMB 1.00 for every 10 Shares (For A Share, income tax included). And at the same time, the company transferred capital reserve to 93,600,000 shares in the ratio of 3 shares for every 10 Shares, and then the total shares of the company increased to 405,600,000. The cash dividend distributed to the foreign shareholders will be paid in HK Dollars converted from RMB by the middle ratio announced by the People’s Bank of China on the first working day after the resolution date of the General Shareholders’ Meeting. The above expected plan of company’s profit distribution and the transfer capital reserve to share capital is subject to be considered and approved by the 2003 Shareholders’ Meeting. 8. Other Disclosed Information (1). The newspapers for the Company to disclose information remained the same and are “China Securities Newspaper”, “Securities Times” in home and “Hong Kong Commercial Newspaper” at abroad. (2) Pricewaterhouse Coopers Zhong Tian Certified Public Accountants Company Limited made a special remark on the capital flows of the company with the related partners and the guarantees undertaken by this company. In accordance with the China Certified Public Accountants Independent Auditing Standards, we have audited the consolidated balance sheet of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related consolidated income statement and cash flow statement for the year then ended. We have issued the unqualified report “Pu Hua Yong Dao Zhong Tian Shen Zi (2004) No.1494” dated 7 April 2004. In accordance with “Circular on certain issues relating to the regulation of the fund transference between listed companies and their related parties and guarantees provided by listed companies” (Zheng Jian FA [2003] No. 56) issued by China Security Regulatory Commission and the State-owned Assets Supervision and Administration Commission of the State Council, the Company prepared the attached statement relating to funds occupation by its controlling shareholders or other related parties for the year ended 31 December, 2003 (hereinafter collectively referred to as “the Statement”). It is the Company’s responsibility to prepare and disclose the Statement, and to ensure the truthfulness, legitimacy and completeness of the information disclosed. We have verified the information disclosed in the Statement with the accounting records we examined during the audit of 2003 financial statement as well as the related contents included in the audited financial statements. In all material respects, we did not note any difference. Besides the audit procedures we conducted to examine the related party transactions during the audit of 2003 financial statements, we did not conduct any extra procedure with regards to the issues presented in the Statement. For a better understanding of the issues relating to the fund occupation by the controlling shareholders or other related parties, the attached statement should be read along with the audited consolidated financial statement. This report is intended solely for the use of disclosing the issues relating to funds occupation by the 20 controlling shareholders or other related parties, and should not be used for any other purpose. Attachment: The statement of issues relating to the fund occupation by the controlling shareholders or other related parties of Yantai Changyu Pioneer Wine Co., Ltd. PricewaterhouseCoopers Zhong Tian CPAs. Co., Ltd. In RMB 10 thousand Issues Name Relationship Transactio Accounts Balance Reasons for Settlement n during at year occupation in 2003 the year end Fund transfer Operating Yantai Controlling 103,263 Other 3,580 under normal Fully repaid fund Changyu Shareholder accounts business by March transfer Group Co., receivable course 2004 Ltd. This statement has been approved by the board of directors in the board meeting on 7 April 2004. （3）The independent director of the board of the company made a special remark and independent comments on the guarantees undertaken by this company. According to “Circular on the Concerns of Capital Flows between the Public Companies and Related Parties and the Guarantees of the Public Companies for Other Economies” (ZJF [2003] No.56) promulgated by China Securities Regulatory Commission and the State-owned Assets Regulatory Commission under the State Council, we’ve adhered to the attitude of conscientious dedication to our commitments and responsibilities in and during the thorough examination of the guarantees the company has made for other businesses and hereby make a statement on the concern as follows: The company has strictly observed the relevant State laws and rules, set up a relatively complete and perfect in-house supervisory system in terms of undertaking guarantees for other businesses so as to effectively control the risks that may arise thereof. During the report period as well as the previous periods, the company has neither conducted guarantees for other businesses nor for its affiliates. Ⅷ. BOARD OF SUPERVISORS’ REPORT 1. Information on meetings of the board of supervisors Four meetings of the board of supervisors were convened during the report period. The 8th meeting of the 2nd-term board of supervisors was held on March 26, 2003, on which day the five resolutions were passed, they were “2002 Year Report and Its Excerpts”, “Report on ’02 Fiscal Year Final Financial Accounts and ’03 Fiscal Year Budget”, “2002 Preliminary Plan of Profit Distribution and Preliminary Plan of Increasing Capital Stock with Public Fund of Capital Report” and “2002 Working Report of the Board of Supervisors”. The 9th meeting of the 2nd-term board of supervisors was held on April 17, 2003, on which day the passed resolutions were “Proposal on Report for the 1st Quarter of 2003”, “Proposal on Mr. Wang Shiliang’s Resignation as Supervisor of the 2nd-term Board of Supervisors” and “Proposal on Adding New Supervisor”. The 10th meeting of the 2nd-term board of supervisors was held on May 21, 2003, on which day the “Proposal on Election of Chairman of the Board of Supervisors” was passed. The 11th meeting of the 2nd-term board of supervisors was held on August 16, 2003, on which day the passed resolutions were “Proposal on Report for Half Year of 2003 and Its Excerpts”, “Proposal on Half-year Profit Distribution of 2003”, “Proposal on Selling Partial Assets of Carton Packaging Materials Company” and “Proposal on Temporary Buying Huaxia Return Fund with Partial Idle Self-owned Capital”. 2、 Independent comments of the board of supervisors on relevant issues 2003 During the report period, the board of supervisors of the company conscientiously performed its duties, was active in its work, attended several meetings of the board of directors as non-voter, carried out a series of supervisory and checking activities in the company’s operations, financial condition, interrelated transactions, use of raised capital, etc.. The following comments are hereto written out after careful studies: (A) Information of legal operation: During the report period, the directors and senior managerial staff of the company were honest and dedicated to their work, abided by laws and rules, could conscientiously execute the resolutions of the shareholders’ meetings and the decisions of the board 21 of directors, followed the national laws, rules and the company-made regulations while performing their duties, safeguarded the interests of both the company and all shareholders, and were found no conducts and behaviors against laws, rules, the company-made regulations or of infringements upon the interests of the company. (B) Information of examination of financial activities: During the report period, various expenses were generally reasonable and acceptable, the special funds withdrawn for future use were in accordance with the relevant laws, rules and the in-house regulations, the financial structure was good and the quality of assets was excellent. Pricewaterhouse Coopers Zhong Tian Certified Public Accountants Company Limited audited the financial statements ’03 fiscal year according to International Accounting Criteria and Chinese Accounting Regulations respectively. (C) During the report period, the company had no conduct of raising capital except the one occurred in October 2000 when the company issued 32,000,000 shares of RMB-denominated common stock and the capital raised thereof was actually invested in the promised projects which were in conformity with those as written in the “Booklet of Directions on Stock Issuance”, and the said capital was not used for any other projects. The projects that have been put into operation have generated satisfactory investment cost recovery. (D) No conducts of underground deals and infringements upon shareholders’ interests or of making the losses of corporate assets were found. (E) Impartiality of interrelated transactions: The interrelated transactions occurred during the report period were carried out strictly in the light of the relevant State stipulations and with complete formalities and on the basis of impartial transaction, which were all for the good of the company and shareholders. The board of supervisors thinks that during the report period, the board of directors and managerial circle were closely united together and in smooth coordination to do the initiative and efficient work and made greater successes. And meanwhile, the board of supervisors hereby suggests that in the new year, the company should stick to the concept of focusing on markets, make more efforts to exploit markets, increasingly reinforce the core competitiveness, try its best to fulfill the yearly targets preset by the board of directors, and push the company ahead in a sustainable, steady and healthy way. IX．Major issues 1.The company had no major lawsuit and arbitration over the year. 2.The company had no merger and acquisition, sales of assets during the report period. On August 15, 2003, the company signed an agreement of “Agreement of Assets Transference” to transfer all the assets except for the properties such as the land-use right and workshops of its affiliated Carton Packaging Materials Company to Yantai Changyu Paper Products Co., Ltd.. As evaluated on the benchmark day of June 30, 2003 by Shandong Zhengyuan Hexin Certified Public Accountants Firm who was accredited to engage in stock business, the value of the evaluated objects of the deal was RMB3,954,500 and the transference price mutually accepted and confirmed by both parties concerned was RMB3,624,300. 3.Interrelated transactions The company had no other new interrelated deals during the report period. See the Note to Financial Statements “7. Relationship with Related Parties and Transactions” for other related deals extended into the report period from the previous years. 4.Major and important contracts and execution results During the report period, the company had no guarantee/ pledge-related contracts. It didn’t trust, contract or lease the assets of other companies, and vice versa. After deliberated and passed by the 15th meeting of the 2nd-term board of directors, the company, during the report period, entrusted Guohai Securities Co., Ltd. to invest in State Bonds with its own money RMB50,000,000 for the duration from April 20, 2003 to November 25, 2003, which generated returns of RMB2,670,000. 22 5.Issues promised by the company The company and its shareholders who were holding 5% or more shares of the company’s total had made no any promises during the report period and no any ones that had been extended to the report period from before either. 6.Information about appointing and dismissing certified public accountants firm 2002 Shareholders’ Meeting passed a resolution, in which the company decided to appoint Pricewaterhouse Coopers Zhong Tian Certified Public Accountants Company Limited to be 2003 international auditor and domestic auditor for the company for a length of one year. The auditing expenditure totaled RMB900,000, including travel fees and all operating cost. 7. During the report period, the company, the board of directors and the directors themselves had got no any administrative punishments, circulating criticism of the related supervisory departments, and public condemnation. 8.Other major issues Impact due to reduction of customs tariff on wine. According to the stipulations of “Section One: Table of the People’s Republic of China for Year-on-Year Reduction of Customs Tariff (Agricultural Products)”, a law document of China’s entry into WTO, since January 1, 2002 the import duties for wine and brandy should be lowered to 44.6% and 46.7% respectively, and to 34.4% and 37.5% in 2003 respectively, and further down to 14% (wine) and 10% (brandy) in 2005. That would be advantageous to foreign producers to export their wine and brandy to Chinese markets and in the medium and long run, make the company face sharper market competition. The company will alleviate the impact on profitability of the company due to the competition by means of the countermeasures of perfecting marketing network, trimming product structure, extending market coverage, reducing operating cost and so forth to strengthen its core competitiveness. X. Financial report We have audited the accompanying consolidated balance sheet of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related consolidated income statement and cash flow statement for the year then ended. These consolidated financial statements set out on pages 2 to 35 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly in all material respects the consolidated financial position of the Group as of 31 December 2003 and of the results of its consolidated operations and cash flows of the Group for the year then ended in accordance with International Financial Reporting Standards. 7 April 2004 23 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in Renminbi (“RMB”) thousands, except for earnings per share) Note 2003 2002 RMB’000 RMB’000 Sales, net 1,053,559 859,987 Cost of sales (488,148) (393,577) Gross profit 565,411 466,410 Distribution costs (235,768) (206,620) Administrative expenses (94,485) (78,576) Other operating expenses, net 3 (678) (3,818) Profit from operations 234,480 177,396 Finance income, net 4 11,260 7,455 Profit before tax and minority interest 6 245,740 184,851 Income tax expense 7 (80,067) (68,099) Profit before minority interest 165,673 116,752 Minority interest (381) (843) Net profit 165,292 115,909 Earnings per share - Basic and diluted 8 RMB0.53 RMB0.37 24 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003 (All amounts in RMB thousands) Note 2003 2002 RMB’000 RMB’000 ASSETS Non-current assets Leasehold land, net 9 15,314 15,792 Property, plant and equipment 10 486,754 535,520 Investment in associate 12 - 703 Available-for-sale investment 13 2,000 2,000 Other non-current assets 14 20,000 - Deferred tax assets 15 21,291 9,097 545,359 563,112 Current assets Inventories 16 340,925 380,027 Trade receivables, net 17 105,326 128,073 Prepayments and other receivables, net 18 27,542 60,739 Due from related party 30 35,800 56,446 Trading investment 19 20,844 - Held-to-maturity investment with maturity within 12 months 20 15,000 - Bank deposits with maturity over 3 months 478,193 248,356 Cash and cash equivalents 21 414,432 422,145 1,438,062 1,295,786 Total assets 1,983,421 1,858,898 EQUITY AND LIABILITIES Shareholders’ equity Share capital 22 312,000 260,000 Reserves 23 1,292,951 1,231,659 II. III. 1,604,951 1,491,659 Minority interests 27,694 27,313 Non-current liabilities Deferred tax liabilities 15 15,603 17,229 Current liabilities Short-term bank borrowings 24 2,652 - Trade payables 109,612 146,216 Other payables and accrued liabilities 25 114,535 123,439 Salaries payable 51,992 46,047 Taxes payable 56,382 6,995 335,173 322,697 Total equity and liabilities 1,983,421 1,858,898 25 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands) Reserves Statutory Statutory Share Capital Fair value surplus public Retained Note capital reserve reserve reserve fund welfare fund earnings Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1 January 2002 260,000 817,169 - 47,880 47,879 260,509 1,173,437 1,433,437 Dividend relating to 2001 27 - - - - - (65,000) (65,000) (65,000) Revaluation reserve 10 - - 7,313 - - - 7,313 7,313 Net profit for the year - - - - - 115,909 115,909 115,909 Appropriation from retained profits 23 - - - 11,124 11,124 (22,248) - - Balance at 31 December 2002 260,000 817,169 7,313 59,004 59,003 289,170 1,231,659 1,491,659 Dividend relating to 2002 27 - - - - - (52,000) (52,000) (52,000) Net profit for the year - - - - - 165,292 165,292 165,292 Appropriation from capital reserve 22 52,000 (52,000) - - - - (52,000) - Appropriation from retained profits 23 - - - 15,125 15,125 (30,250) - - Balance at 31 December 2003 312,000 765,169 7,313 74,129 74,128 372,212 1,292,951 1,604,951 26 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDARIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands) Note 2003 2002 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 28 384,457 216,928 Income tax paid (73,602) (80,292) Net cash generated from operating activities 310,855 136,636 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of leasehold land (35) (9,538) Purchase of property, plant and equipment (19,085) (204,009) Increase in bank deposits with maturity over 3 months (229,837) (14,545) Increase in investments and other non-current assets (55,000) - Dividends received 396 - Proceeds from sale of current held-to-maturity investment 2,670 - Proceeds from disposals of property, plant and equipment 19,246 19,862 Disposal of a production unit 29 3,624 - Interest received 8,803 7,681 Net cash used in investing activities (269,218) (200,549) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term bank 2,650 - borrowings Capital injections of minority interests - 24,815 Dividends paid (52,000) (65,000) Net cash used in financing activities (49,350) (40,185) Net decrease in cash and cash equivalents (7,713) (104,098) Cash and cash equivalents at beginning of year 422,145 526,243 Cash and cash equivalents at end of year 414,432 422,145 27 1 ORGANIZATION AND OPERATIONS Yantai Changyu Pioneer Wine 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”) on 18 September 1997. As part of the reorganization (the “Reorganization”), the Company issued 88,000,000 domestically listed foreign shares (“B Shares”). The Reorganization involved a reorganization carried out by Yantai Changyu Group Company Limited (“Changyu Group Company”), the promoter and the parent company of the Company, which injected certain assets and liabilities in relation to the brandy, wine, sparkling wine and cider and tonic wine production and sales businesses to the Company. The Company’s B Shares were listed on the Shenzhen Stock Exchange on 23 September 1997. In October 2000, the Company issued 32,000,000 domestic investment ordinary shares (“A Shares”). The Company’s A Shares were listed on Shenzhen Stock Exchange on 26 October 2000. The Company and its subsidiaries (the “Group”) are principally engaged in the production and sales of wine, brandy, sparkling wine and cider and tonic wine. The average number of employees in the Group was approximately 2,138 in 2003 and 2,231 in 2002. The registered office address of the Company is 56 Dama Road, Yantai City, Shandong Province, the PRC. The directors of the Company considered Changyu Group Company, a company incorporated in the PRC and owned by the government of the PRC, to be the ultimate parent company. 2 ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of property, plant and equipment and trading and available-for-sale investments. 28 The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. This basis of accounting differs from that used in the statutory accounts of the Group companies which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises in the PRC (“PRC GAAP”). (b) Group accounting (1) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. 29 (2) Associate Investment in associate is accounted for by the equity method of accounting. Under this method the Company’s share of the post-acquisition profits or losses of associate is recognised in the consolidated income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associate is an entity 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 associate are eliminated to the extent of the Group’s interest in the associate; 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 associate. (c) Foreign currency translations (1) Measurement currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”). The consolidated financial statements are presented in RMB, which is the measurement currency of the Company. (2) Transactions and balances Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. (d) Leasehold land Leases of land acquired are classified as operating leases. The prepaid lease payments are amortised over the lease period (50 years) on a straight-line basis. 30 (e) Property, plant and equipment Property, plant and equipment is shown at fair value, based on valuations by external independent valuers, less subsequent depreciation. Other property, plant and equipment acquired subsequent to last valuation is stated at historical cost less depreciation. Increases in the carrying amount arising on revaluation of property, plant and equipment are credited to fair value reserve in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against fair value reserve; all other decreases are charged to the consolidated income statement. Each year the difference between depreciation based on the revalued carrying amount of the asset (the depreciation charged to the consolidated income statement) and depreciation based on the asset’s original cost is transferred from fair value reserve to retained earnings. Depreciation is calculated on the straight-line method to write off the cost or revalued amount of each asset to their residual values over their estimated useful lives as follows: Buildings 30-40 years Machinery and equipment 10-20 years Motor vehicles 6-12 years Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in fair value reserve are transferred to retained earnings. Repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow into the Group. Major renovations are depreciated over the remaining useful life of the related asset. (f) Impairment of long lived assets Property, plant and equipment and leasehold land 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. 31 (g) Investments The Group classifies its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets; for the purpose of these financial statements short term is defined as 3 months. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments are included in the consolidated income statement in the period in which they arise. Unrealised gain and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in equity. The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the consolidated income statement as gains and losses from investment securities. 32 (h) Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. (i) Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. (j) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (k) Cash and cash equivalents Cash and cash equivalents are carried in the consolidated balance sheet at cost. For the purposes of the consolidated 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 maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities on the consolidated balance sheet. (l) Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings. 33 (m) Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associate, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. (n) Employee benefits Contribution to pension scheme are recognised as an expense in the consolidated income statement as incurred. Pursuant to the PRC laws and regulations, contributions to the basic pension scheme for the Group’s local staff are to be made monthly to a government agency based on 25% of the standard salary set by the provincial government, of which 20% is borne by the Group and the remainder is borne by the staff. (o) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. (p) 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 recognised as a separate asset but only when the reimbursement is virtually certain. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. 34 Restructuring provisions comprise lease termination penalties and employee termination payments, and are recognised in the period in which the Group becomes legally or constructively committed to payment. Costs related to the ongoing activities of the Group are not provided in advance. (q) Revenue recognition Revenue comprises the invoiced value for the sale of goods and services net of value-added tax (“VAT”), 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. Dividends are recognised when the right to receive payment is established. (r) Dividends Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders. (s) Financial risk management (1) Financial risk factors and financial risk management The Group’s activities expose it to a variety of financial risks, including foreign exchange risk, interest rate risk, credit risk and liquidity 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) Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. 35 (ii) 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. The Group policy is to maintain all its borrowings in fixed rate instruments. (iii) Credit risk The Group has no significant concentration of credit risk with any single counterparty or group counterparties. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. (iv) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. (2) Fair value estimation The fair value of publicly traded securities is based on quoted market prices at the balance sheet date. In assessing the fair value of non-trading securities and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. (t) Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 36 3 OTHER OPERATING EXPENSES, NET 2003 2002 RMB’000 RMB’000 Financial refund (Note 7(a)) 4,300 3,990 Profit on sale of current held-to-maturity investment 2,670 - Fair value gain on trading investment 844 - Cash dividend income of trading investment 396 - Share of results of investment in associate (703) - Impairment of property, plant and equipment (1,018) - Loss on disposals of property, plant and equipment (6,871) (7,830) Others (296) 22 (678) (3,818) 4 FINANCE INCOME, NET 2003 2002 RMB’000 RMB’000 Interest income 12,332 7,681 Others (1,072) (226) 11,260 7,455 5 STAFF COSTS 2003 2002 RMB’000 RMB’000 Wages and salaries and bonus 99,555 103,091 Provision for staff welfare 8,871 8,904 Defined contribution pension scheme 7,620 7,565 116,046 119,560 37 6 PROFIT BEFORE TAX AND MINORITY INTEREST Profit before tax and minority interest was determined after charging the following: 2003 2002 RMB’000 RMB’000 Depreciation of property, plant and equipment (Note 10) 39,304 28,758 Amortisation of leasehold land (Note 9) 513 195 Advertising expenses 89,047 78,276 Sales commission 5,259 3,594 Freight 38,602 32,951 Trademarks licence (Note 30(b)) 22,653 18,564 Travelling expenses 14,561 15,775 Research and development costs included in general and administrative expenses 2,242 3,325 Operating lease rentals - Lease of machinery, facilities and trademark (Note 30(e)) 3,400 3,400 - Lease of land use rights (Note 30(d)) 550 550 Provision for doubtful debts 3,843 8,376 Loss on write-off of inventories 26,452 - 7 TAXATION (a) Enterprise income tax (“EIT”) Details of taxation charged during the year were as follows: 2003 2002 RMB’000 RMB’000 Current income tax expense 93,887 72,767 Deferred tax income relating to the reversal and origination of temporary differences (13,820) (4,668) 80,067 68,099 38 The reconciliation of the applicable tax rate to the effective tax rate is as follows: 2003 2002 RMB’000 % RMB’000 % Accounting profit before tax 245,740 100% 184,851 100% Tax at the statutory tax rate of 33% 81,094 33% 61,000 33% Tax effect of expenses that are no deductible in determining taxable profit: - Provision for doubtful debts 1,198 1% 2,764 2% - Loss on disposals of property, plant and equipment 2,267 1% - - - Loss on write-off of inventories 8,729 4% - - - Advertising expenses in excess of deductible limit - - 7,061 4% - Sales commission 1,735 1% 1,186 1% - Depreciation of revaluation surplus on property, plant and equipment 2,112 1% 2,073 1% Tax effect of income that are not subject to income tax: - Deductible provision for doubtful debts of prior years (1,550) (1%) - - - Financial refund (1,419) (1%) (1,317) (1%) - Fair value gain on trading investment (279) - - - Effect of deferred taxes relating to the reversal and origination of temporary differences (13,820) (6%) (4,668) (3%) Income tax expense 80,067 33% 68,099 37% The Group is subject to EIT which is levied at a rate of 33% of taxable income based on the PRC statutory accounts. Pursuant to the relevant circulars issued by the Shandong Provincial Municipal Government, started from the date of the listing of the Group’s B Shares, the Company was entitled to a financial refund on the income tax paid. The refund was calculated at 18% of its taxable income. Pursuant to the relevant circulars issued by the Ministry of Finance in October 2000, effective on 1 January 2002, the above mentioned financial refund policy should be discontinued. In 2003, the Group received financial refund amounting to RMB4,300,000. This refund was related to the EIT paid in 2001. 39 (b) VAT The Group is subject to VAT, which is a tax charged on top of the selling price at a general rate of 17%. An input credit is available whereby VAT previously paid on purchases of semi-finished products, raw materials, etc., can be used to offset the VAT on sales to determine the net VAT payable. (c) Sales taxes The Group is subject to consumption tax (“CT”) on its products. CT is levied on the gross turnover of products at rates ranging from 10% to 15%. In addition to the above, the Group is subject to the following types of sales taxes: - City development tax, a tax levied at 7% of CT and net VAT payable, - Education supplementary tax, a tax levied at 3% of CT and net VAT payable. 8 EARNINGS PER SHARE The calculation of basic earnings per share is based on the net profit for the year attributable to shareholders of approximately RMB165,292,000 (2002: approximately RMB115,909,000), divided by the weighted average number of ordinary shares outstanding during the year of 312,000,000 shares (2002: 312,000,000 shares). Diluted earnings per share equal to basic earnings per share as there are no potentially dilutive shares outstanding. 9 LEASEHOLD LAND, NET 2003 2002 Cost RMB’000 RMB’000 Beginning of year 16,387 6,849 Additions 35 9,538 End of year 16,422 16,387 Accumulated amortisation Beginning of year 595 400 Additions 513 195 End of year 1,108 595 Net book value End of year 15,314 15,792 Beginning of year 15,792 6,449 40 10 PROPERTY, PLANT AND EQUIPMENT Movements in property, plant and equipment were as follows: Machinery and Construction Buildings equipment Motor vehicles -in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost/Valuation Beginning of year 270,181 250,143 13,598 1,598 535,520 Additions 467 1,670 206 16,742 19,085 Transfers 6,496 1,659 952 (9,107) - Disposal of a production uni (Note 29) - (4,132) (338) - (4,470) Other disposals (23,229) (29,746) (2,438) - (55,413) End of year 253,915 219,594 11,980 9,233 494,722 Accumulated depreciation Beginning of year - - - - - Charges 9,691 27,586 2,027 - 39,304 Disposal of a production uni (Note 29) - (1,863) (177) - (2,040) Other disposals (2,276) (25,425) (1,595) - (29,296) 7,415 298 255 - 7,968 Impairment Beginning of year - - - - - Charges - 926 92 - 1,018 Disposal of a production uni (Note 29) - (926) (92) - (1,018) End of year - - - - - Net book value End of year 246,500 219,296 11,725 9,233 486,754 Beginning of year 270,181 250,143 13,598 1,598 535,520 The property, plant and equipment of the Group as of 31 December 2002 were revalued by Shandong Zhengyuan Hexin Certified Public Accountants, independent professional valuers. The independent valuers determined the fair value of the property, plant and equipment based on the replacement cost and open market value methods. According to the revaluation result, a revaluation surplus net of applicable deferred income tax of approximately RMB7,313,000 was credited to the fair value reserve in shareholders’ equity. Group management estimates that there have been no significant changes in economic circumstances since the last valuation that would affect the fair value of the property, plant and equipment carried at revalued amounts at the balance sheet date. 41 If property, plant and equipment were carried at cost less accumulated depreciation, the amounts of each category of property, plant and equipment would be as follows: Machinery and Construction Buildings equipment Motor vehicles -in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 258,581 296,605 14,989 9,233 579,408 Accumulated depreciation (24,514) (89,922) (2,772) - (117,208) 234,067 206,683 12,217 9,233 462,200 No borrowing costs were capitalised during 2003. 11 INVESTMENT IN SUBSIDIARIES As of 31 December 2003, the Group had the following consolidated subsidiaries. All subsidiaries were incorporated in the PRC: Percentage of Percentage of Date of equity interest equity interest Paid-in Principal Name of company establishment held directly held indirectly capital activities Yantai Changyu Pioneer Wine Machine 1 December 1992 100% - RMB300,000 Machinery Packaging Co.,Ltd sub-contracting and repairing Yantai Changyu Pioneer Vehicular Transport Co., 1 December 1992 100% - RMB300,000 Transportation Ltd. service Changyu (Jingyang) Pioneer Wine Co., Ltd. 5 December 2001 90% 10% RMB1,000,000 Production and sales of wine Yantai Changyu Pioneer Wine Sales Co., Ltd. 24 December 2001 90% 10% RMB8,000,000 Sales of wine Dalian Changyu Sales and Distribution Co., Ltd. 23 January 1998 70% 30% RMB500,000 Sales of wine Xi’an Changyu Sales and Distribution Co., Ltd. 25 January 1999 70% 30% RMB500,000 Sales of wine Hangzhou Changyu Sales and Distribution Co., 7 April 1998 70% 30% RMB500,000 Sales of wine Ltd. Changchun Changyu Sales and Distribution Co., 19 January 1998 70% 30% RMB500,000 Sales of wine Ltd. Zhengzhou Changyu Sales and Distribution Co., 16 January 1998 70% 30% RMB500,000 Sales of wine Ltd. Nanjing Changyu Sales and Distribution Co., Ltd. 10 February 1998 70% 30% RMB500,000 Sales of wine Changsha Changyu Sales and Distribution Co., 22 January 1998 70% 30% RMB500,000 Sales of wine Ltd. Wuhan Changyu Sales and Distribution Co., Ltd. 12 January 1998 70% 30% RMB500,000 Sales of wine Nanchang Changyu Sales and Distribution Co., 24 March 1998 70% 30% RMB500,000 Sales of wine Ltd. Taiyuan Changyu Sales and Distribution Co., Ltd. 20 January 1998 70% 30% RMB500,000 Sales of wine 42 Percentage of Percentage of Date of equity interest equity interest Paid-in Principal Name of company establishment held directly held indirectly capital activities Shijiazhuang Changyu Sales and Distribution 2 April 1998 70% 30% RMB500,000 Sales of wine Co., Ltd. Beijing Changyu Sales and Distribution Co., Ltd. 14 July 1998 70% 30% RMB500,000 Sales of wine Guangzhou Changyu Sales and Distribution Co., 15 May 1998 70% 30% RMB500,000 Sales of wine Ltd. Zhanjiang Changyu Sales and Distribution Co., 20 October 1998 70% 30% RMB500,000 Sales of wine Ltd. Yantai Changyu-Castel Wine Chateau Co., Ltd. 3 September 2001 70% - USD5,000,000 Production and (“Chanyu-Castel”) (c) sales of wine Shanghai Changyu Sales and Distribution Co., 28 April 2003 60% 40% RMB500,000 Sales of wine Ltd. Yantai Kylin Packaging Co., Ltd. (“Kylin 29 September 1999 50% - USD1,000,000 Production o Packaging”) (a) packaging materials Langfang Development Zone Castel-Changyu 1 March 2002 49% - USD3,000,000 Production and Wine Co., Ltd. (“Langfang Castel”) (b) sales of wine Changyu (Jingyang) Pioneer Wine Sales Co., 8 April 2002 10% 90% RMB1,000,000 Sales of wine Ltd. Langfang Changyu Pioneer Wine Sales Co., Ltd. 19 April 2002 10% 90% RMB1,000,000 Sales of wine (a) The Company has more than one half of voting power in the board of directors of Kylin Packaging and has the power to control its strategic operating, investing and financing policies. (b) Langfang Castel is a sino-foreign joint venture established by the Company and a foreign investor. According to an operation contract signed by the Company, Langfang Castel and the foreign partner, the Company is entrusted to manage Langfang Castel and therefore has the power to control its strategic operating, investing and financing policies. The foreign investor is not entitled to any profit sharing. In return the Company is required to pay an annual guaranteed fee to the foreign partner. (c) Changyu-Castel is a sino-foreign joint venture established by the Company and a foreign investor. According to an operation contract signed by the Company, Changyu-Castel and the foreign partner, the Company is entrusted to manage Changyu-Castel and therefore has the power to control its strategic operating, investing and financing policies. The foreign investor is not entitled to any profit sharing. In return the Company is required to pay an annual guaranteed fee to the foreign partner. 43 12 INVESTMENT IN ASSOCIATE 2003 2002 RMB’000 RMB’000 Beginning of year 703 703 Share of results (703) - End of year - 703 As of 31 December 2003, the Company had the following associate which was incorporated in the PRC: Percentage of equity Date of interest held Registered Principal Name of company establishment directly capital activities Yantai Sino-French Pegase Brandy 25 February 40% French Franc Manufacture and Co., Ltd. 1992 1,604,060 sale of brandy 13 AVAILABLE–FOR–SALE INVESTMENT 2003 2002 RMB’000 RMB’000 Available-for-sale investment - Unlisted shares 2,000 2,000 Non-current available-for-sale investment comprises a 5% shareholding in Shenzhen Jiadeyu Information Business Co., Ltd. It is not practicable to determine the fair value of this investment because there is no quoted market price available in an active market, nor any other alternative method available that can reasonably estimate the fair value of the investment. 14 OTHER NON-CURRENT ASSETS 2003 2002 RMB’000 RMB’000 Prepayment for acquisition of an associate 20,000 - Pursuant to an agreement between the Company and Tiantong Securities Co., Ltd., the Company will acquire 20% equity interest in Tiantong Funds Management Co., Ltd. at a consideration of RMB20,000,000 in 2004. The other non-current asset represents the consideration paid for the acquisition. As of 31 December 2003, the relevant legal approvals were still in progress and the consideration paid was accounted for as prepayment. 44 15 DEFERRED TAX ASSETS / LIABILITIES Deferred tax assets / liabilities were calculated in full on temporary differences under the liability method using a principal tax rate of 33% (2002: 33%). The movements on the deferred tax assets / liabilities were as follows: Credited Beginning Charged) to net Ending of of year profit year RMB’000 RMB’000 RMB’000 Deferred tax assets: - Loss on disposals of property plant and equipment - 2,267 2,267 - Loss on write-off of inventories - 8,729 8,729 - Provision for doubtful debts 9,097 1,198 10,295 9,097 12,194 21,291 Deferred tax liabilities: - Revaluation surplus on property plant and equipment 10,346 (1,905) 8,441 - General and administrative expenses recorded using the accrual basis 6,883 - 6,883 - Fair value gain on trading investment - 279 279 17,229 (1,626) 15,603 The above deferred taxes arise in the following circumstances: - Disposals of property, plant and equipment and loss on write-off of inventories is not tax deductible until approved by the local tax bureau; - Provision for doubtful debts is not tax deductible until approved by the local tax bureau; - Because revaluation is for accounting purpose only, property, plant and equipment stated at fair value have different bases for tax purpose; - Certain accrued expenses are not tax deductible until payments are made; and - Fair value gain on trading investment is not subject to income tax until the income is realized upon the trading of the investment. 2003 2002 RMB’000 RMB’000 Deferred tax assets to be recovered after more than 12 months 10,295 9,097 Deferred tax liabilities to be settled after more than 12 months 13,421 15,238 45 16 INVENTORIES 2003 2002 RMB’000 RMB’000 Raw materials, at cost 35,122 43,218 Work-in-process, at cost 170,447 173,271 Finished goods, at cost 135,356 163,538 340,925 380,027 Less: Provision for obsolescence - - 340,925 380,027 17 TRADE RECEIVABLES, NET 2003 2002 RMB’000 RMB’000 Accounts receivable 120,858 143,163 Notes receivable 10,023 12,476 130,881 155,639 Less: Provision for doubtful debts (25,555) (27,566) 105,326 128,073 Pursuant to the resolution approved by the Annual General Meeting on 22 May 2003 regarding the write-off of doubtful debts, the Group wrote off accounts receivable of approximately RMB4,698,000. Full provision had already been provided for the amounts written off. 18 PREPAYMENTS AND OTHER RECEIVABLES, NET 2003 2002 RMB’000 RMB’000 Prepayments to suppliers 2,706 4,176 Advances to employees 5,463 7,281 VAT and CT refund receivable on export sales 1,911 5,162 Interest receivable from bank deposits 3,529 - Deposits to suppliers for packaging materials 652 1,396 Public housing fund receivable 10,876 9,008 Others 3,350 33,716 28,487 60,739 Less: Provision for doubtful debts (945) - 27,542 60,739 46 As of 31 December 2003, the net book value of VAT and CT refund receivable on export sales was pledged as security for the Group’s short-term bank borrowings amounting to RMB2,652,000 (Note 24). 19 TRADING INVESTMENT The trading investment is traded in active market and is valued at market price as of 31 December 2003 by reference to the fund statement provided by Huaxia Funds Management Co., Ltd. In the consolidated income statement, changes in faire value of trading investment are recorded in other operating expenses, net (note 3). 20 HELD-TO-MATURITY INVESTMENT WITH MATURITY WITHIN 12 MONTHS On 23 May 2003, the Company and Shandong International Entrust Investment Company Limited (“Shandong Entrust”) signed a contract whereby the Company entrusted Shandong Entrust to provide RMB15,000,000 entrusted loan to third parties at a rate of 4.2% per annual. The entrusted period is from 23 May 2003 through 23 November 2004. In accordance with related agreement, Shandong Luming Credit Guaranty Company Limited will be the guarantor for the amount entrusted. 21 CASH AND CASH EQUIVALENTS 2003 2002 RMB’000 RMB’000 Cash 382 110 Short-term bank deposits 414,050 422,035 414,432 422,145 22 SHARE CAPITAL As of 31 December 2003, the outstanding share capital comprised State-owned Shares, A Shares and B Shares. The B Shares ranked pari passu in all respects with the A Shares except that A Shares can only be owned and traded by investors in the PRC mainland; while B Shares can be owned and traded in foreign currency by both foreign and qualified domestic investors. 47 2003 2002 2003 2002 Number of shares RMB’000 RMB’000 (in thousands) Issued and fully paid: Listed - A Shares of RMB1 each 38,400 32,000 38,400 32,000 - B Shares of RMB1 each 105,600 88,000 105,600 88,000 144,000 120,000 144,000 120,000 Unlisted - State-owned Shares of RMB1 each 168,000 140,000 168,000 140,000 312,000 260,000 312,000 260,000 Pursuant to the “resolution concerning profit appropriations in respect of 2002” approved by the Annual General Meeting held on 22 May 2003, the Company declared a cash dividend of RMB0.2 per share, totalling a cash dividend of RMB52,000,000 (2002: RMB52,000,000). In addition, by appropriations of the Company’s capital reserve, the Company declared bonus share dividend of 0.2 share per share, totalling bonus share of 52,000,000 shares (2002: nil). The dividends were accounted for in shareholders’ equity as an appropriation of reserves. 23 RESERVES (a) Capital reserve In accordance with the Company’s articles of association, the Company shall record the followings as capital reserve: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the articles of association and relevant regulations in the PRC. Capital reserve may be utilised to offset prior years’ losses or for the issuance of bonus shares. (b) Statutory reserves In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital, and thereafter any further appropriation is optional. The SRF can be utilised to offset prior years’ losses or for the issuance of bonus shares. However, such SRF shall be maintained at a minimum of 25% of share capital after such issuance. 48 In accordance with the Company Law of the PRC and the Company’s articles of association, the Company also shall appropriate 5% to 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory public welfare fund (“PWF”). PWF shall be utilised for collective staff benefits such as building of staff quarters or housing. No distribution of the fund shall be made other than on liquidation of the Company. For the year ended 31 December 2003, the directors of the Company proposed that 10% (2002: 10%) of the net profit as reported in the statutory accounts be appropriated to each of SRF and PWF respectively, totalling approximately RMB30,250,000 (2002: approximately RMB22,248,000). The resolution is subject to the approval by the shareholders in the Annual General Meeting. 24 SHORT-TERM BANK BORROWINGS As of 31 December 2003, the short-term bank borrowings were secured by VAT and CT refund receivable on export sales (Note 18). 25 OTHER PAYABLES AND ACCRUED LIABILITIES 2003 2002 RMB’000 RMB’000 Welfare payable 14,078 11,923 Advances from customers 41,421 44,998 Housing fund due to employees 9,917 8,162 Payables for advertising expenses 17,958 25,390 Others 31,161 32,966 114,535 123,439 26 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 25% of the standard salary set by the provincial government, of which 20% 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 contributions on an accrual basis (Note 5). 49 27 DIVIDENDS 2003 2002 RMB’000 RMB’000 Dividends proposed after year-end 31,200 52,000 In accordance with the relevant regulations of the PRC and the articles of association of the Company, the Company declares dividends based on the lower of the retained earnings as reported in the PRC statutory accounts and in the financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with PRC GAAP, the retained earnings as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements. As of 31 December 2003, the retained earnings before final dividends reported in the statutory accounts were approximately RMB386,513,000 (2002: approximately RMB265,510,000). At the meeting of the board of the directors on 7 April 2004, a cash dividend in respect of 2003 of RMB0.1 per share, totalling cash dividend of RMB31,200,000 (2002: RMB52,000,000), is to be proposed. The profit appropriations need to be approved by the Annual General Meeting. These consolidated financial statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2004. 50 28 CASH GENERATED FROM OPERATIONS 2003 2002 RMB’000 RMB’000 Profit before tax and minority interest 245,740 184,851 Adjustments for: Loss on disposals of property, plant and equipment 6,871 7,830 Impairment charge 1,018 - Provision for obsolescent inventory 760 - Provision for doubtful debts 3,843 8,376 Depreciation and amortisation 39,817 28,953 Share of results of investment in associate 703 - Fair value gain on trading investment (844) - Profit on sale of current held-to-maturity investment (2,670) - Dividend income (396) - Interest income (12,332) (7,681) Operating profit before changes in working capital 282,510 222,329 Decrease (Increase) in inventories 36,875 (75,979) Decrease in trade receivables 18,981 19,424 Decrease in prepayments and other receivables 32,229 5,412 Decrease (Increase) in due from related party 20,646 (56,374) (Decrease) Increase in trade payables (31,704) 107,254 Increase (Decrease) in salaries payable 5,945 (3,116) (Decrease) Increase in other payables and accrued liabilities (8,826) 13,818 Increase (Decrease) taxes other than income tax payable 27,801 (15,840) Cash generated from operations 384,457 216,928 51 29 DISPOSAL OF A PRODUCTION UNIT Pursuant to a resolution passed in the meeting of the board of directors on 5 July 2003, the Company disposed a packaging production unit, namely Yantai Changyu Pioneer Wine Co., Ltd. Paper Packaging Material Company. The consideration was the net book value as of 30 June 2003 of the certain net assets disposed, which were summarised as follows: RMB’000 Net assets disposed: Trade receivables 5,777 Less: Provision for doubtful debts (211) Other receivables 23 Inventories, at cost 2,227 Less: Provision for obsolescence (760) Property, plant and equipment, net 1,412 Trade payables (4,900) Prepaid taxes 134 Accrued liabilities (78) Consideration / Cash inflow on disposal 3,624 30 RELATED PARTY TRANSACTIONS For the year ended 31 December 2003, the Group had the following significant related party transactions: (a) Services agreement Pursuant to a service agreement dated 18 May 1997, starting from 18 September 1997 (date of the incorporation), Changyu Group Company has provided facilities and services such as kindergarten and canteen to the Company. An annual service fee of RMB500,000 is payable by the Company to Changyu Group Company from the date of incorporation, until the end of the fourth accounting year (i.e. 2000). As from the fifth accounting year, the service fee may be adjusted every three years by not more than 10% of the previous annual service fee. The agreement is effective until 31 December 2007. For the year ended 31 December 2003, the Company paid service fee of RMB544,000 (2002: RMB500,000) to Changyu Group Company. 52 (b) Trademarks licence Pursuant to a trademark’s licencing agreement dated 18 May 1997, starting from 18 September 1997, the Company may use certain trademarks of Changyu Group Company, which have been registered with the PRC Trademark Office. An annual fee at 2% of the Group’s annual sales is payable to Changyu Group Company. The licence is effective until the expiry of the registration of the trademarks. For the year ended 31 December 2003, the Group paid trademarks fee of approximately RMB22,653,000 (2002: approximately RMB18,564,000) to Changyu Group Company. (c) Patents implementation licence Pursuant to a patents implementation licence dated 18 May 1997, starting from 18 September 1997, the Company may use the patents of Changyu Group Company. The annual patents usage fee payable by the Company to Changyu Group Company is RMB50,000. The contract is effective until 20 December 2005. For the year ended 31 December 2003, the annual patents usage fee payable to Changyu Group Company amounted to RMB50,000 (2002: RMB50,000). (d) Agreement for the lease of land use rights Pursuant to an agreement dated 18 May 1997, the Company agreed to lease from Changyu Group Company certain pieces of land for the period from 18 September 1997 to 21 April 2047. The annual rental payable by the Company to Changyu Group Company is approximately RMB550,000. For the year ended 31 December 2003, the annual rental of land use rights payable to Changyu Group Company amounted to approximately RMB550,000 (2002: RMB550,000). (e) Operating lease agreement Pursuant to a lease agreement dated 28 April 1999 and the supplementary agreement, starting from 1 January 1999, Changyu Group Company agreed to lease the machinery, facilities and trademark of “Zhongya” of Yantai Chinese Traditional Medicine Factory, a wholly owned subsidiary of Changyu Group Company, to the Company. An annual leasing fee of RMB3,400,000 is payable by the Company to Changyu Group Company. The agreement is effective until 28 May 2004. For the year ended 31 December 2003, the Company paid leasing fee of RMB3,400,000 (2002: RMB3,400,000) to Changyu Group Company. 53 (f) Agreement for purchase of wine bottles Pursuant to an agreement dated 13 September 2001, the Company agreed to purchase wine bottles from Changyu Group Company starting from 22 October 2001. For the year ended 31 December 2003, the Company purchased wine bottles of approximately RMB53,637,000 (2002: approximately RMB35,263,000) from Changyu Group Company. (g) Balance with related party As of 31 December 2003, the balance with related party was amount due from Changyu Group Company. The balance was repaid by Changyu Group Company in March 2004. 31 SEGMENT INFORMATION The Group conducts its business within one business segment - the business of production and sales of wine products in the PRC. No segment statement of income has been prepared by the Group for the year ended 31 December 2003. The Group also mainly operates within one geographical segment because its revenue is primarily generated in the PRC and its assets are located in the PRC. Accordingly, no geographical segment data is presented. 32 CONTINGENT LIABILITIES As of 31 December 2003, the Group had no material contingent liabilities. 33 COMMITMENTS (a) Capital commitments As of 31 December 2003, the Group had an investment commitment in a subsidiary amounted to approximately RMB1,450,000. 54 (b) Operating leases Total future minimum lease payments under non-cancelable operating leases are as follows: 2003 2002 RMB’000 RMB’000 Lease of land use rights - not later than one year 947 947 - later than one year and not later than five years 3,790 3,790 - later than five years 31,709 32,656 36,446 37,393 Lease of machinery, facilities and trademark - not later than one year 1,416 3,400 - later than one year and not later than five years - 1,416 1,416 4,816 (c) According to an operation contract signed by the Company, Langfang Castel and the foreign partner, in exchange for the exclusive control power and profit sharing right over Langfang Castel, the Company is required to pay an annual guaranteed fee to the foreign partner during the period from 1 January 2002 to 31 December 2006. The guaranteed fee for the year ended 31 December 2003 was 12% of the foreign investor’s paid in capital of USD1,530,000 (equivalent to RMB12,648,000) in Langfang Castel, thereafter the guaranteed fee will be increased by 2% annually. According to an operation contract signed by the Company, Changyu-Castel and the foreign partner, in exchange for the exclusive control power and profit sharing right over Changyu-Castel, the Company is required to pay an annual guaranteed fee to the foreign partner during the period from 1 January 2003 to 1 January 2008. The guaranteed fee for the years ended 31 December 2003, 2004, 2005, 2006 and 2007 is 12%, 12%, 14%, 16% and 20%, respectively, of the foreign partner’s paid in capital of USD1,500,000 (equivalent to RMB12,414,900) in Changyu-Castel. 55 34 SUBSEQUENT EVENTS (a) Due from Changyu Group Company was received in March 2004 in the amount of RMB40,000,000. (b) In April 2004, the Company and Tiantong Securities Co., Ltd., reached an agreement whereby the Company will acquire 20% equity interest in Tiantong Funds Management Co., Ltd. at a consideration of RMB20,000,000 in 2004. The prepayment of cash consideration by the Company during 2003 was accounted as other non-current assets in the consolidated balance sheet as of 31 December 2003. The acquisition will conclude in 2004 when the relevant legal approvals are obtained. (c) At the meeting of the board of the directors on 7 April 2004, a cash dividend in respect of 2003 of RMB0.1 (2002: RMB0.2) per share, totalling cash dividend of RMB31,200,000 (2002: RMB52,000,000) is to be proposed. The profit appropriations need to be approved by the Annual General Meeting. 35 IMPACTS OF IFRS ADJUSTMENTS ON NET PROFIT AND NET ASSETS Net profit for the year Net assets ended 31 December as of 31 December 2003 2002 2003 2002 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the Group’s statutory accounts 151,254 111,241 1,567,272 1,468,019 Impact of adjustments, net - adjustment on administrative expenses using accrual basis - - 20,857 20,857 - revaluation surplus on property, plant and equipment - - 7,313 7,313 - depreciation on revaluation surplus on property, plant and equipment (626) - (626) - - fair value gain on trading investment 844 - 844 - - provision for deferred taxes 13,820 4,668 9,291 (4,530) As restated in accordance with IFRS 165,292 115,909 1,604,951 1,491,659 56 Ⅺ. DOCUMENTS AVAILABLE FOR INSPECTION 1.Original copy of the Annual Report signed by the Chairman of the Board of Directors; 2.Financial Statements signed by and under the seal of the legal representative, chief accountant and accounting supervisors; 3.Original copy of the Auditors’ Report under the seal of the accounting firm, and signed by and under the seal of the certified accountants; 4.The “Prospectus” and “Public Listing Notice” related to the issue of domestically listed foreign Shares(B shares) by the Company in 1997; The “Prospectus” and “Notice of Share’s Changing and A Share’s Public listing” related to issuing A Share for capital increase by the company in 2000; 5.All the originals of the Company’s documents and public notice disclosed in the newspapers designated by the Securities Supervision Committee of China in the reporting period. Yantai Changyu Pioneer Wine Company Limited Board of Directors Dated 13th, April, 2004 57