江铃汽车(000550)江铃Ｂ2003年年度报告（英文版）

Jiangling Motors Corporation, Ltd. 2003 Annual Report 1 Important Note The Board of Directors is collectively and individually liable for the truthfulness, accuracy and completeness of the information disclosed in the report and undertakes that no major events have been omitted, and that there are no misstatements and material misleading information in this report. Chairman Jiang Linsheng, President Lu Shuifang, CFO Manto Wong and Head of Finance Department, Wu Kai, ensure that the Financial Report in this Annual Report is truthful and complete. The Annual Report is prepared in Chinese and English. In case of discrepancy, the Chinese version will prevail. Except that the Financial Report (chapter X) of the English version is drawn up according to the Auditors’ Report prepared in accordance with International Accounting Standards (‘IAS’), all financial data are based on Chinese Accounting Standards (‘CAS’). Abbreviations: SEVP Senior Executive Vice President EVP Executive Vice President CFO Chief Financial Officer VP Vice President Contents Chapter I Brief Introduction…………………………………………………3 Chapter II Operating Highlight……………………………………………….4 Chapter III Share Capital Changes & Shareholders……………..…………….7 Chapter IV Directors, Supervisors, Senior Management and Employees……..10 Chapter V Corporate Governance…………………………………………….12 Chapter VI Shareholders’ Meeting…………………………………………….13 Chapter VII Report of the Board of Directors………………………………….14 Chapter VIII Report of the Supervisory Committee…………………………….21 Chapter IX Major Events………………………………………………………22 Chapter X Financial Reports………………………………………………….27 Chapter XI Index of Documents for Reference……………………………… 58 2 Chapter I Brief Introduction Company’s Chinese name: 江铃汽车股份有限公司 English name: Jiangling Motors Corporation, Ltd. Abbreviation: JMC Company legal representative: Mr. Jiang Linsheng JMC’s Board secretary: Mr. Xiong Zhongping (Tel: 86-791-5235675) Person for financial information disclosure: Mr. Manto Wong (Tel: 86-791-5232888 extent 6503) JMC’s securities affair representative: Mr. Quan Shi (Tel: 86-791-5232888 extent 6178) Contact address: No. 509, Northern Yingbin Avenue, Nanchang City, Jiangxi Province, P.R.C Switchboard: 86-791-5232888 Fax: 86-791-5232839 E-mail: relations@jmc.com.cn Company registered address & headquarters address: No. 509, Northern Yingbin Avenue, Nanchang City, Jiangxi Province, P.R.C Post Code: 330001 JMC’s website: http://www.jmc.com.cn Newspapers for information disclosure: China Securities, Securities Times, Hong Kong Commercial Daily Website designated by CSRC for publication of JMC’s Annual Report: http://www.cninfo.com.cn Place for placing Annual Report: Securities Department, Jiangling Motors Corporation, Ltd. Place of listing: Shenzhen Stock Exchange Share’s name: Jiangling Motors Jiangling B Share’s code: 000550 200550 Other Information: 1. JMC was registered with Nanchang Municipal Bureau of Industrial & Commercial Administration on November 28, 1993. The company registration was changed to be with 3 Jiangxi Provincial Bureau of Industrial & Commercial Administration on January 8, 1997 and on October 25, 2003. 2. Business License Registration Number: 002473. 3. Taxation Registration Number: 360100612446943. 4. Accounting Firm appointed by JMC for audit under both Chinese Accounting Standards and International Accounting Standards: Name: PwC Zhong Tian CPAs Co., Ltd. Headquarters address: 325, ShenJiaNong, PuDong New Zone, Shanghai City, P.R.C Chapter II Operating Highlight I. Certain Financial Indexes of the Reporting Year Unit: RMB’000 Total profit 535,634 Net profit 448,812 Net profit after non-recurring income and loss 447,266 Profit from core business 1,264,628 Profit from other business 21,072 Operating profit 539,241 Investment income 4,993 Subsidy income 0 Net income outside of core business -8,600 Net cash flows from operating activities 826,487 Net increase in cash and cash equivalent 167,203 Notes: deducted non-recurring items and amounts involved Unit: RMB’000 Item Amount Losses due to disposal of fixed asset and CIP -4,942 Non-operating income 1,224 Non-operating expenditure -2,502 Reversal of impairment provisions accrued in previous years 8,693 Impact of income tax on non-recurring items -927 Total 1,546 4 Impact of IAS adjustments on the net profit: Unit: RMB ‘000 Net profit 2003 As prepared per CAS # 448,812 Adjustment per IAS: Amortization difference of Housing Fund -26,956 Power Capability Upgrade expense 1,642 Deferred Tax asset -10,703 Pension defined benefit -22,206 Minority interest -253 Staff bonus and welfare fund of Jiangling Isuzu JV -8,081 appropriated from profit after tax As restated in conformity with IAS 382,255 # Based on the financial statements audited by PwC Zhong Tian CPAs per CAS. II. Main accounting data and financial ratios of recent three years. Unit: RMB’000 2002 Item 2003 2001 Adjusted* Unadjusted Turnover 5,094,897 4,270,869 4,270,869 3,379,072 Net profit 448,812 286,760 286,760 100,848 Total assets 3,802,330 3,581,901 3,581,901 3,666,636 Shareholders’ equity (after minority 2,258,863 1,904,453 1,818,132 1,616,364 interests) Earnings per share (RMB) 0.52 0.33 0.33 0.12 Net assets per share (RMB) 2.62 2.21 2.11 1.87 Adjusted net assets per share (RMB) 2.47 1.94 1.84 1.51 Net cash flow per share from operating 0.96 1.15 1.15 0.79 activities (RMB) Return on net assets ratio 19.87% 15.06% 15.77% 6.24% *See Item 7, Section I of Chapter VII ‘Major Change in Accounting Policies’. Year 2003 return on net assets ratio and earnings per share Return on net assets ratio Earnings per share (unit: RMB) Profit of reporting period Diluted Weighted Diluted Weighted Profit from core business 55.99% 60.75% 1.47 1.47 Operating profit 23.87% 25.90% 0.63 0.63 Net profit 19.87% 21.56% 0.52 0.52 Net profit after non-recurring income and loss 19.80% 21.49% 0.52 0.52 5 III. Shareholder’s equity change in year 2003 Unit: RMB ’000 Share Capital Surplus Statutory public Retained Item capital reserves reserves welfare fund earnings Total At the beginning of the year 863,214 835,226 82,507 7,899 123,506 1,904,453 Increase 67,322 22,440 448,812 Decrease 161,724 At the end of the year 863,214 835,226 149,829 30,339 410,594 2,258,863 Explanation of Changes: 1. The increase in surplus reserves is due to the appropriation per the Board’s Year 2003 profit distribution proposal. 2. The increase in statutory public welfare fund is due to the appropriation per the Board’s Year 2003 profit distribution proposal. 3. The decrease in retained earnings is due to the two above-mentioned appropriations per the Board’s Year 2003 profit distribution proposal and the cash dividend paid per Year 2002 profit distribution resolution. IV. Year 2003 impairment provisions table Unit: RMB Item Jan. 1, 2003 Increase Decrease Dec. 31, 2003 I. Bad-debt provision 19,480,147 153,916 11,100,307 8,533,756 Including: Receivables 9,168,337 153,916 3,619,882 5,702,371 Other receivables 10,311,810 0 7,480,425 2,831,385 II. Short-term investment devaluation 0 0 0 0 provision Including: Share investment 0 0 0 0 Bond investment 0 0 0 0 III. Inventory obsolescence provision 33,606,349 10,481,942 11,276,615 32,811,676 Including: Commodities in stock 6,200,593 5,976,387 767,043 11,409,937 Raw materials 27,405,756 4,505,555 10,509,572 21,401,739 IV. Long-term investment devaluation 0 0 0 0 provision Including: Long-term stake investment 0 0 0 0 Long-term credit right investment 0 0 0 0 V. Fixed asset impairment provision 9,973,631 5,370,433 9,273,877 6,070,187 Including: Houses, buildings 419,227 0 0 419,227 Machines 6,624,341 2,427,505 6,031,017 3,020,829 VI. Intangible asset devaluation provision 0 0 0 0 VII. Construction-in-progress impairment 12,012,942 0 10,229,011 1,783,931 provision VIII. Designated loan devaluation provision 0 0 0 0 Total 75,073,069 16,006,291 41,879,810 49,199,550 6 Chapter III Share Capital Changes & Shareholders I. Table on the changes of shareholding structure Before the Change (+, -) After the change change Allocated Bonus Reserve-conv New Others Subtotal Shares Shares erted shares issuance I. Non-listed shares 1. Promotion shares 354,176,000 354,176,000 Including: State-owned shares 354,176,000 354,176,000 Domestic legal-person shares Foreign legal-person shares Others 2. Other legal-person shares 47,438,000 47,438,000 3. Management shares 69,540 69,540 4. Preferred shares or others Subtotal 401,683,540 401,683,540 II. Listed shares 1. A shares 117,530,460 117,530,460 2. B shares 344,000,000 344,000,000 Overseas-listed Foreign-invested shares Others Subtotal 461,530,460 461,530,460 3. Total 863,214,000 863,214,000 JMC did not issue shares or derivative securities during the past three years ending December 31, 2003. JMC’s total shares and the share structure remained the same in 2003. II. Shareholders 1. JMC had 42,423 shareholders, including 30,527 A-share shareholders and 11,896 B-share shareholders, as of December 31, 2003. 7 2. The top ten shareholders as of December 31, 2003: No. Name Change in Shares at the end Proportion of Share type total shares 2003 (+, -) of 2003 （%） 1 Jiangling Motors Company 0 354,176,000 41.03 State-owned (Group) (‘JMCG’) legal-person shares 2 Ford Motor Company (‘Ford’) 0 258,642,800 29.96 Circulation B shares 3 Shanghai Automotive Co., Ltd. 0 25,970,000 3.01 Domestic legal-person shares 4 China Baoan Group Co., Ltd. 0 12,000,000 1.39 Domestic legal-person shares 5 Tianhua Securities Investment 8,733,077 8,733,077 1.01 Circulation A shares Fund 6 Jingfu Securities Investment 5,789,099 5,789,099 0.67 Circulation A shares Fund 7 GT PRC FUND 5,499,933 5,499,933 0.64 Circulation B shares 8 Puhui Securities Investment Fund 5,282,838 5,282,838 0.61 Circulation A shares 9 Tongyi Securities Investment 3,572,023 3,572,023 0.41 Circulation A shares Fund 10 Yinhua Advantaged-Enterprise 3,332,069 3,332,069 0.39 Circulation A shares Securities Investment Fund Notes: i. JMC legal-person shares of 12 million held by China Baoan Group Co, Ltd were frozen on collateralization, including 7 million shares frozen due to judicial appeal. ii. There is no association among the shareholders who respectively hold more than 5% of JMC’s total shares. iii. JMCG holds the shares on behalf of the state; Ford is a foreign-invested shareholder. 3. Controlling Shareholders The controlling shareholders of JMC are JMCG and Ford, and there is no change in respect of the controlling shareholders in 2003. JMCG, a wholly state-owned enterprise founded on July 27, 1991, is subordinate to the State-owned Assets Administration Bureau of Nanchang. Its registered capital is RMB 420.85 million, and its legal representative is Mr. Wang Xigao. Main scope of business: manufacture of automobiles, engines, chassis, variant vehicles and automotive components, automotive quality test, sales of self-produced products, as well as related after-sale services. Ford, founded in 1903, is a US-based listed company. Its registered capital is US$ 1.222 billion. Chairman & CEO: William Clay Ford, Jr. Main scope of business: design, manufacturing, assembly and sales of cars, trucks, parts and components, financing, leasing of vehicles and equipment, and insurance business. 8 4 The top ten circulation-share shareholders No. Name Shares at the Proportion of Share Type total shares end of 2003 （%） 1 Ford Motor Company 258,642,800 29.96 B share 2 Tianhua Securities Investment Fund 8,733,077 1.01 A share 3 Jingfu Securities Investment Fund 5,789,099 0.67 A share 4 GT PRC FUND 5,499,933 0.64 B share 5 Puhui Securities Investment Fund 5,282,838 0.61 A share 6 Tongyi Securities Investment Fund 3,572,023 0.41 A share 7 Yinhua Advantaged-Enterprise 3,332,069 0.39 A share Securities Investment Fund 8 MERRILL LYNCH 3,270,351 0.38 B share INTERNATIONAL 9 Yulong Securities Investment Fund 2,473,685 0.29 A share 10 Jingbo Securities Investment Fund 2,042,723 0.24 A share Note: Tianhua Securities Investment Fund and Yinhua Advantaged-Enterprise Securities Investment Fund are related funds, and Jingfu Securities Investment Fund and Jingbo Securities Investment Fund are related funds. III. Trading of JMC’s share 1. Jiangling A shares Highest price Closing price Total Total volume First transaction Lowest price of Total amount in Year of the year at the year end transaction in million price (RMB) the year (date) million RMB (date) (RMB) days shares 2001 7.10 9.70(04/03) 5.25(10/12) 6.50 239 407 3,297 2002 6.50 10.80(06/28) 5.66(01/18) 7.40 236 698 6,066 2003 7.4 14.28(05/26) 7.16(01/03) 10.43 240 710 7,908 2. Jiangling B shares Highest price Closing price Total Total volume First transaction Lowest price of Total amount in Year of the year at the year end transaction in million price (HKD) the year (date) Million HKD (date) (HKD) days shares 2001 1.94 6.19(05/28) 1.80(01/09) 3.60 234 452.55 2,079 2002 3.61 4.95(07/08) 2.80(01/14) 3.56 236 160.49 614 2003 3.55 6.95(11/04) 3.51(01/02) 6.65 239 325.10 1,801 9 Chapter IV Directors, Supervisors, Senior Management and Employees I. Directors, Supervisors and Senior Management 1. Basic Information Position Name Gender Age Term of office Shares at Share Cause of the end of change in share Year 2002 Year 2002 change Directors： Chairman Jiang Linsheng Male 41 2003.9～2005.6 0 0 Vice chairman Mei Wei Cheng Male 54 2002.6～2005.6 0 0 Director Zhou Ming Male 42 2003.9～2005.6 0 0 Director Dave Schoch Male 53 2003.9～2005.6 0 0 Director & President Lu Shuifang Male 50 2002.6～2005.6 0 0 Gordon L. Director & SEVP Male 55 2002.6～2005.6 0 0 Spaulding Independent director Xu Wenguang Male 52 2003.9～2005.6 0 0 Independent director Pan Yuexin Male 46 2002.6～2005.6 0 0 Independent director Lok Kim Chai Male 57 2003.9～2005.6 0 0 Supervisors： Chief supervisor Wu Yong Male 54 2002.6～2005.6 4,860 0 Supervisor Alvin Qing Liu Male 47 2002.6～2005.6 0 0 Supervisor Zhu Yi Male 34 2002.6～2005.6 0 0 Supervisor Zhang Jianguo Male 47 2002.6～2005.6 0 0 Supervisor Jin Wenhui Male 37 2002.6～2005.6 0 0 Senior Management: EVP Xiong Chunying Female 40 2002.6～2005.6 0 0 EVP Liu Nianfeng Female 42 2002.6～2005.6 0 0 VP Eric Hoile Male 62 2002.6～2005.6 0 0 CFO Manto Wong Male 41 2002.6～2005.6 0 0 VP Wan Hong Male 43 2002.6～2005.6 0 0 VP Zhou Yazhuo Male 41 2002.6～2005.6 0 0 VP Kevin Whipp Male 37 2002.6～2005.6 0 0 Board Secretary Xiong Zhongping Male 41 2002.6～2005.6 0 0 Positions with shareholder entities held by the JMC directors and the supervisors: Chairman Jiang Linsheng stepped down as JMCG’s Chairman on February 19, 2004, and has been appointed as the Party Secretary of JMCG; Director Zhou Ming is a Board member and a Deputy General Manager of JMCG; Director Lu Shuifang is a Board member of JMCG; Vice Chairman Mei Wei Cheng is a Vice President of Ford, and the Chairman & CEO of Ford Motor (China), Ltd.; Director Dave Schoch is Director of Finance for Ford Asia Pacific Operations; 10 Chief Supervisor Wu Yong is a Board member of JMCG; Supervisor Alvin Qing Liu is a Vice President of Ford Motor (China), Ltd.; Supervisor Zhu Yi is the head of JMCG Asset & Finance Department. 2. Annual Compensation The directors and the supervisors who did not concurrently hold other management positions in JMC were not paid by JMC. Directors Jiang Linsheng, Zhou Ming, Supervisors Wu Yong and Zhu Yi were paid by JMCG. Directors Mei Wei Cheng, Dave Schoch and Supervisor Alvin Qing Liu were paid by Ford. (1) The compensation for the Chinese-side senior management, according to the approval from the Board of Directors, consists of two parts: base salary and position allowance. JMC has six Chinese-side senior management persons. Their total 2003 annual compensation was about RMB 1.7 million. The total annual compensation for the top 3 persons with the highest compensation among these 6 persons was about RMB 1 million. One person was paid between RMB 350 thousand and 400 thousand, 2 persons between RMB 250 thousand and 350 thousand, 3 persons between RMB 200 thousand and 250 thousand. Two employee-representative supervisors were paid about RMB 100 thousand per person. (2) JMC pays to Ford the annual compensation for Ford-seconded senior management personnel in line with the Personnel Agreement signed between Ford and JMC, and Ford pays the senior management and other foreign personnel seconded to JMC. In 2003, JMC paid US$ 1.8 million, including salary & insurance, etc., to Ford for six Ford secondees. The six foreign secondees include four senior management personnel appointed by the Board of Directors. The annual compensation for these 4 senior management persons averaged US$ 300 thousand per person. (3) The annual compensation for the JMC independent directors is RMB 30 thousand per person, and JMC bears their travel-related expenses involving JMC’s business. (The Board of Directors agreed on December 7, 2003 to submit to 2003 Annual Shareholders’ Meeting a proposal on adjusting independent directors’ annual compensation from RMB 30,000 per person to RMB 60,000 per person.) 3. Stepping-down of Directors, Supervisors and Senior Management in 2003 Upon the approval of JMC 2002 Annual Shareholder’s Meeting, the number of directors was changed from eleven to nine. Mr. Jiang Linsheng, Mr. Zhou Ming and Mr. Dave Schoch were elected as directors of JMC, and Mr. Xu Wenguang and Mr. Lok Kim Chai as independent directors. Mr. Sun Min stepped down as JMC’s director due to retirement, Mr. Rao Xiaoqiu resigned from independent director position due to individual work reason, and Mr. Liu Shanbo, Mr. Luo Jun, Mr. Mark Schulz, Mr. Norbert Kuehne and Mr. Qi Honghao resigned from director position due to work reason. Subsequent Event The Board of Directors agreed in form of paper meeting on March 16, 2004 to accept Mr. 11 Jiang Linsheng’s resignation from director position of JMC due to duty change. The Board also agreed to submit to 2003 Annual Shareholders’ Meeting a proposal concerning nominating Mr. Wang Xigao as the Company’s director candidate. 4. Appointments or Dismissals of Senior Management There is no new appointments or dismissals of senior management during the reporting period. II. Employees At the end of 2003, JMC had a total of 6,733 employees, of whom 4,872 were production workers, 255 sales personnel, 777 technical personnel, 90 finance personnel, 739 administrative staff. The employees with polytechnic school degrees or above accounted for 27.27% of the total. There were 596 persons with junior technical titles, 419 with intermediate technical titles and 117 with senior technical titles, altogether accounting for 16.81% of the total. There were 1,461 early-retired employees and 89 laid-offs. JMC had a total of 1,685 retired employees. Chapter V Corporate Governance 1. Status of the Corporate Governance in JMC The Company has been in compliance with the Company Law, the Securities Law and other laws and regulations in relation to the management of listed companies, with a view to continue to fine-tune the Company’s corporate governance structure and standardize its operation procedures. During the reporting period, the details of the Company’s enhancements to corporate governance were as follows: 1. three independent directors were appointed while number of the Board members being adjusted from eleven to nine so that the ratio of independent directors to total directors reached 1/3, and the Articles of Association of JMC was amended correspondingly; 2. three special committees, i.e. Strategy Committee, Compensation Committee and Audit Committee, were established under the Board. Meanwhile, the independent directors took up the post of Chairman of Compensation Committee and of Audit Committee, and they are the majority in these two special committees; and 3. an Investor Relations Management Department was set up, and an information disclosure system and rules of investor relations management were established. 2. Status of Independent Directors in Execution of Duty JMC has appointed three independent directors so far. JMC independent directors have diligently fulfilled their duties, attending all the Board meetings and the shareholder’s meeting held during their term of office. The independent directors exercised their fiduciary duties regarding the routine work and major decision-making of the Board of Directors, and actively engaged in the affairs of Compensation Committee and Audit Committee, to protect the interests of the Company and all shareholders. 12 3. JMC’s Separation from the Controlling Shareholders in respects of Personnel, Assets and Finance, and Independence concerning the Organization and the Business: (1). In respect of personnel, the chairman position and the president position are held by different persons, JMC’s senior management do not hold positions other than director positions with its controlling shareholders; JMC senior management personnel drew salaries from JMC; the labor, personnel matters and salary management of JMC are completely independent. (2) In respect of assets, JMC assets are complete. The assets, including production system, auxiliary production system and conveyance facilities, and non-patent technology which are mainly utilized by JMC, are owned and/or controlled by JMC. (3) In respect of the finance, JMC has independent finance department and independent accounting system, and has a uniformed and independent accounting system and financial control system for its branches and subsidiaries. JMC has its own bank accounts, and there is no bank account jointly owned by JMC and its controlling shareholders. JMC pays taxes independently. (4). In respect of the organization, JMC’s organization is independent, complete and scientifically established with good operating mechanism and efficiency. The establishment and the operation of JMC’s corporate governance are strictly carried out per the Articles of Association of JMC. The production and administrative management are independent from the controlling shareholders. JMC has set up the organization structure that meets the need for its development. (5). In respect of business, JMC has independent purchasing, production and sale systems. The purchasing, production and sales of main materials and products are carried out through its own purchasing, production & sale functions. There are related party transactions with controlling shareholders only in respects of the purchase of components, e.g. rear axle, transmission and some interior trims, etc. JMC is independent from the controlling shareholders in respect of the business, and has independent & complete business and self-sufficient operation capability. The controlling shareholders basically did not engage in production or sales of the same products to compete with JMC. 4. Compensation & Incentive Mechanism for Senior Management in the Reporting Period The Board of Directors reviewed and approved Year 2003 Senior Management One-time Bonus Plan on December 7, 2003. The bonus totaled RMB 1.2 million for the years 2002 to 2003. This plan was applicable only to the Chinese-side senior management in 2003. At the December 2003 Compensation Committee meeting, the committee had established the principle requirements on setting up a complete senior management compensation system in the future, and it is actively studying the system establishment. Chapter VI Shareholders’ Meeting I. Notification, Convening and Holding of the Shareholders’ Meeting Due to SARS situation of the time, JMC published the Announcement on Postponing 2002 Annual Shareholders’ Meeting in China Securities, Securities Times and Hong Kong Commercial Daily on May 23, 2003. 13 JMC published the Announcement on Holding 2002 Annual Shareholders’ Meeting in China Securities, Securities Times and Hong Kong Commercial Daily on August 5, 2003. The 2002 Annual Shareholders’ Meeting of JMC was held in the conference room on the fourth floor of the Administrative Building of JMC on September 5, 2003. A total of 13 shareholders and proxies attended the meeting, who represented a total of 646,826,650 JMC shares, accounting for 74.93% of the total share capital of JMC. At this meeting, there were 11 A-share shareholders, who held a total of 383,608,417 A shares, accounting for 44.44% of the total share capital, and there were 2 B-share shareholders, who held 263,218,233 B shares, accounting for 30.49% of the total share capital. II. Resolutions passed at the JMC 2002 Annual Shareholders’ Meeting are as follows: 1) approved the 2002 Work Report of the Board of Directors. 2) approved the 2002 Work Report of the Supervisory Committee. 3) approved the 2002 Financial Report. 4) approved the Proposal on Profit Distribution for Year 2002 5) approved the Proposal on Appointment of Accountant Firm for A-Share and B-Share 6) approved the Proposal on Director Changes 7) approved the Proposal on Adjustment to the Number of Directors, and 8) approved Proposed Amendment to the Article of Association. The public announcement on the resolutions of this Shareholders’ Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on September 6, 2003. III. Election & Changes of the Directors and the Supervisors Please refer to the above paragraphs for details, namely, “Stepping-down of Directors, Supervisors and Senior Management in 2003”. Chapter VII Report of the Board of Directors I. Management Discussions and Analysis 1. Operating Results JMC’s core business is production and sales of light vehicles and related components. Its major products include JMC series light truck and pickup, and Ford Transit series commercial bus. The Company also produces engine, casting and other components. In 2003, JMC sales volume reached a record of 58,518 units including 22,719 light trucks and microbuses, 24,289 pickups and 11,510 Transit commercial vehicles. Total sales volume was up 14% from last year. Total production volume was 60,276 units, including 22,728 light trucks and microbuses, 26,111 pickups and SUV, and 11,437 Transits. 14 JMC’s sales increase was primarily due to the introduction of new Baodian pickup which was launched into the market at the beginning of this year. Sales of better equipped 2003 Model pickup increased by 31% compared with last year. Transit sales increased by 20%, owning to the launch of Transit 03 Model and gas model, increase in SVO volume, and aggressive marketing actions. In 2003, the Company achieved a market share of about 1.3% of the Chinese automotive market, down slightly from last year. JMC light trucks (including pickup) accounted for 7% of the light truck market, down 1 point from year ago. Transit achieved about 8% of the light bus market (excluding MPV, SUV, chassis cab and quasi-car products), slightly higher than last year. (Data source for above analysis: China Association of Automobile Manufacturers and the Company sales records) The Detailed Table on the Year 2003 Income & Costs From Core Business Unit: RMB’000 Product Turnover Cost of goods sold Tax additional Gross Profit from Gross from core business Core business Margin I. Vehicles 4,863,369 3,574,403 72,616 1,216,350 25.0% II. Components 231,528 183,110 141 48,277 20.9% Total 5,094,897 3,757,513 72,757 1,264,627 24.8% 2. Operating Results of Subsidiaries Operating Name of Main Registered Assets Turnover Net Profit Business Profit Subsidiaries Products Capital (RMB’000) (RMB’000) (RMB’000) (RMB’000) N series Jiangling-Isuzu $30 Light Truck, Motors Manufacture 878,691 3,167,999 184,391 161,625 TF series Company, Ltd. million Pickup 3. Main Suppliers and Customers The total amount of the purchase from the top 5 suppliers was RMB 925 million, accounting for 25% of JMC’s total annual purchasing amount. The total sale amount to the top 5 customers was RMB 1,073 million, accounting for 22% of JMC’s total turnover. 4. Operational Challenges and Resolutions JMC mainly participates in light bus and light truck segments of the industry. In the light bus segment, JMC Transit was able to slightly increase its market share in 2003 without reducing prices for the most part of 2003, while some of major competitors reduced prices 15 during the year. In the light truck segment, which includes cargo truck and pickup, however, JMC market share was down compared with last year. Although JMC cargo truck sales declined slightly, the Company was able to achieve strong sales growth for Baodian pickup, up 31% from last year. This slight decline of cargo truck sales was mainly due to the aging of JMC products and aggressive marketing and pricing pressure from competition. The Company was facing major challenges from stagnant sales of cargo truck and pressure to maintain the market share. To respond to competition and to improve market shares and profitability, the Company plans to take measures to increase its marketing activities, and to speed up the introduction of freshened models with new styling, functions and pricing required by the market. On February 1, 2004, the Company reduced prices of JMC brand cargo truck ranging from RMB 5000 – 8000. In addition, a new cargo truck model will be launched in First Half of 2004. In 2003, the Company continued its focus on benchmarking competition with respect to quality and customer satisfaction. Significant improvement has been made with customer expectation met or even exceeded. In order to improve and sustain product quality and customer satisfaction, the Company has taken a number of initiatives in many respects, including the systematic improvements in product development, part purchasing, production, vehicle delivery and customer service processes, and institutionalization of these corrective measures step by step. Lastly, Company continued to focus on aggressive cost control over all business aspects in response to the significant steel and other raw material price increases, and product cost pressure resulted from adding equipment and meeting regulatory requirements. In 2003, the Company was able to maintain its gross margin of 25%, about the same with last year. 5. Investment in the reporting period (1) In 2003, JMC did not raise equity funding, nor did it use equity funding raised in previous years. (2) Non-raised fund use Total Investment Program Name Progress (Occurred) Planned Job#1 Date Estimate Euro III Project (Engine & Vehicle) RMB 120 mil. RMB 5.4 mil. May 2005-March 2006 A3 Press Line RMB 90 mil. RMB 36.7 mil. December, 2004 Euro II Project (Engine & Vehicle) RMB 86.8 mil. RMB 51.3 mil. July, 2004 J116 Light Truck RMB 46.2 mil. RMB 43.7 mil. April, 2004 Gas Engine RMB 40.3 mil. Completed Computer Server Expansion RMB 14.5 mil. Completed Engine Warehouse RMB 13.4 mil. Completed 1000T Press RMB 8.3 mil. RMB 1.8 mil. September, 2004 Transit Assembly Tool Upgrade RMB 4.2 mil. Completed 16 6. Financial Conditions Revenue in 2003 was RMB 5,095 Million, up 19% from year ago. This increase reflected higher vehicle sales volume and growth in automotive component OEM business. Under Chinese Accounting Standards, net profit was RMB 449 Million, up 56% from year ago. Higher net profit was attributed to higher sales volume in vehicles and components, part cost reduction, and lower financing cost. Higher profit was partially offset by higher steel costs, higher selling expense and administrative expenses (primarily resulted from projects and R&D spending), and price reduction of selected Transit models effective from November 2003. Cash flow from operations was positive RMB 826 million, driven by profitability and working capital control and management. Investment cash flow was negative RMB 159 million, reflecting primarily spending for capital goods such as facilities, equipment and tooling. Financing cash flow was negative RMB 501 million, reflecting mainly bank loan pay down, dividends, and interest expenses. At the end of 2003, the Company had total of RMB 984 million cash and cash equivalents, up RMB 167 million from the end of 2002. The balance of bank borrowing was RMB 356 million, down RMB 367 million from end of 2002 (reduced 51%). Total liabilities as percent of asset was reduced from 47% to 41%, compared with that of December 31, 2002. Total asset was RMB 3,802 million, up 6% from RMB 3,582 million at year-end 2002, reflecting mainly higher cash balance. Total liabilities were RMB 1,543 million, down 8% from the end of last year, reflecting mainly reduction of bank borrowing. Higher account payable due to production volume increase partially offset bank debt reduction. Shareholder equity was RMB 2,259 million at December 31, 2003, up RMB 354 million from year-end 2002. This increase was due to net profit earned in the reporting period. Dividends payment of 2002 year partially offset equity increase. 7.Major Change in Accounting Polices Since July 1, 2003, the Company complied with the revised “Enterprise Accounting Standards - Events After Balance Sheet Date”. Before adoption of the revised standards, an amount equal to cash dividend should be transferred out of shareholder’s equity and recognized as liabilities once the Board of Directors established a profit distribution proposal. However, since July 1, 2003, an amount equal to cash dividend shall be recognized as liabilities only after the Shareholders’ Meeting has approved a profit distribution plan. Retroactive adjustment has been made in line with the accounting-policy change, and the impact on the year-end 2002 retained earnings is as follows: 17 December 31, 2002 Unadjusted retained earnings 37,185,003 Plus: retroactive adjustment—Cash dividend paid upon the approval of Shareholders’ Meeting after balance sheet 86,321,400 date Adjusted retained earnings 123,506,403 8.Impact on JMC’s Operation Due to Policy & Statute Changes Per the timetable of automobile emission issue announced by State Environmental Protection Administration, enforcement date for type approval of light vehicles reaching Euro II Emission Standard is July 1, 2004. The overwhelming majority of the Company’s products have achieved Euro II Emission Standard, and the rest can also meet the requirements prior to the stipulated dates. The implementation of Euro II Emission Standard is projected to increase costs of the Company’s productions and thereby may reduce the gross margin of the products. 9.2004 Plan In 2004, the Company plans to focus on three areas: (1) maintain growth momentum, (2) increase customer satisfaction, and (3) continue to generate cash and profits. Specific actions include: a). Introduce new models and editions for light cargo truck, Pick-up and Transit. b). Enhance and strengthen distribution network; continue to roll out JMC cares. c). Accelerate cost reduction and quality improvement through the deployment of modern management methods, such as 6-Sigama. The Company is projecting revenue in the range of RMB 6,100 to 6,500 million for 2004. Continuing price pressure from the market place is expected. In addition, product cost is expected higher to meet higher emission, noise, and safety standards. Every effort will be made, including purchase cost reduction and quality cost management, to offset cost increase due to regulatory requirement to the maximum extent possible. II. Routine Work of the Board of Directors 1. Board Meetings and Resolutions in 2003 The Board of Directors of JMC approved with the written consent of the directors the following resolution on January 22, 2003: approved additional QAD system server project. The Board of Directors approved with the written consent of the directors the following resolutions on February 13, 2003: i. approved Frame Plant 1000T Press project; and ii. approved Transit Assembly Tool Upgrade project. The Board of Directors approved with the written consent of the directors the following 18 resolution on February 24, 2003: approved to use asset collateral for bank loan that requires guarantee. The Board of Directors approved with the written consent of the directors the following resolution on March 10, 2003: approved Transit A3 Press Line project. The Board of Directors passed the following resolutions with the written consent of the directors on March 29, 2003: i. approved 2002 Annual Report of JMC and the extracts from the annual report; and ii. approved the proposal on year 2002 profit distribution plan. The Board of Directors approved with the written consent of the directors the following resolution on April 16, 2003: approved to sell Shenzhen property of JMC. The Board of Directors approved with the written consent of the directors the following resolution on April 23, 2003: approved JMC 2003 First Quarter Report. The Board of Directors approved with the written consent of the directors the following resolutions on August 4, 2003: i. approved the proposal on director changes; ii. approved the proposal on adjustment to the number of directors; iii. approved proposed amendment to the Articles of Association of JMC; and iv. approved the notice on holding 2002 Annual Shareholders’ Meeting of JMC. The Board of Directors approved with the written consent of the directors the following resolution on August 15, 2003: approved JMC 2003 Half-year Report. The third session of the Fourth Board of Directors was held in the conference center on the second floor of JMC administrative building on September 5, 2003. The following resolutions were passed at the meeting: i. elected Mr. Jiang Linsheng as the Chairman of JMC; ii. approved to establish three special committees, i.e. Strategy Committee, Compensation Committee, and Audit Committee, under the Board of Directors, and approved the personnel structure and the working rules for these special committees; iii. approved conditionally to start the Diesel Engine Euro III emission upgrade project; iv. approved additional investment for Transit Mitsubishi gas engine project; v. approved engine warehouse investment overrun; and vi. approved to introduce a small batch of 2.8L gas engine Pickup to the market. The Board of Directors approved with the written consent of the directors the following resolutions on October 24, 2003: approved JMC 2003 Third Quarter Report. The 4th session of the fourth Board of Directors was held in the conference center on the second floor of JMC administrative building on Dec 6 and Dec 7, 2003. The following resolutions were passed at the meeting: i. approved the resolutions relating to new product development proposals submitted by the Strategy Committee; ii. approved JMC 2004 budget; iii. approved the diesel engine reaching the Euro III emission standard project; iv. approved to adjust independent directors’ annual compensation from RMB 30,000 per 19 person to RMB 60,000 per person. The proposal is subject to the approval of the Shareholders’ Meeting; v. approved 2003 Eight Accounting Provisions & Write-off proposal; vi. authorized CFO Manto Wong with full power to handle the loan financing between JMC and financial institutions. The duration of the authorization is one year from December 20, 2003 to December 19, 2004, and vii. approved 2003 Senior Management One-time Bonus Plan submitted by the Compensation Committee. 2. Board of Directors’ Executing the Resolutions of the Shareholders’ Meeting According to Y2002 profit distribution plan approved by the 2002 Annual Shareholders’ Meeting, the Y2002 dividend distribution was published in China Securities, Securities Times and Hong Kong Commercial Daily on September 18, 2003, and it had been put into effect. JMC did not convert capital reserve into share capital in 2003. 3. Proposal on Year 2003 Profit Distribution Plan Details on the profit available for appropriation of the Company in 2003 prepared in accordance with Chinese Accounting Standards (‘CAS’) and International Accounting Standard (‘IAS’) are as follows: Unit: RMB’000 CAS IAS Profit available for appropriation after tax 485,997 382,350 Include: Net profit for 2003 448,812 382,255 Transferred profit available for appropriation 123,506 86,416 at the beginning of the year Allocation of dividend for 2002 (86,321) (86,321) The upper limit of profit available for distribution was based on the lower of the unappropriated profit calculated in accordance with CAS and that calculated in accordance with IAS. Therefore, the Company’s profit available for distribution in 2003 was RMB 382,350 thousand. The Board approved to submit to the 2003 Annual Shareholders’ Meeting the following proposal on year 2003 profit distribution: (1). to appropriate 10% of the 2003 net profit calculated in accordance with CAS to statutory surplus reserve; (2). to appropriate 5% of the 2003 net profit calculated in accordance with CAS to statutory public welfare fund; (3). to appropriate for dividend distribution from the net profit the year, basing on the Company’s total share capital and a dividend of RMB 0.15 per share; and, (4). the balance of the unappropriated profit will be brought forward to the following financial year. 20 Dividend distribution proposal: A cash dividend of RMB1.5 (including tax) will be distributed for every 10 shares held. Based on the total share capital of 863,214,000 shares as at 31 December 2003, total cash dividend distribution amounted to RMB 129,482,100. B share dividend is to be paid in Hong Kong Dollars exchanged from RMB based on the HKD-to-RMB exchange rate published by the People’s Bank of China on the first working day when the profit distribution proposal is approved at JMC’s Shareholders’ Meeting. The Board decided not to transfer capital surplus reserve to share capital at this time. 4. The independent directors’ explanation and independent opinion on the Company’s outside guarantee and the implementation of relevant regulations JMC has no outside guarantee. 5. Others JMC continues to designate China Securities, Securities Times and Hong Kong Commercial Daily as the newspapers for information disclosure. Chapter VIII Report of the Supervisory Committee I. Work of the Supervisory Committee Pursuant to the relevant regulations in the Company Law, Securities Law and JMC Articles of Association as well as the spirit of being responsible to the shareholders, the Supervisory Committee seriously fulfilled its duties stipulated by the laws and regulations and energetically worked to perform its functions fully in 2003. The Chief Supervisor attended all the board meetings as a non-voting attendee, and all the supervisors attended the annual Shareholders’ Meeting. The committee held 3 meetings during the reporting period. The following is the information in regard to the meetings and the subjects at the meetings: 1. The Supervisory Committee reviewed and passed the following proposals with the written consent of the supervisors on March 27, 2003: i. reviewed and passed the 2002 annual work report of the Supervisory Committee; and ii. reviewed and passed 2002 Annual Report of JMC and the extracts from the annual report. 2. The Supervisory Committee reviewed and passed the following resolutions with the written consent of the supervisors on August 14, 2003: reviewed and passed 2002 Half-year Report of JMC and the extracts from the half-year report. 3. The 2nd session of the fourth Supervisory Committee, held in JMC administrative building on September 5, 2003, passed the following resolutions by discussion: i. the committee highly appraised the operating results of JMC in the first half year and 21 the successes achieved in quality improvement activity; ii. the committee hoped that JMC can speed up approval and implement of new product development plan; and, iii. to strengthen learning and training of the supervisors to further bring the supervisory committee into play. II. Supervisory Committee’s independent opinion on the following matters during the reporting period: 1. JMC’s operation in conformity with laws JMC operated in conformity with the laws and regulations, such as Company Law, Securities Law and the Articles of Association in 2003. The decision-making procedure was standardized and legal, and a relative complete internal control system was established. No behaviors violating laws, regulations and the Articles of Association or harming JMC’s interest by the Directors, President and other senior management in carrying out their duties were found. 2. JMC’s financial status PwC Zhong Tian audited JMC’s 2003 financial statements and issued unqualified audit reports. We believe the reports reflect JMC’s financial status, operating results and asset change objectively and truly. 3. In 2003, JMC’s procedure for asset sale was legal and the prices were reasonable. There were no insider trading and deals or situations harmful to shareholders’ interest or where a leak of JMC’s assets was detected. 4. JMC’s related transactions: the imported component purchasing applied negotiated arm-length prices. The pricing for localized components was determined through the process of inviting public bidding, discussion and business negotiation. The prices were adjusted periodically, were fair and reasonable. Chapter IX Major Events 1. JMC had no major litigation or arbitration in 2003. 2. In 2003, JMC did not acquire or sell operation, and there was no merger. 3. Major Related Transactions 22 (1) Related party transactions for purchase of commodities and services A. JMC purchased certain raw materials, auxiliary materials and components from related parties. The ones with annual value over RMB 30 million are listed as follows: Transaction parties Amount (RMB ‘000) Ratio to the transactions of the same kind JMCG 269,311 7.28% Nanchang Gear Co., Ltd 151,013 4.08% Jiangling-Lear Interior Trim Factory 124,490 3.36% JMCG Interior Trim Factory 115,986 3.13% Jiangxi FuChang Climate System Co. 93,313 2.52% Ford 78,958 2.13% JMCG Variant Vehicle Factory 43,223 1.17% Settlement: Letter of Credit method for Ford and its designated suppliers; payment on accounts or prepayment for other related parties. Pricing principle: Ford and its designated suppliers applied the negotiated arm-length pricing; the pricing for localized components from related parties were determined through the process of suppliers quote, costing assessment and negotiation between both sides. The prices were adjusted periodically. Necessity and continuity: the purchase of the imported components will immediately stop when the respective localization is achieved, and these components will be substituted by localized ones; some components from other related parties were unique parts for JMC’s Transit series, N series and T series, and other general components were purchased through competitive bid. B. The sales of products by JMC to related parties with annual value over RMB 30 million: Transaction parties Amount (RMB ‘000) Ratio to the transactions of the same kind Jiangling Import and Export Co., Ltd. 71,814 1.41% Jiangling Land-wind Autos Co., Ltd. 66,936 1.31% Settlement: cash sales or settlement with bank acceptance in the month. Pricing principle: market price. Necessity and continuity: Jiangling Import and Export Co., Ltd had mature network and human resources in import & export trade, so JMC will continue to use its sales network to sell products to overseas markets. JMC will also continue supplying relevant components to Jiangling Land-wind Autos Co., Ltd. for the attractive margin from the supply. C. Management Compensations In 2003, JMC should pay US$ 1.8 million to Ford for its seconded personnel working in JMC in line with the Personnel Agreement and Supplemental Contract to the Personnel Agreement signed by JMC and Ford. D. General Service JMCG bears the middle school and primary school educational fees and retired employees expenses of JMC and its subsidiaries, and provides services such as security, fire control, road maintenance and cable television. The costs consequent on that were shared by JMC and its subsidiaries in the agreed percentage based on headcount ratio, and so were the costs preventing SARS in 2003. In 2003, RMB 9.34 million of the above-mentioned costs was shared by JMC and its subsidiaries in the percentage. 23 E. Purchasing Agency Jiangling Import & Export Co., Ltd. was the import agent of JMC for acquiring import materials, equipments and technology services with a fixed commission rate of 1.5%. In 2003, JMC paid Jiangling Import & Export Co., Ltd. commission totaling RMB 3.89 million. (2) There was no related party transaction resulting from the transfer of assets or stake in 2003. (3) Creditor’s rights, liabilities and guarantees between JMC and related parties. A. Balance of accounts due to or due from main related parties with value over RMB 30 million: Item Related parties Amount Ratio to the balance (RMB ‘000) of the item Accounts and bills payable JMCG Interior Trim Factory 32,142 4.99% B. Deposit At the end of year 2003, JMC had deposit of RMB 99,800 thousand in JMCG Finance Co., Ltd. and charged interest according to same period bank deposit interest rate (HK$ at 0.0625% - 0.125%, RMB at 0.72% - 1.44%). JMC received a total of RMB 2,300 thousand in interest from JMCG Financial Co., Ltd. in 2003. C. Loan JMC borrowed 3-year loan of US$ 2,500 thousand (equal to RMB 20,690 thousand) at interest rate of 4.3% from JMCG Finance Co., Ltd. on June 22, 2000. The loan had been repaid on June 22, 2003. JMC paid interest of RMB 450 thousand for the loan in 2003. D. Guarantee JMCG provided guarantee for parts of JMC’s bank loans, of which the maximum was US$ 7 million and RMB 426 million, totaling RMB 483 million. The year 2003 guarantee fee was about RMB 730 thousand. As of Dec. 31, 2003, JMC had not gotten bank loans guaranteed by JMCG. JMCG Finance Co. Ltd provided guarantee for parts of JMC’s bank loans, of which the maximum was US$ 2,280 thousand, or RMB 18,890 thousand. As of Dec. 31, 2003, JMCG Finance Co. Ltd provided guarantee for JMC’s bank loans of US$ 1,340 thousand, or RMB 11,110 thousand. (4) Other major related party transactions in 2003 A. JMC charged rent on the facilities leased by JMCG and the rental income in 2003 was RMB 1,260 thousand. JMC also rented facilities from JMCG, and paid rent of RMB 1,680 thousand in 2003. B. According to the Joint Development Agreement and the 2nd Amendment Contract to the Joint Development Agreement signed by JMC and Ford, JMC is to pay technology development fee totaling US$ 40 million to Ford. JMC bore the technology development fee of US$ 3,500 thousand (equal to RMB 28,960 thousand) in year 2003 at 1.8% of Transit sales revenue. 24 4. Major Contracts and the Execution (1) There were neither entrustment, contract or lease of assets from other companies, nor entrustment, contract or lease of JMC’s assets to other companies through which profit was generated to exceed 10% of 2003 total profit in the reporting period. (2) JMC had no outside guarantee in the reporting period. (3) JMC did not entrust other people with cash asset management in the reporting period. 5. Neither JMC nor the shareholders holding 5% or above shares disclosed commitments on the designated newspapers or website in 2003. 6. Appointment or Dismissal of Accounting Firms JMC 2002 Annual Shareholders’ Meeting approved to appoint PwC Zhong Tian CPAs as JMC’s year 2002-2006 A & B share auditor. The firm has offered JMC audit service three consecutive years. The compensation paid to the accountants firm: Accountant Firm Year 2003 Out of Pocket Expense RMB 1 mil. Contained in audit fee. PwC ZhongTian (Both A & B share) 7. Neither JMC nor its Directors or senior management were punished by regulatory authorities in 2003. 8. Public Announcements Index Item Date for Newspaper (page) disclosure Announcement on the resolutions of the Board and March 29, 2003 China Securities (49th page) the Supervisory Committee on 2002 annual report Securities Times (48th page) and profit distribution as well as the Extracts from Hong Kong Commercial Daily (A7 page) 2002 Annual Report 2003 First Quarter Report April 23, 2003 China Securities (29th page) Securities Times (49th page) Hong Kong Commercial Daily (B4 page) Announcement on postponing 2002 annual May 23, 2003 China Securities (7th page) shareholders’ meeting Securities Times (7th page) Hong Kong Commercial Daily (B3 page) Announcement on the resolutions of the Board on Aug 5, 2003 China Securities (16th page) director changes, adjusting the number of directors, Securities Times (7th page) amending the Articles of Association of JMC and Hong Kong Commercial Daily (B5 page) approving the Notice on Holding 2002 Annual Shareholders’ Meeting, as well as the notice Announcement on the resolutions of the Board and Aug 15, 2003 China Securities (28th page) the Supervisory Committee on 2003 half-year Securities Times (24th page) report, as well as 2003 Half-year Report Hong Kong Commercial Daily (B3 page) 25 Announcement on the resolutions of the 3rd session Sep 6, 2003 China Securities (16th page) of the fourth Board and the resolutions of 2002 Securities Times (10th page) Annual Shareholders’ Meeting Hong Kong Commercial Daily (page) Announcement on Year 2002 Dividends Sep 18, 2003 China Securities (13th page) Distribution Securities Times (14th page) Hong Kong Commercial Daily (B3 page) 2003 Third Quarter Report Oct 24, 2003 China Securities (21st page) Securities Times (19th page) Hong Kong Commercial Daily (B4 page) Announcement on the resolutions of the 4th session Dec 10, 2003 China Securities (5th page) of the fourth Board Securities Times (6th page) Hong Kong Commercial Daily (B6 page) 26 Chapter X Financial Report 27 JIANGLING MOTORS CORPORATION LTD. YEAR ENDED 31 DECEMBER 2002 (All amounts are stated in RMB thousands unless otherwise stated) Jiangling Motors Corporation, Ltd. Consolidated Financial Statements 2003 28 12th Floor, Shui On Plaza 333 Huai Hai Zhong Lu Shanghai 200021 People's Republic of China Telephone +86 (21) 6386 3388 Facsimile +86 (21) 6386 3300 REPORT OF THE AUDITORS PwC ZT Shen Zi (2004) No.921 To the shareholders of Jiangling Motors Corporation, Ltd. We have audited the accompanying consolidated balance sheet of Jiangling Motors Corporation, Ltd. (“the Company”) and its subsidiaries (“the Group”) as of 31 December 2003 and the related consolidated income and cash flow statements for the year then ended. These consolidated financial statements 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 financial position of the Group as of 31 December 2003 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPA’s Co., Ltd. 7 April 2004 Business is undertaken in the registered name of PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 Consolidated income statement Year ended 31 December (All amounts in RMB thousands) Notes 2003 2002 Sales 1 5,094,897 4,270,869 Sales tax and surcharge (72,757) (54,822) Net sales 5,022,140 4,216,047 Cost of sales (3,757,513) (3,149,441) Gross profit 1,264,627 1,066,606 Other operating income 22,971 28,883 Distribution costs (315,038) (298,333) Administrative expenses (475,460) (407,343) Other operating expense (10,498) (8,044) Profit from operations 2 486,602 381,769 Finance costs - net 3 (11,563) (53,018) Share of result of associates before tax 12 4,993 2,415 Profit before tax 480,032 331,166 Income tax expense 5 (59,138) 6,119 Group profit before minority interest 420,894 337,285 Minority interest 25 (38,639) (24,177) Net profit 382,255 313,108 Earnings per share (RMB per share) 6 0.443 0.363 2 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 Consolidated balance sheet As at 31 December (All amounts in RMB thousands) Notes 2003 2002 ASSETS Non-current assets Property, plant and equipment 8 1,707,675 1,832,525 Land use rights 9 151,483 154,899 Investment property 10 23,751 19,507 Intangible assets 11 7,372 - Investments in associates 12 18,891 15,091 Other non-current assets 13 26,956 - Deferred tax assets 14 18,675 29,378 1,920,475 2,085,728 Current assets Inventories 15 602,533 436,839 Receivables and prepayments 16 314,059 297,091 Held-to-maturity investments 200 - Cash and cash equivalents 17 983,938 816,735 1,900,530 1,550,865 Total assets 3,821,005 3,636,593 Shareholder’s equity Ordinary shares 24 863,214 863,214 Share premium 24 816,609 816,609 Reserves 24,26 168,514 101,192 Retained earnings 315,029 86,416 Total shareholders’ equity 2,163,366 1,867,431 Minority interest 25 104,664 80,836 LIABILITIES Non-current liabilities Borrowings 19 191,111 404,890 Retirement benefit obligations 21 93,722 80,516 284,833 485,406 Current liabilities Trade and other payables 18 1,016,743 819,084 Current tax liabilities 3,592 5,637 Borrowings 19 165,000 318,480 Provisions 20 63,807 49,719 Retirement benefits obligations 21 10,000 19,000 1,268,142 1,202,920 Total liabilities 1,552,975 1,668,326 Total equity and liabilities 3,821,005 3,636,593 These financial statements have been approved for issue by the Board of Directors on 7 April 2004. 3 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 Consolidated statement of changes in shareholders’ equity (All amounts in RMB thousands) Notes Ordinary Shares Reserves Retained Total shares premium earnings Balance at 1 January 2002 863,214 816,609 77,496 (202,996) 1,554,323 - as previously reported 863,214 817,088 77,017 (103,196) 1,654,123 - effect of adopting IAS19 21 - - - (99,800) (99,800) - reserve on reclassified amounts - (479) 479 - - - as restated 863,214 816,609 77,496 (202,996) 1,554,323 Net profit for the year - - - 313,108 313,108 Balance at 31 December 2002/ 1 January 2003 863,214 816,609 77,496 110,112 1,867,431 - Statutory reserves transfer relating to 2002 - - 23,696 (23,696) - - As reclassified 863,214 816,609 101,192 86,416 1,867,431 Net profit for the year - - - 382,255 382,255 Statutory reserves transfer relating to 2003 - - 67,322 (67,322) - Dividend relating to 2002 - - - (86,320) (86,320) Balance at 31 December 2003 863,214 816,609 168,514 315,029 2,163,366 4 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 Consolidated cash flow statement Year ended 31 December (All amounts in RMB thousands) Notes 2003 2002 Cash flows from operating activities Cash generated from operations 27 876,967 1,007,424 Interest paid (31,635) (57,480) Tax paid (50,480) (19,746) Net cash from operating activities 794,852 930,198 Cash flows from investing activities Purchase of property, plant and equipment (184,092) (124,154) Proceeds from sale of property, plant and equipment 27 3,257 2,325 Proceeds from disposal of held-to-maturity investments 200 200 Interest received 20,213 14,023 Complementary investment in an associate - (3,553) Dividend Received 1,193 - Net cash used in investing activities (159,229) (111,159) Cash flows from financing activities Proceeds from borrowings 450,000 444,394 Repayments of borrowings (817,406) (1,036,151) Dividends paid to group shareholders (85,625) - Dividends paid to minority interest 25 (14,811) (12,864) Other cash paid relating to financing activities (1,152) (6,794) Net cash used in financing activities (468,994) (611,415) Effects of exchange rate changes 574 (254) Net increase in cash and cash equivalents 167,203 207,370 Cash and cash equivalents at beginning of year 816,735 609,365 Cash and cash equivalents at end of year 983,938 816,735 5 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) General information Jiangling Motors Corporation Ltd. (hereafter referred to as “the Company”) was established in the People’s Republic of China (hereafter referred to as “PRC”) under the Company Law of the PRC and under the approval Hongban (1992) No. 005 of Nangchang Revolution and Authorization Group of Company’s Joint Stock as a joint stock limited company to hold certain operational assets and liabilities of the automotive manufacturing business of Jiangxi Motors Manufacturing Factory. The Legal Representative’s Operating License is No.002473. On 23 July 1993, with the approval of Zhengjianfashen [1993] No. 22 and Zhengjianhan [1993] No.86 of China Securities Regulatory Commission, the Company issued 494,000,000 A share to domestic public investors and PRC legal persons in Shenzhen Stock Exchange on 1 December 1993. On 8 April 1994, with the approval of Board minutes and Ganzhengquan [1994] No. 02 of Jiangxi Securities Regulatory Team, the Company issued 25,214,000 A shares as bonus shares to the existing 494,000,000 shares in issue in July 1993. The bonus shares were issued as a distribution from the retained earning account within shareholders’ equity. In 1995, with the approval Zhengjianfa [1995] No. 144 of China Securities Regulatory Commission and Shenzhengbanfu [1995] No. 92 of Shenzhen Securities Management Office, the Company issued 174,000,000 B shares and additional 170,000,000 B shares in 1998 with the approval Zhengjianfa [1998] No. 19 of China Securities Regulatory Commission. As at 31 December 2003, the total issued shares of the Company are 863,214,000 shares. The business scope of the Company includes the development, manufacture and sale of automobiles, engines and automobile related parts, dies and tools. 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 (hereafter referred to as “IFRS”). The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. The preparation of financial statements 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. 6 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Accounting policies (continued) B Group accounting (1) Subsidiaries Subsidiaries, which are those entities in which the Company and its subsidiaries (hereafter referred to as “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. (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the company’s share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. C Foreign currency translation (1) 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 on the first day of the month in which the transactions took place. 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 income statement. D Property, plant and equipment Property, plant and equipment are stated at cost or, in the case of assets injected into the Group at the time of its reorganisation, at valuation less accumulated depreciation representing the deemed cost to the Group, less accumulated depreciation and any impairment losses. Depreciation is calculated on the straight-line method to write off the cost or the revalued amount of each asset, to their residual values (10% except for moulds, which have no residual values) over their estimated useful lives as follows: 7 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Accounting policies (continued) D Property, plant and equipment (continued) Buildings 20-35 years Plant and machinery 10 years Equipment and Motor Vehicles 6 years Moulds 5 years Others 5 - 7 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. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset, when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. Assets under construction comprises factories, office buildings, plant and machinery under construction including the related furniture, fixtures and equipment, are stated at cost less any impairment losses, and is not depreciated. Construction in progress is transferred to property, plant and equipment when it is ready for its intended use. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. E Land use rights Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which various warehouses, container storage areas and buildings are situated for 50 years. Amortisation of land use right is calculated on a straight-line basis over the period of the land use right. F Investment Property Investment property, principally comprising factory building, is held for long-term rental yields and is not occupied by the Group. Investment property is treated as a long-term investment and is stated at cost and are depreciated over the estimated useful lives of 35 years. 8 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Accounting policies (continued) G Intangible assets Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, not exceeding five years. H Impairment of long lived assets Property, plant and equipment and other non-current assets, including intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. I Investments The Group recorded its investments in debt and equity securities as held-to-maturity investments. The classification is dependent on the purpose for which the investments were acquired. Management determines its investments at the time of the purchase. 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. J Other non-current assets Other non-current assets include deferred staff costs. Deferred staff costs represent expenses charged by Jiangling Motors Corporation Group (hereafter referred to as “JMCG”), being the excess of the construction cost of the staff quarters over the proceeds received from staff upon their purchases of the quarters from JMCG. The ownership of the staff quarters may only be transferred or disposed of by the staff after a period of eight years from the date of purchase. The deferred staff costs are amortised at a rate of 25% of the total annual wages. K Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises direct materials, direct labour and an attributable proportion of production overheads. Net realisable value is the estimated selling prices in the ordinary course of business, less the costs of completion and selling expenses. Accounting policies (continued) 9 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) L 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. M Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand and deposits held at call with banks. N Ordinary shares (1) Ordinary shares with discretionary dividends are classified as equity. (2) Incremental external costs directly attributable to the issue of new shares, other than in connection with business combination, are shown in equity as a deduction, net of tax, from the proceeds. Share issue costs incurred directly in connection with a business combination are included in the cost of acquisition. O 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 income statement over the period of the borrowings. P 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 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. 10 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Accounting policies (continued) Q Employee benefits (1) Pension obligations The Group participates in defined contribution retirement schemes regarding pension and medical benefit required under existing PRC legislation. The contributions to the schemes are charged to the income statement as and when incurred. The Group’s obligations include contributions to a defined contribution retirement plan administered by a government agency determined at a certain percentage of the salaries of the employees and contributions to a supplementary pension fund of a fixed monthly amount per employee. The Group accounts for these contributions on the accrual basis. In addition, the Group provides certain retirees with post-retirement benefits and the cost of providing the aforementioned post-retirement benefits under the Group’s defined benefit plan is actuarially determined and recognised over the employees’ service period by using the projected unit credit method. Post-retirement benefit expenses recognised in the income statement, include, if applicable, current service cost, interest cost, the expected return on plan assets, amortised actuarial gains and losses, the effect of any curtailment or settlement and past service cost. (2) Early retirement benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date. The Group recognises termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value. 11 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Accounting policies (continued) R 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. S Revenue recognition Revenue comprises the invoiced value for the sale of goods and services net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is 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. T Dividends Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders. U Segment Reporting The Group’s turnover and profit for the year were mainly derived from the manufacture and domestic sale of automobiles and the principal assets employed by the Group are located in the PRC. Accordingly, no segmental analysis by business or geographical segments has been provided for the year. V Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 12 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Financial risk management The financial assets of the Group include cash and bank balances, cash and time deposits with a related financial institution, investments, accounts and bills receivable, prepayments and other receivables, and amounts due from JMCG and related companies. The financial liabilities of the Group include bank loans, a loan from a related financial institution, accounts and bills payable, receipts in advance, accruals and other payables, accrued staff welfare and benefits, amounts due to related companies, an amount due to minority shareholders of the company and an amount due to a minority shareholder of a subsidiary. (1) Interest rate risk The interest rates and terms of the repayment of a loan from a related financial institution and bank loans of the Group are disclosed in note 19 to the financial statements, respectively. (2) Credit risk (i) Cash at bank and in hand Substantial amounts of the Group’s cash balances are deposited with the Bank of China, the Industrial and Commercial Bank of China, The Bank of Communications, The Agricultural Bank of China and the People’s Construction bank of China. Cash and time deposits are also placed with Jiangling Motors Corporation Finance Co., Ltd., a subsidiary of JMCG. (ii) Accounts receivable The Group does not have a significant exposure to any individual customer or counter party. The major concentrations of credit risk arise from exposures to a substantial number of accounts receivable operating in one geographical region, i.e., the PRC. (3) Fair values The fair values of cash and bank balances, cash and time deposits with a related financial institution, investments, accounts and notes receivable, prepayments and other receivables amounts due from JMCG and related companies, accounts and bills payable, receipts in advance, accruals and other payables, accrued staff welfare and benefits, amounts due to related companies, an amount due to minority shareholders and an amount due to a minority shareholder of a subsidiary, are not materially different from their carrying amounts. The carrying values of short term bank loans are estimated to approximate their fair values based on the nature or short term maturity of these instruments. The fair values of long term bank loans as estimated by applying a discounted cash flow using current market interest rates for similar financial instruments approximate their carrying values. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 13 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Notes to the consolidated financial statements 1 Sales The Group principally derives its turnover from the manufacture, assembly and sale of automobiles, related spare parts and components, and sales are made principally in the PRC. Considering the principal assets employed by the Group are also located in the PRC, no segmental analysis by business or geographical segments has been provided for the year. 2 Profit from operations The following items have been included in arriving at operating profit: 2003 2002 Depreciation on property, plant and equipment (Note 8) 299,245 293,646 Impairment / (write-back of impairment) - property, plant and equipment (Note 8) 2,380 4,271 - receivables and prepayments (6,941) (9,733) - inventory 10,481 1,775 Loss on disposal of property, plant and equipment 4,942 1,683 Repairs and maintenance expenditure on property, plant and equipment 27,866 48,918 Amortisation - other non-current assets (Note 13) (included in ‘Administrative expenses’) 26,956 18,331 - intangible assets (Note 11) (included in ‘Administrative expenses’) 7,372 42,571 - land use rights (Note 9) (included in ‘Administrative expenses’) 3,416 6,335 - investment properties under operating leases (included in ‘Administrative expenses’) 730 1,523 Research and development expenditure 95,205 67,016 Inventory - costs of inventories recognised as expense (included in ‘Cost of sales’) 3,307,660 2,677,025 Staff costs (Note 4) 264,837 193,269 3 Finance costs – net 2003 2002 Interest expense (Note 27) - Bank loans (30,599) (59,115) - Loan from Jiangling Motors Corporation Finance Co., Ltd. (hereafter referred to as “JMCF”) (453) (955) Interest income (Note 27) 20,213 14,023 Net foreign exchange transaction gain/(loss) 574 (461) Guarantee expense (725) (4,650) Others (573) (1,860) (11,563) (53,018) 14 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 4 Staff costs 2003 2002 Wages and salaries 172,668 141,987 Social security costs 26,272 19,878 Pension costs − defined contribution plan 18,164 23,159 Pension costs − defined benefit plan (Note 21) 41,000 - Others 6,733 8,245 264,837 193,269 The average number of employees in 2003 was 6,733 (2002:6,246). The employees of the Group participated in a retirement benefit plan organized by the municipal and provincial governments under which the Group was required to make defined contributions monthly to this plan. In addition, the Company also paid certain pension subsidies to certain retired employees. In accordance with the Company’s early retirement programs, the Company was also committed to make periodic benefit payments to certain early-retired employees until they reach their legal retirement ages. 5 Income tax expense 2003 2002 Current tax (48,435) (23,259) Deferred tax (Note 14) (10,703) 29,378 (59,138) 6,119 15 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 5 Income tax expense (continued) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the Company as follows: 2003 2002 Profit before tax 480,032 331,166 Tax calculated at a tax rate of 10%(2002:12%) (48,003) (39,740) Income not subject to tax 12,921 27,058 Expense not deductible for tax purposes (5,989) (3,256) Utilization of previously unrecognised tax losses - 25,454 Effect of tax rate change (4,735) - Effect of different tax rates for associates and consolidated subsidiaries (13,332) (3,397) Tax credit/ (charge) (59,138) 6,119 With the approval HongganGuoshuiwaifa [2003] No.054 of tax authority in Nanchang, the applicable tax rate of the Company is 15%, and the Company is entitled to a preferential tax rate of 10% for the period from 2002 to 2004. The income tax rate applicable to Jiangling Isuzu Motors Company Limited (hereafter refer to as “Jiangling Isuzu”), a subsidiary, is 15%. With the approval of Hongguoshuifa [2003] No. 10, 50% tax exemption was granted to Jiangling Isuzu for the period from January 2001 to December 2003. The income tax rate applicable to Jiangling Motors Sales Company, another subsidiary, is 33%. 6 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. 2003 2002 Net profit attributable to shareholders (RMB’000) 382,255 313,108 Weighted average number of ordinary shares in issue 863,214 863,214 (thousands) Basic earnings per share (RMB per share) 0.443 0.363 No diluted earnings per share is presented as there were no potential ordinary share outstanding during the year ended 31 December 2003 and 2002. 7 Dividend per share At the Annual General Meeting on 7 April 2004, a dividend in respect of 2003 of RMB0.15 Yuan per share amounting to a total dividend of RMB129,482.1 is to be proposed. These 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 ended 31 December 2004. 16 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 8 Property, plant and equipment Asset Buildings Plant & machinery Vehicles Moulds const Year ended 31 December 2002 Opening net book amount 519,065 715,450 14,912 244,446 1 Additions - - 4,584 598 1 Reclassification 5,450 10,117 2,372 3,077 Transfers 3,167 77,885 - 17,680 (10 Disposals (188) (2,111) (647) - ( Impairment charge (Note 2) - 104 (104) (1,243) ( Depreciation charge (Note 2) (14,578) (115,396) (4,628) (84,147) Closing net book amount 512,916 686,049 16,489 180,411 1 At 31 December 2002 Cost 586,747 1,346,106 45,136 504,880 1 Accumulated depreciation (73,831) (660,057) (28,647) (324,469) Net book amount 512,916 686,049 16,489 180,411 1 Year ended 31 December 2003 Opening net book amount 512,916 686,049 16,489 180,411 1 Additions 160 6,594 5,287 7,332 1 Reclassification (4,974) - - - Transfers 17,243 24,097 9,736 - (9 Disposals - (3,152) (933) - Impairment charge (Note 2) - (2,428) (229) - Depreciation charge (Note 2) (15,405) (121,263) (4,373) (83,622) Closing net book amount 509,940 589,897 25,977 104,121 1 At 31 December 2003 Cost 618,915 1,357,011 54,602 529,301 1 Accumulated depreciation (108,975) (767,114) (28,625) (425,180) Net book amount 509,940 589,897 25,977 104,121 1 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 8 Property, plant and equipment (continued) In connection with the Group’s reorganisation in 1993, the Group’s property, plant and equipment were revalued on 31 December 1992 by Zhonghua (Shenzhen) Certified Public Accountants on a depreciated replacement value basis. The opening accumulated depreciation of the revalued assets was computed using depreciation rates as stipulated by the State regulations, which are generally consistent with those applied by the Group for the preparation of its financial statements. Since this was a special purpose valuation conducted for the purposes of the formation of a joint stock limited company, this became deemed costs of the Company’s property, plant and equipment. Subsequent revaluations have not been performed and all further additions have been recorded at cost. As at 31 December 2003, buildings, machinery and equipment with a net book value of RMB268,941 (cost of RMB426,782) had been pledged as security for current borrowings of RMB60,000 and non-current borrowings of RMB140,000 (Note 19). 9 Land use rights 2003 2002 Opening net book amount 154,899 183,135 Reclassification – net - (21,901) Amortisation charge (Note 2) (3,416) (6,335) Closing net book amount 151,483 154,899 At 31 December Cost 172,906 206,239 Accumulated amortisation (21,423) (51,340) Net book amount 151,483 154,899 10 Investment property 2003 2002 Investment properties under operating leases, net 23,751 19,507 11 Intangible assets 2003 2002 Opening net book amount 7,372 49,943 Amortisation charge (Note 2) (7,372) (42,571) Closing net book amount 7,372 - At 31 December Cost 205,146 221,444 Accumulated amortisation (205,146) (214,072) Net book amount 7,372 - Intangible assets are comprised of research and development costs related to the Transit engineering services. 18 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 12 Investments in associates 2003 2002 At the beginning of year 15,091 11,128 Share of results before tax 4,993 2,415 Dividends received (1,193) - Others - 1,548 At end of year 18,891 15,091 The associates, which are unlisted, are: Country of % interest incorporation held Jiangxi Fujiang After-Sales Service Co., Ltd. PRC 20% Jiangxi Fuchang Climate System Co., Ltd. PRC 19.15% Jiangxi Fujiang After-Sales Service Co., Ltd (hereafter referred to “Jiangxi Fujiang”) is a Sino-foreign equity joint venture with a registered capital of US$ 4.4 million, of which Ford Motors Company has an 80% interest and the Company has the remaining 20% interest. Jiangxi Fujiang’s principal activity includes after-sales services. In March 1996, the Company entered into a Sino-foreign equity joint venture agreement with Visteon International Holding Co., Ltd. (hereafter referred to as “Visteon”) to form Jiangxi Fuchang Climate Systems Co., Ltd. (hereafter referred to as “Jiangxi Fuchang”). The tenure of Jiangxi Fuchang is thirty years, and its principal activities include manufacture and sale of air-conditioners and spare parts for motor vehicles. Jiangxi Fuchang has a registered capital of US$5.6 million, of which Visteon has an 80.85% interest and the Company has the remaining 19.15% interest. The registered capital of Jiangxi Fuchang was paid up by the Company in the form of buildings, land use rights and electricity usage rights totalling RMB8,934, equivalent to approximately US$1,072. 13 Other non-current assets 2003 2002 Opening net book amount 26,956 45,287 Amortisation provided for the year (Note 2) (26,956) (18,331) Closing net book value - 26,956 At 31 December Cost 150,750 150,750 Amortisation (123,794) (150,750) Net book amount 26,956 - Other non-current assets is comprised of deferred staff cost. 19 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 14 Deferred tax assets Deferred income taxes are calculated in full on temporary differences under the liability method using a principal tax rate of 10% (2002: 12%). The movement on the deferred tax assets account is as follows: 2003 2002 At beginning of year 29,378 - Income statement credit/(charge) (Note 5) (10,703) 29,378 At end of year 18,675 29,378 Deferred tax assets recognised for provisions of assets At beginning of year 18,516 - Income statement credit/(charge) (11,113) 18,516 At end of year 7,403 18,516 Deferred tax assets recognised for retirement benefits obligations At beginning of year 10,862 - Income statement credit/(charge) 410 10,862 At end of year 11,272 10,862 The amounts shown in the balance sheet include the followings: 2003 2002 Deferred tax assets to be recovered after more than 12 months 18,485 18,860 15 Inventories 2003 2002 Raw materials (at net realisable value) 287,072 216,859 Work in progress (at cost) 54,893 43,640 Finished goods (at net realisable value) 260,568 176,340 602,533 436,839 16 Receivables and prepayments 2003 2002 Trade receivables 101,699 75,393 Less: Provision for impairment of receivables (5,702) (9,168) Trade receivables – net 95,997 66,225 Receivables from associates (Note 28) 4,457 3,077 Other receivables 213,605 227,789 314,059 297,091 20 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 17 Cash and cash equivalents 2003 2002 Cash at bank and in hand 830,898 643,732 Short term bank deposit 153,040 173,003 983,938 816,735 As at 31 December 2003, the Group had cash deposits of RMB99,796 (2002: RMB 90,506) placed with a related financial institution, JMCF, which is a subsidiary of JMCG, of which RMB2,123 (2002: RMB2,114) was denominated in foreign currencies of US$69 and HK$1,457 (2002: US$68 and HK$1,457), respectively. The cash deposits, which can be withdrawn at any time on demand, are interest-bearing at 0.0625% to 1.44% per annum (2002: 0.4375% to 1.89% per annum). 18 Trade and other payables 2003 2002 Trade payables 632,583 445,512 Amount due to associates (Note 28) 11,992 14,868 Accrued expenses 63,570 82,058 Payroll and welfare payable 93,799 78,256 Other payables 214,799 198,390 1,016,743 819,084 19 Borrowings 2003 2002 Current Bank borrowings - unsecured 105,000 69,846 - secured 60,000 227,941 Loan from JMCF 20,693 - 165,000 318,480 Non-current 2003 2002 Bank borrowings - unsecured 51,111 130,000 - secured 140,000 274,890 191,111 404,890 Total borrowings 356,111 723,370 The interest rate of bank borrowings is ranging from 1.65% to 5.58% per annum (2002: from 2.48% to 5.85%). As at 31 December 2003, secured bank borrowings comprise: (1) Bank borrowings of RMB200,000 (2002: nil) secured over certain buildings, machinery and equipment with a net book value of RMB268,941 (original cost of RMB426,782) (Note 8). (2) Bank borrowings of RMB11,111 (2002: RMB18,890) guaranteed by JMCF. 21 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 19 Borrowings (continued) Maturity of non-current borrowings: 2003 2002 Between 1 and 2 years - 200,000 Between 2 and 5 years 140,000 186,000 Over 5 years 51,111 18,890 191,111 404,890 20 Provisions The Group gives warranties on vehicles sold and undertakes to repair or replace items that fail to perform satisfactorily within the period of the sooner of two years and fifty thousand kilometres. A provision of Rmb63,807 (2002:Rmb49,719) has been recognised at the year-end for the expected warranty claims based on past experience of the level of repairs and returns. It is expected that Rmb39,400 will be used during 2004, and Rmb24,407 during 2005. The movement on the provisions account is as follows: 2003 2002 At beginning of year 49,719 12,108 Additional provision 70,345 78,027 Payment for the year (56,257) (40,416) At end of year 63,807 49,719 Current 39,400 40,000 Non-current 24,407 9,719 63,807 49,719 21 Pensions and other post-retirement obligations 2003 2002 At beginning of year 90,516 99,800 Additional provision 41,000 - Payment for the year (18,794) (9,284) At end of year 112,722 90,516 Current 19,000 10,000 Non-current 93,722 80,516 112,722 90,516 The material actuarial assumptions used in valuing these obligations are as follows: (1) Discount rate adopted: 4% (2) Mortality: average life expectancy of residents in the PRC. Based on the assessment and IAS No. 19, the Company estimated that, at 31 December 2003, a provision of RMB112,722 is sufficiently to cover all future retirement-related obligations. Obligation in respect of retirement benefits of Rmb112,722 is the present value of the unfunded obligations, of which the current portion amounting to Rmb19,000 (2002:Rmb10,000) has been included under current liabilities. 22 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 22 Contingencies At 31 December 2003, the Company did not have any significant contingent liabilities. 23 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements, comprises purchases of buildings, plant and machinery, is as follows: 2003 2002 Contracted 56,081 9,860 Authorised but not contracted - 73,600 56,081 83,460 (b) Royalty fee payable to a shareholder On 21 August 1995, the Company entered into a joint development agreement with a shareholder, Ford Motor Company (hereafter referred to as “Ford”), in which Ford agreed to provide technical assistance to the Company for the production of automobiles. In return, the Company agreed to pay Ford a total amount of US$40,000 by the end of the year 2004. On 29 September 2000, an amendment to the development agreement was entered into between the Company and Ford to waive the aforesaid repayment terms and royalty payment is calculated based on 1.8% of sale value of automobiles. As at 31 December 2003, the outstanding royalty fee committed, but not provided for, amounted to US$27,574(2002: US$29,001). 24 Ordinary share and share premium Number of shares Ordinary Share Capital (thousands) shares premium reserve Total Balance at 1 January 2003 863,214 863,214 816,609 18,685 1,698,508 Addition - - - - - Balance at 31 December 2003 863,214 863,214 816,609 18,685 1,698,508 The total authorised number of ordinary shares is 863,214 shares (2002: 863,214 shares) with a par value of RMB 1 per share (2002: RMB 1 per share). All issued shares are fully paid. 25 Minority interests 2003 2002 At 1 January 80,836 69,523 Share of net profit of subsidiaries (Note 27) 38,639 24,177 Dividend paid (14,811) (12,864) At 31 December 104,664 80,836 23 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 26 Statutory and discretionary reserves Statutory Discretionary Statutory public surplus reserve welfare fund reserve Total Balance at 1 January 2002 58,811 - - 58,811 Addition - - - - Balance at 31 December 2002/ 1 January 2003 58,811 - - 58,811 - Reserves transfer relating to 2002 15,797 7,899 - 23,696 - As reclassified 74,608 7,899 - 82,507 Reserve transfers relating to 2003 44,881 22,441 - 67,322 Balance at 31 December 2003 119,489 30,340 - 149,829 Transfers from the statement of income to statutory reserve and statutory public welfare fund were made in accordance with the relevant statutory rules and regulations and the Articles of Association of the Company and Jiangling Isuzu. Statutory reserve According to the Company’s Articles of Association, the Company is required to transfer 10% of its profit after tax, as determined under PRC accounting regulations, to the statutory reserve until the reserve balance reaches 50% of the registered capital. The statutory reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issuance of new shares to shareholders in proportion to their existing shareholdings. The transfer to this reserve must be made before the distribution of dividends to shareholders. Statutory public welfare fund The statutory public welfare fund can only be utilized on capital items for the collective benefits of the Company’s employees such as the construction of dormitories, canteen and other staff welfare facilities. The transfer to this reserve must be made before distribution of dividends to shareholders. This reserve is non-distributable other than in liquidation of the Company. Discretionary surplus reserve The Board of Directors, after obtaining approval from the shareholders, has the discretion to provide for discretionary surplus reserve. 24 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 27 Cash generated from operations 2003 2002 Net profit 382,255 313,108 Adjustments for: Minority interest (Note 25) 38,639 24,177 Tax (Note 5) 59,138 (6,119) Depreciation (Note 2) 299,245 293,646 Amortisation (Note 2) 38,474 68,760 Impairment charge / (Write-back of impairment) (Note 2) 5,920 (3,687) Loss on sale of property, plant and equipment (Note 2) 4,941 1,683 Loss on sale of leased assets - - Interest income (Note 3) (20,213) (14,023) Dividend income - Interest expense (Note 3) 31,052 60,070 Other finance costs 6,971 724 Share of results of associates before tax (Note 12) (4,993) (2,415) Changes in working capital: Inventories (176,176) 12,274 Trade and other receivables (24,660) 105,056 Held-to-maturity investments (200) Payables 206,327 119,796 Provisions 14,088 37,611 Pensions and other retirement benefits 22,206 (9,284) Cash generated from operations 876,967 1,007,424 In the cash flow statement, proceeds from sale of property, plant and equipment comprise: 2003 2002 Net book amount 8,199 4,008 Less: disposals of leased assets - - 8,199 4,008 Loss on sale of property, plant and equipment (Note 2) (4,942) (1,683) Proceeds from sale of property, plant and equipment 3,257 2,325 25 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 28 Related party transactions JMCG (state-owned enterprise incorporated in the PRC), which owns 41.03% of the Company’s shares, and Ford (foreign enterprise incorporated in the United State of America), which owns 29.96% of the Company’s shares, are major shareholders of the Company. The following is a summary of the significant transactions carried out between the Group, its associates, JMCG and its subsidiaries (including Nanchang Gear Co. Ltd. and JMCF), Ford, Isuzu-Motors Corporation of Japan (hereafter referred to as “Isuzu”) and their subsidiaries in the ordinary course of business during the year: i) Sales of goods and provision of services 2003 2002 Sales of goods: JMCG Variant Vehicle Factory 1,949 1,208 Jiangling Land Wind Vehicle Co., Ltd. 66,936 11,770 Jiangling Tractor Co., Ltd. 2,589 1,186 JMCG Import & Export Co., Ltd. 71,814 10,932 Total 143,288 25,096 Provision of services: JMCG’s subsidiaries Rental Income 1,258 1,447 ii) Purchases of goods and services 2003 2002 Purchases of goods: JMCG 269,311 263,582 Nanchang Gear Co., Ltd. 151,013 105,918 Jiangling-Lear Interior Trim Factory 124,489 101,638 Jiangxi Fuchang Climate System Co., Ltd. 93,313 77,350 JMCG Interior Trim Factory 115,986 53,399 Ford Motor Company 78,958 47,004 JMCG Variant Vehicle Factory 43,223 33,525 JMCG Industrial Co. 29,746 26,809 Nanchang Brake Plant 18,335 21,015 Jiangxi Radiator Plant 18,516 14,773 Nanchang Oil Tank Plant 16,539 11,981 Jiangxi Forging Co., Ltd. 10,145 9,438 Xinyu Xinling Nonferrous Compression Casting Co., Ltd. 4,874 5,404 Others 984 - 975,432 771,836 26 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 28 Related party transactions (continued) ii) Purchases of goods and services (continued) 2003 2002 Purchases of Services: JMCG Import & Export Co., Ltd. - Commission expenses 3,891 2,224 JMCG - Guarantee expense 725 4,650 - Rental expense 1,684 1,684 - Management expense 9,344 16,110 11,753 22,444 iii) Year-end balances arising from sales/purchases of goods/services 2003 2002 Receivables from related parties: Nanchang Gear Co., Ltd. 17,719 33,311 JMCG Import & Export Co., Ltd. 15,865 15,473 JMCG Industrial Co. 6,871 4,246 Jiangxi Fujiang After-Sales Service Co., Ltd. 4,457 3,077 Jiangling Motors Group Interior Trim Factory 1,353 - Jiangling Chassis Co. 1,387 - Jiangling Land Wind Motor Co., Ltd. 4,963 2,911 Others 703 839 53,318 59,857 2003 2002 Payables to related parties: JMCG Interior Trim Factory 32,142 36,557 Jiangxi Fuchang Climate System Co., Ltd. 11,992 14,868 Ford Motor Company 9,431 9,458 JMCG Variant Vehicle Factory 5,232 9,320 JMCG 904 6,667 JMCG Import & Export Co., Ltd. 5,725 4,696 Jiangxi Forging Co., Ltd. 1,166 2,114 Nanchang Gear Co., Ltd. 1,788 86 Nanchang Brake Plant 3,556 14 Jiangling-Lear Interior Trim Factory 15,197 - Others 191 - 87,324 83,780 iv) Directors’ remuneration In 2003 the total remuneration of the directors was RMB 68 (2002: RMB 60). 27 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) 29 Principal subsidiaries Percentage Place and date of of equity Entity incorporation interest held Principal activities Jiangling Isuzu Motors Nanchang, PRC 75% Manufacture and sale of Company Limited 10 March 1993 automobiles and spare parts Jiangling Motors Sales Nanchang, PRC 100% Sale of automobiles, engines Company 31 December 1993 and spare parts 30 Post balance sheet events On 7 April 2004, the Board of Directors proposed a final dividend of RMB 0.15 Yuan per share for the year ended 31 December 2003, totally approximately RMB129,482.1 and an appropriation to the statutory reserve and statutory public welfare fund of approximately RMB67,322 (15% of profit after tax). The proposed dividend distribution and the appropriation to the discretionary surplus reserve fund are subject to shareholders’ approval in the next general meeting. In accordance with the revised IFRS 10, “Events after the Balance Sheet Date”, the dividend and the appropriation to the discretionary surplus reserve fund after the balance sheet date will be recorded in the Group’s financial statements for the year ended 31 December 2004. 28 JIANGLING MOTORS CORPORATION, LTD. Year ended 31 December 2003 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In the notes, all amounts are shown in thousands of RMB unless otherwise stated) Impact of IFRS adjustments on the consolidated profit after tax and shareholders’ fund Net assets Net profit As reported in the accounts of the Group under PRC accounting principles 2,258,863 448,812 1. Amortisation difference of Housing Fund - (26,956) 2. Power Capability Upgrade expense - 1,642 3. Deferred Tax asset 18,675 (10,703) 4. Pension defined benefit (112,722) (22,206) 5. Minority interest (1,450) (253) 6. Staff bonus and welfare fund of Jiangling Isuzu appropriated from profit after tax - (8,081) As restated in conformity with IFRS 2,163,366 382,255 29 Chapter XI Catalog on Documents for Reference 1. Originals of 2003 financial statements signed by legal representative and Chief Financial Officer. 2. Originals of the Auditors’ Reports signed by registered accountants and stamped by accountants firm. 3. Originals of all the documents and public announcements disclosed in newspapers designated by CSRC in 2003. 4. The Annual Report in CAS. Board of Directors Jiangling Motors Corporation, Ltd. March 24, 2004 30