杭汽轮Ｂ(200771)2004年年度报告（英文版）

杭州汽轮机股份有限 公司 HANGZHOU STEAM TURBINE CO.,LTD ANNUAL REPORT 2004 Important Statement The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. The Annual Report 2004 was examined by the 5th meeting of the 3rd term of Board, and passed by all of the eight directors presented the meeting. Director Nie Zhonghai, Yan Jianhua and the independent director Hua Xiaoning are on overseas business travel. They empowered Wang Hongkang, Bo Ronghua, and Zhang Mingguang (the independent director) to vote affirmative votes on the Annual Report. The Chairman Mr. Nie Zhonghai, the General Manager Mr. Yan Jianhuan, the Chief Accountant Mr. Bo Ronghua, and the Chief Director of Accounting Department Mr. Wu Guomei hereby declares: the Financial Statement in the report is guaranteed to be truthful and complete. PriceWaterHouseCoopers Zhongtian CPA and Zhejiang Orient CPA issued standard auditing report on the Financial Report 2004 without emphasis issues and qualified opinion. This report is prepared both in English and Chinese. When there is any conflict in understanding, the Chinese version shall prevail. The Board of Directors of Hangzhou Steam Turbine Co., Ltd. April 15th 2005 Table of Contents Chapter I. Company Profile ...............................................................2 Chapter II. Financial Highlight ..........................................................3 Chapter III. Changes in Share Capital & Particulars about Shareholders 5 Chapter IV. Directors, Supervisors, Senior Executives and Employees 8 Chapter V. Management Structure ...................................................14 Chapter VI. Particulars about the Shareholders’ Meeting ................17 Chapter VII. Reports of the Board of Directors ............................20 Chapter VIII. Report of the Supervisory Committee ....................36 Chapter IX Significant Events ......................................................39 Chapter X. Documents For Reference ..........................................45 Chapter XI, Financial Report ...........................................................46 1 Chapter I. Company Profile (I) Legal Name of the Company Name in Chinese: 杭州汽轮机股份有限公司 Name in English: HANGZHOU STEAM TURBINE CO., LTD Abbreviation in English: HTC (II) Registered Address and Office Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Post Code: 310022 Website: http://www.htc.net.cn (III) Legal Representative: Mr. Nie Zhonghai (IV) The General Manager: Mr. Yan Jianhua (V) Secretary of the Board: Mr. He Jianhang Tel: (0571)85780198 Fax: (0571)85780433 E-mail: he@htc.net.cn Contact address: Securities Office, Hangzhou Steam Turbine Co., Ltd., 357 Shiqiao Rd., Hangzhou City, Zhejiang Security Affair Representative: Mr. Zhou Yongmei Tel:(0571) 85780198 Fax:(0571) 85780433 E-mail: zzym@htc.net.cn (VI) Shares Listed in: Shenzhen Stock Exchange Stock Abbreviation: Hangqilun B Stock Code: 200771 (VII) Presses Assigned by National Security Supervisory Committee for Information Disclosure: Press media: Securities Times, Hong Kong Commercial Daily Website: http://www.cninfo.com.cn (VIII) Report prepared and ready for inquire at: Securities Office, Hangzhou Steam Turbine Co., Ltd. (IX) The primary business range of the Company is: designing, manufacturing, selling and service providing of steam turbine and its supplementary equipments, elements and accessories. (X) Supplementary information: 1. Primary business registration of the company is on April 23, 1998 at Zhejiang Provincial Business Administration. With the authorization of the 1st Provisional Shareholders’ General Meeting 1998 held on September 15, 1998, the company changed its property of business into “Sino-foreign joint public company”. (For details about this event please refer to the announcement on Sept. 16th, 1998 issues of Security Times and Hong Kong Commercial Daily titled “The Public Notice of the 1st Provisional Shareholders’ General Meeting 1998” The date of business registration renewed was December 18th, 1998 and at Zhejiang Provincial Business Administration. 2. Business license No. Qi-gu-ze-zong-fu-zi 002150. 3. Tax registration No. 330165704202620 4. Consignee of the non-negotiable stocks: The 140,000,000 non-negotiable state-owned stocks of the company were consigned to: China Securities Depository & Clearing Corporation Ltd. Shenzhen Branch. 5. Public accountants invited: Overseas public accountant: PriceWaterHouseCoopers CPA. Address: 12/F Shui On Plaza, 333 Huai Hai Zhong Road, Shanghai 200021, PRC Telephone: (021) 6386 3388 Fax: (021) 6386 3300 Domestic public accountant: Zhejiang Orient Zhonghui CPA. Office address: Floor 3 &4, Mingyang Building, No. 18 Jiefang Rd., Changcheng, Hangzhou Post office: 310009 Email: zecpa@zecpa.com Tel: (0571)87178685 Fax: （0571）87188686 2 Chapter II. Financial Highlight (I) Major business data (in RMB) No. Items Amount 1 Gross profit 254,621,928.02 2 Net profit 174,190,581.58 3 Net profit deducted non-recurring gain/loss 168,628,088.41 4 Major business profit 394,396,288.16 5 Other business profit 1,823,635.25 6 Operation profit 248,016,836.76 7 Investment income -1,959,580.58 8 Allowance income 4,245,322.82 9 None business income / expense (net) 4,319,349.02 10 Net Cash flow generated by business operation 441,511,505.85 11 Net decreasing of cash and cash equivalents 274,364,162.11 12 Net profit under IAS 179,225,243.46 [Note 1]: Subjects of net profit after deducting of irregular gain/loss and amount involved. (in RMB) No Items Amount . 1 Impairment provision drawn previously and written back 3,073,321.24 2 Other none-business gain/loss after deducting of impairment 4,339.88 provisions according to enterprise accounting standard 3 Gain/loss from disposal of long-term equity investment, fixed 3,377,700.48 assets, construction in process, intangible asset, and other long-term assets. 4 Less: Income tax 892,868.43 Total 5,562,493.17 [Note 2] Non-business income was primarily come from selling small amount of materials. [Note 3] The investment gains was RMB-1,959,580.58. Among which, with equity-method, RMB245,830.58 of loss was undertaken for Hangzhou Steam Turbine Environment Engineering Co., Ltd. which invested by the company, long-term investment provision of RMB1.8 million, transferring of the share equity of Hangzhou Keximeng brought RMB 86,250 of gain. [Note 4] The non-business income are mainly: compensation for land and buildings amounted to RMB4,021,251.70, disposal of fixed asset income amounted to RMB754,728.32, compensation of materials amounted to RMB121,054.09, and quality penalty of generator amounted to RMB80 thousand. [Note 5]: Influence of IAS and other adjustments on profit after tax and net asset RMB’000 Profit after tax Net value of assets Dec. 31 2004 Dec. 31 2003 Dec. 31 2004 Dec. 31 2003 Financial Statement under China Accounting 174,190 44,003 646,394 512,745 Standard Influence of adjustments: Government fund recognized as deferred income and carried over to other income 605 2,750 3,355 2,750 di i 3 diversity Deferred income tax 4,983 6,772 4,985 2 Influence of differed tax of subsidiaries on the equity and gain/loss of minor -323 -323 shareholders -- Deferred income confirmed from fund -11,819 -11,819 transferred in -- Increment of property, plant and 29,479 29,479 equipment -- Income offset from account not able to 3,458 2,140 be disbursed Different of depreciation on evaluated property, plant and equipment -3,688 -7,039 -11,975 -8,286 Different of equity investment provision Statements under IAS 179,225 48,626 660,096 524,871 (II) Supplementary form of the profit statement: 2004 Profit of the report period Net earnings / capital Earnings per share ratio (%) (RMB) On full weighted On full weighted amortizin average amortizin average g basis g basis Major business profit 61.01 67.82% 1.793 1.793 Operation profit 38.37% 42.65% 1.127 1.127 Net profit 26.95% 29.96% 0.792 0.792 Net profit deducted 26.09% 29.00% 0.766 0.766 non-recurring gain/loss (III) Major accounting data and financial indices of past 3 years till the end of the report term In RMB No. Indices Dec. 31 2004 Dec. 31 2003 Dec. 31 2002 1 Major business turnover 977,825,970.01 439,936,177.99 326,027,763.80 2 Net profit 174,190,581.58 44,002,529.98 34,706,731.04 3 Gross Assets 1,754,500,766.93 1,022,375,377.57 685,480,273.39 4 Shareholders’ Equity (Exclude Minority Shareholders’ 646,394,236.62 512,745,380.16 476,783,502.12 Equity) 5 Earnings per share (yuan/share) 0.792 0.20 0.158 6 Net asset per share (yuan/share) 2.94 2.33 2.17 7 Net asset per share, adjusted (RMB/share) 2.90 2.25 2.02 8 Net Cash flow per share generated by business operation 2.01 1.02 0.36 (yuan/share) 9 Net earnings / capital ratio (%) 26.95% 8.58 7.28 10 Earnings per share, weighted average (yuan/share) 0.792 0.20 0.158 11 Earnings per share after deducting of non-recurring 0.766 0.186 0.156 gain/loss (RMB) [Note 1] Major business income increased by RMB537,889,800 that was 122.27% over that of the previous year. This was caused by the increasing of market demand and productivity of the company. [Note 2] The net profit increased by RMB130,188,100. which increased by 295.86% over previous year. This was benefited from the increasing of output and implementing of cost-controlling measures. [Note 3] The gross assets increased by RMB732,125,400 which increased by 71.61% over the previous year. This was caused by increasing of purchase orders which brought increasing of advance payments collected. The Company enforced the investment in technical reforming, which made the physical assets of engineering materials and constructions in process increased significantly. It was influenced by the 4 increasing of profit not distributed profit. (for details please go to Notes to the Financial Statements regarding Consolidated Balance Sheet Note 9 and 22.) [Note 4] The shareholders’ equity increased by RMB133,648,900 (26.07%) over the previous year. This was caused by increasing of net profit, surplus reserves and capital reserves. (IV) Changing of shareholders’ equity and causation In RMB Items Share capital Capital reserves Surplus Incl. Statutory Un-distributed Total of reserves public welfare profit shareholders’ equity Initial 220,000,000 163,699,760.75 46,070,962.66 23,035,481.33 82,974,656.75 512,745,380.16 Increased 0 3,458,274.88 38,235,154.81 19,044,554.97 135,955,426.77 177,648,856.46 this term Decreased 0 44,000,000.00 44,000,000.00 this term At the end 220,000,000 167,158,035.63 84,306,117.47 42,080,036.30 174,930,083.52 646,394,236.62 of term Causation The major reason for increasing of shareholders’ equity: increasing of common reserves, public welfares, and profit not distributed in year 2004. Increasing of capital reserves was due to payables not possible to be paid and transferring into capital reserves according to Enterprise Accounting Standard. Chapter III. Changes in Share Capital & Particulars about Shareholders (I) Movement of Capital Share 1. Change of share capital In shares Changed (+,-) Initial End of term Transferre reserves Sub-total d from allotted Others Bonus shares Share (I) None negotiable shares 1. Promoter’s shares, incl. State-owned shares 140,000,000 140,000,000 Domestic legal person shares Overseas legal person shares Others 2. Legal person shares placed 3. Employees’ shares 4. Preference shares or others Total of non-negotiable shares 140,000,000 140,000,000 (II) Negotiable shares 1. Common RMB shares placed domestic 2. Foreign shares in domestic 80,000,000 80,000,000 market 3. Foreign shares in overseas market 4. Others 5 Total of negotiable shares 80,000,000 80,000,000 (III) Total shares 220,000,000 220,000,000 (II) Share placing and listing 1. The company didn’t place any stock or derivative securities during the past 3 years till the end of the report term. 2. Particulars about the primary placing of stocks of the company Hangzhou Steam Turbine Co., Ltd. (the Company) was promoted solely by Hangzhou Steam Turbine Power Group Co., Ltd. (the Group), and established by the mean of foreign shares (B shares) placing in the domestic market as a shareholding company. The Group invested in the Company with net asset of RMB199,485,800 and takes 140,000,000 state-owned shares of the Company at RMB1 each. The Company primarily issued 80,000,000 of foreign shares (B shares) in the domestic market at HKD2.14 per share by means of close placing between March 31 and April 6, 1998 (equal to RMB2.29 / share at RMB:HKD=1:1.0691). On April 28, 1998, 80,000,000 B shares were approved to be listed in Shenzhen Stock Exchange. 3. The amount of capital shares of the Company in the report term was amounted to 220,000,000 shares. Including 140,000,000 of state-owned shares takes 63.64% of the total; and 80,000,000 of foreign shares listed in domestic market (B shares), takes 36.36% of the total. 4. None of bonus share distributing, capitalizing, share allotting, new share placing, acquisition/merging, transferring of transferable company bonds, capital reducing, listing of employee shares, that cause the changing of capital share and/or share structure. 5. The company issued no employees’ shares nor corporation employees’ shares (III) Particulars about the shareholders 1. At the end of report term, the company has totally 9060 shareholders. Among which, 1 is state-owned share holders, and 9059 are B share holders. The number of shareholders decreased by 1459 than the number at September 30, 2004. 2. Top ten shareholders at the end of report term. Shares held Decrease/increase Proportion Pledged or Rank Name of the shareholder at the end of over 9.30.2003 in the frozen Property of report term capital share shares 1 Hangzhou Steam Turbine Power 140,000,000 None 63.64 70,000,000 State-owned Group Co., Ltd. shares 2 HTHK-VALUE PARTNERS 8,185,164 8,185,164 3.72 N/A Current B INTELLIGENT FD-CHINA B SHS shares FD 3 CUOTAI JUNAN SECURIES HONG 3,822,489 2,468,538 1.74 N/A Current B KONG LIMITED shares 4 SKANDIA GLOBAL FUNDS PLC 3,150,494 430,000 1.43 N/A Current B shares 5 GT PRC FUND 2,999,970 None 1.36 N/A Current B shares 6 TOYO SECURITIES ASIA 1,491,398 -420,700 0.68 N/A Current B LIMITED-A/C CLIENT shares 7 内滕证券株式会社 853,947 -420,483 0.39 N/A Current B shares 8 HTHK-BOBL/MANULIFE 793,053 793,053 0.36 N/A Current B GLOBAL FUND-CHINA VALUE shares 9 Luo Yi 745,732 745,732 0.34 N/A Current B shares 10 Shen Guo 542,517 542,517 0.25 N/A Current B shares Note: 6 (1) Of top ten shareholders, Hangzhou Steam Turbine Group Co., Ltd. holds shares on behalf of the State and the others are to B-Share shareholders. (3) No shareholders hold over 5% of the Company’s shares except for Hangzhou Turbine Power Group Co., Ltd. (3) Hangzhou Steam Turbine Group Co., Ltd. is not related to any of the other 9 shareholders. It is unknown whether there is any relationship among the 9 shareholders. (6) Hangzhou Steam Turbine Group Co., Ltd. has put 70 million shares of promoter’s state-owned shares (takes 50% of the total shares it is holding in the Company, and takes 31.82% of the total share capital of the Company) into pledge to Shanghai Pudong Development Bank Hangzhou – Zhongshan Branch for the loan credit up to RMB100 million. The pledge will expire at the end of October 2005. (For details about this issue please go to the announcement about the pledging of controlling shareholder published on November 14, 2003 issue of Security Times.) (5) The controlling shareholder of the Company stay unchanged in the report term. (IV) Introduction to Hangzhou Turbine Power Group Co., Ltd. (1) The controlling shareholder Name of the shareholder: Hangzhou Turbine Power Group Co., Ltd. (the Group) Registered Office of the Group: 357 Shiqiao Rd., Hangzhou City; Legal Representative: Mr. Nie Zhonghai; Major Business: textile machine, paper-making machine, pump, casting, changing speed gear, heat exchanging instrument, digital and display system and their manufacturing and processing. Original material, equipment and parts for groups’ purchasing and making, providing services of water, electricity and gas for its owning enterprises. (2) Changing of controlling shareholder and practical controller of the Company The controlling shareholder and practical controller of the Company havn’t been changed during the report term. (3) Chart of the controlling relationship between the practical controller and the Company The Municipal Government of Hang Zhou 100% Hangzhou Steam Turbine Power Group Co., Ltd. 63.64% Hangzhou Steam Turbine Co., Ltd. (V) Particulars about the top-10 holders of current shares Rank Shares held at the Decrease/increase over Proportion in Name of the shareholder end of term (share) 9.30.2003 current B-shares % 1 HTHK-VALUE PARTNERS 8,185,164 8,185,164 10.23 INTELLIGENT FD-CHINA B SHS FD 2 CUOTAI JUNAN SECURIES HONG 3,822,489 2,468,538 4.78 KONG LIMITED 3 SKANDIA GLOBAL FUNDS PLC 3,150,494 430,000 3.94 7 4 GT PRC FUND 2,999,970 None 3.75 5 TOYO SECURITIES ASIA 1,491,398 -420,700 1.86 LIMITED-A/C CLIENT 6 内滕证券株式会社 853,947 -420,483 1.07 7 HTHK-BOBL/MANULIFE GLOBAL 793,053 793,053 0.99 FUND-CHINA VALUE 8 Luo Yi 745,732 745,732 0.93 9 Shen Guo 542,517 542,517 0.68 10 China Everlight Securities (HK) Ltd. 533,900 None 0.67 Note: The Company is not informed by the above top-10 shareholders whether there is any related connections among them. Chapter IV. Directors, Supervisors, Senior Executives and Employees I. Current directors, supervisors and senior managements (I) Basic information 1. Profiles of the current directors, supervisors and senior managements and their shareholding status No. Sex Age shareholding status Name Job taken in the Company Job term 1 Nie Zhonghai M 47 Chairman 2004.6-2007.6 None 2 Wang Hongkang M 52 Vice Chairman 2004.6-2007.6 None 3 Jin Fujuan F 51 Vice Chairman 2004.6-2007.6 None 4 Yan Jianhua M 46 Director, GM 2004.6-2007.6 None 5 Li Lie M 56 Director, standing GM 2004.6-2007.6 None 6 Ye Zhong M 36 Director, Chief engineer 2004.6-2007.6 None 7 Zhou Shaohua M 53 Director, Chief accountant 2004.6-2007.6 None 8 Zhang Mingguang M 66 Independent Director 2004.6-2007.6 None 9 Zhou Zhaoxue M 66 Independent Director 2004.6-2007.6 None 10 Hua Xiaoning M 41 Independent Director 2004.6-2007.6 None 11 Qi Guoning M 55 Independent Director 2004.6-2007.6 None 12 Chu Shuilong M 52 Chief Supervisor 2004.6-2007.6 None 13 Shao Linna F 50 Supervisor 2004.6-2007.6 None 14 Zhang Yougen M 47 Supervisor 2004.6-2007.6 None 15 Lu Jianhua M 42 Employee Supervisor 2004.8-2007.6 None 16 Zhao Ying F 48 Employee Supervisor 2004.8-2007.6 None 17 Yu Changquan M 47 Vice General Manager 2004.6-2007.6 None 18 Yan Jinghe M 50 Vice General Manager 2004.6-2007.6 None 19 He Jianhang M 47 Secretary of the Board 2004.6-2007.6 None Note: (1) None of the directors, supervisors and senior management is holding the stocks of the Company during the reporting term. (2) The Board of Directors, the Supervisory Committee and the management has been altered to new terms. The details about this are available at May 18th 2004 issues of Securities Times and Hong Kong Commercial Daily numbered Lin 2004 –05,06, 07, 08, 09,10 and the announcement published on June 22nd 2004 issues of Securities Times and Hong Kong Commercial Daily numbered Lin 2004 – 11, 12, and 13. (3) Lu Jianhua and Zhao Ying was elected by the employees’ conference and adopted by the 2nd meeting of the 3rd term of Supervisory Committee as the employees’ supervisor of the 3rd term of Supervisory Committee. (for details please go to announcement Lin2004-17 published on August 18th 2004 issues of Securities Times.) 2. Directors and supervisors taking positions in the shareholding parties 8 No. Name Name of the shareholder Job taken Job term 1 Nie Zhonghai Hangzhou Steam Turbine Power Group Co., Chairman 2003.8-2006.8 Ltd. 2 Wang Hangzhou Steam Turbine Power Group Co., Vice Chairman, GM 2003.8-2006.8 Hongkang Ltd. 3 Jin Fujuan Hangzhou Steam Turbine Power Group Co., Vice Chairman, Chairman of the 2003.8-2006.8 Ltd. Union 4 Yan Jianhua Hangzhou Steam Turbine Power Group Co., Director 2003.8-2006.8 Ltd. 5 Ye Zhong Hangzhou Steam Turbine Power Group Co., Director 2003.8-2006.8 Ltd. 6 Chu Shuilong Hangzhou Steam Turbine Power Group Co., Director, Vice GM 2003.8-2006.8 Ltd. 7 Shao Linna Hangzhou Steam Turbine Power Group Co., Director of financial department - Ltd. (II) Main working experiences of the incumbent directors, supervisors and senior executives 1. Members of the Board of Directors Mr. Nie Haizhong: Party Member; Academic credentials of junior college; Economist. He joined Hangzhou Match Factory in 1979. In 1984 he was transferred to Hangzhou Economic and Trade Committee and successively took such positions as secretary, organizer of the Party of Economic and Trade Committee, and Deputy Director of the Office of the Committee and the Office of the Party of the Committee. From April 1997 to August 2003, Mr. Nie held the positions of Chairman of the Board and General Manager of Hangzhou Thermoelectricity Group. In August 2003, Mr. Nie assumed Secretary of the Party and Chairman of the Board of Huangzhou Steamer Power Co., Ltd. He was elected as Director of the second Board of the Company in the first temporary shareholders’ meeting in October 2003 and was elected as Chairman of the second Board in the 13th Board of Directors. When the Board of Directors changed on June 19, 2004, Mr. Nie was elected as Chairman of the Board. Mr. Wang Hongkang: Party Member; Undergraduate course academic credentials; Senior Engineer. Mr Wang graduated from Power Department of Xi’an Jiaotong University in 1979 and completed a course of postgraduates’ class for advanced studies of engineering management in Zhejiang University in 2000. He joined Hangzhou Steamer Power Co., Ltd. in 1970 and took such positions as worker, technician, Deputy Director and Director of Industrial Steamer Research Center, Director of Comprehensive Administrative Dept., Director of the Board and Deputy Manager of Hangzhou Steamer Power Co., Ltd. Since May, 2005, Mr. Wang has assumed Vice Chairman of the Board and General Manager of Hangzhou Steamer Power Co., Ltd. When the Board of Directors changed on June 25, 2001, he was selected as Vice Chairman of the second Board and was reappointed as Vice Chairman of the third Board again on June 19, 2004. Ms. Jin Fujuan: Party Member; Undergraduate course academic credentials; Senior Lecturer. Ms. Jin studied turbine generator and graduated from Power Department of Shanghai Machine University in 1982 and joined Hangzhou Steamer Power Co., Ltd. in the same year, holding the positions of technician, Director of Education Office and Science and Technology Quality Dept., Vice Chairwoman of the Board and Chairman of the Trade Union. Mr. Jin was Vice Chairwoman of the first and the second Board. When the Board of Director changed on June 19, 2004, she was reappointed as Vice Chairwoman of the third Board. Mr. Yan Jianhua: Party Member; Undergraduate course academic credentials; Professorial Senior Engineer. Mr. Yan studied Steamer and graduated from Zhejiang Industrial University in 1982 and joined Hangzhou Steamer Power Co., Ltd. in the same year, holding the positions of technician, Director, Deputy Superintendent and Superintendent of Industrial Steamer Research Center and Vice Engineer-in-chief of Hangzhou Steamer Power Co., Ltd. When the Board of Directors changed on June 25, 2001, Mr. Yan was selected as Director of the second Borad and General Manager of the Company. When the Board of Director changed on June 19, 2004, he was selected as Director of the third Board and General Manager. Mr. Li Lie: Party Member; Academic credentials of special secondary school; Engineer. Mr. Li graduated in Mechanical Vocational School of Hangzhou Steamer Factory. He joined Hangzhou Steamer Power Co., Ltd. in the same year and held the positions of worker, Section Chief of the Workshop, Director of Final Assembly Workshop, Director of sale Dept. and Deputy Sales Manager. Mr. Li was Director of the first and the second Board and Deputy Manager. When the managers changed on June 25, 2001, he was employed as 9 Executive Deputy Manager. When the Board of Director changed on June 19, 2004, he was selected as Director of the third Board and Executive Deputy Manager. Mr. Bo Ronghua, Party Member; Undergraduate course academic credentials; Senior accountant. Mr. Bo completed course of Finance and Accounting in Finance and Economics Department of Hangzhou University in 1991 and graduated from Economic management class of correspondence school of Central Party School. He joined Hangzhou Steamer Power Co., Ltd. in 1977 and held the positions of Accountant, Deputy Director and Director of Financial Office and Deputy Director of Assets Dept. Mr. Bo was Director of the first and the second Board and General Accountant. When the Board of Director changed on June 19, 2004, he was selected as Director of the third Board and General Accountant. Mr. Ye Zhong: Party Member; Undergraduate course academic credentials; Senior Engineer. Mr. Ye graduated from Power Engineering Department of Dalian Technology Institute in 1990 and joined Hangzhou Steamer Power Co., Ltd. in the same year, holding such positions as technician, Deputy Director of the second Workshop and Final Assembly Workshop, Director of General Engineer Office and Deputy General Engineer. When the Board of Directors changed on June 25, 2001, Mr. Ye was selected as Director of the second Borad and General Engineer of the Company. When the Board of Director changed on June 19, 2004, he was selected as Director of the third Board and General Engineer. Mr. Zhang Mingguang: Party Member; Academic credentials of special secondary school; Senior Engineer; Be good at Economics Management. Mr. Zhang once held such positions as Director General and Secretary of the Party of hangzhou Mechanical Office, Deputy Director of Municipal Planning Commission, General secretary of municipal government; Vice-mayor; Member of the city standing committee; Deputy Director of City People's Congress. He’s now retired. Mr. Zhang was selected as Independent Director of the second Board of the Company in 2001 Shareholders' Meeting which held on May, 2002. When the Board of Director changed on June 19, 2004, he was selected as Independent Director of the third Board. Mr. Zou Zhaoxue: Party Member; Academic credentials of special secondary school; Senior Accountant; Be good at accounting and audit. He was once a teacher and cadre of finance and economics, and he ever held such positions as Deputy Director of Hangzhou Audit Bureau and division chief and Deputy Director of Audit Bureau of Zhejiang Province He has already retired now. Mr. Zou was selected as Independent Director of the second Board of the Company in 2001 Shareholders' Meeting which held on May, 2002. When the Board of Director changed on June 19, 2004, he was selected as Independent Director of the third Board. Mr. Hua Xiaoning: Nonparty personage; Statistics master; Chinese certified accountant. Mr. Hua graduated from Accounting Department of Hangzhou Electronic Engineering Institute in 1984. he got Master degree from Hangzhou Electronic Engineering Institute in 1989. Mr. Hua held the positions of Deputy Director of China CPA in Shekou of Shenzhen in 1989 and Senior Manager of Hua Qiang Certified Public Accountants of Anderson. Since 2003, Mr. Hua has been assuming General Manager of Shenzhen Dianlue Investment Co., Ltd., Independent Director of Shenzhen Fiyta Holdings Ltd. and Shenzhen Tianma Microelectronic Co., Ltd. and member of Professional Technical Committee of Shenzhen Certified Accountant. Mr. Hua was selected as Independent Director of the second Board of the Company in 2001 Shareholders' Meeting which held in may, 2002. When the Board of Director changed on June 19, 2004, he was selected as Independent Director of the third Board. Mr. Qi Guoning: Nonparty personage; Engineering doctor; Professor; Doctoral supervisor. Mr. Qi got engineering doctor degree in Zhejiang University in 1993. He once held the position of Deputy General Engineer of Hangzhou Steamer Power Co., Ltd. He is now a professor and doctoral supervisor of Machine Manufacturing and Automating Department of Zhejiang University, member of Committee of State “863 Program” Advanced Manufacturing and Automating Experts, member of Zhejiang Provincial Government Consultative Committee and member of the standing committee of CPPCC of Hangzhou. When the Board of Director changed on June 19, 2004, he was selected as Independent Director of the third Board. 2. Members of the Supervisory Committee Mr. Zhu Shuilong: Party Member; Undergraduate course academic credentials; Senior Economist. Mr. Zhu studied Party Politics and graduated from Luoyang technical College in 1987 and graduated from economic management class of correspondence school of Central Party School in 1992. In 1999, he completed a course of postgraduates’ class for advanced studies of engineering management in Zhejiang University. Mr. Zhu joined Hangzhou Steamer Power Co., Ltd. in 1977 and ever held such positions as worker, Director of wooden model workshop, HR Manager, Director of Ministry of Education and Secretary of Discipline 10 Inspection Commission of Hangzhou Steamer Power Co., Ltd. Mr. Zhu is Director of the First and the Second Board of Hangzhou Steamer Power Co., Ltd. and Director of the First and the Second Supervisory Committee of the Company. When the Supervisory Committee changed on June 19, 2004, he was selected as Director of the Third Supervisory Committee. Mr. Zhang Yougen: Party Member; Undergraduate course academic credentials; Political and ideological expert. He graduated from economic management class of correspondence school of Central Party School in 2000. Mr. Zhang joined Hangzhou Steamer Power Co., Ltd. in 1977 and ever held such positions as worker, Secretary of the Trade Union and Party office, Deputy Secretary of Discipline Inspection Commission and Director of Party Office. When the Supervisory Committee changed on June 25, 2001, Mr. Zhang was elected as Supervisor of the Second Supervisory Committee. When the Supervisory Committee changed on June 19, 2004, he was elected as Supervisor of the Third Supervisory Committee. He’s now assuming Director of Party Politics Office of the Company. Ms. Shao Linna: Member of the Democratic Revolutionary Party; Accountant. She studied finance and accounting and graduated from Finance and Economics Department of Hangzhou University. Ms. Shao joined Hangzhou Steamer Power Co., Ltd. in 1972 and ever held such positions as Accountant and Deputy Director and Director of Finance Department. She is now assuming Director of Finance Department of Hangzhou Steamer Power Co., Ltd. Mr. Shao is Supervisor of the First and the Second Supervisory Committee of the Company. When the Supervisory Committee changed on June 19, 2004, he was elected as Supervisor of the Third Supervisory Committee. Mr. Lu Jianhua: Party Member; Academic credentials of junior college. Mr. Lu joined Hangzhou Steamer Power Co., Ltd. in December 1981 and ever held such positions as worker, Secretary of Trade Union and Director of the Union Office. At the first Session of the first congress of workers and staff of our company which held on July 23, 2004, Mr. Lu was elected the vice-president of Trade Union, and is elected as worker's supervisor. At the third Session of the second meeting of the Supervisory Committee which held on August 15, 2004, he was elected as worker’s supervisor of the Third Supervisory Committee. Ms. Zhao Ying: Party Member; Academic credentials of junior college; Accountant. Ms. Zhao started to work in March 1976 and joined Hangzhou Steamer Power Co., Ltd. in December 1978. She is now the accountant of our company, member of Trade Union of Hangzhou Steamer Power Co., Ltd. and our company. At the 12th Session of the 4th congress of workers and staff of Hangzhou Steamer Power Co., Ltd. which held on September 5, 2001, Ms. Zhao was subjoined as worker’s supervisor of the Second Supervisory Committee. At the first Session of the first congress of workers and staff of our company which held on July 23, 2004, Ms. Zhao was elected as worker's supervisor again. At the third Session of the second meeting of the Supervisory Committee which held on August 15, 2004, he was elected as worker’s supervisor of the Third Supervisory Committee. 3. Senior Executives Mr. Yan Jianhua, Director and General Manager. Please read the above-mentioned director introduction. Mr. Li Lie, Director and Executive Deputy Manager. Please read the above-mentioned director introduction. Mr. Bo Ronghua, Director and Accountant General. Please read the above-mentioned director introduction. Mr. Ye Zhong, Director and General Engineer. Please read the above-mentioned director introduction. Mr. Yan Jinghe: Deputy manager; Party Member; Undergraduate course academic credentials; Engineer. Mr. Yan joined Hangzhou Steamer Power Co., Ltd. in 1982 and ever held such positions as teach of Education Dept., Workshop technician, Sales engineer, Deputy Sales Manager, Sales Manager and Deputy General Engineer. Since January 2001, Mr. Yan has been appointed to Deputy Manager of our company. When the managers changed ion June 19, 2004, he was appointed to Deputy Manager again. Mr. Yu Cangquan: Deputy Manager; Party Member; Undergraduate course academic credentials; Senior economist. Mr. Yu joined Hangzhou Steamer Power Co., Ltd. in 1977 and ever held such positions as worker, Managing Director of branch factory, Deputy Director and Director of workshop and Director of Supply Outside Processing Office. Since January 2001, Mr. Yu has been appointed to Deputy Manager of our company. When the managers changed ion June 19, 2004, he was appointed to Deputy Manager again. Mr. He Jianhang: Secretary of the Board; Party Member; Undergraduate course academic credentials; Economist. He completed a course of postgraduates’ class for advanced studies of global economy and international relations in East China Normal University in July 1997. In 1997 he joined Hangzhou Steamer 11 Power Co., Ltd. and ever held such positions as worker, Secretary and Deputy Director of Communications Unit, Deputy Director and Director of General Manager’s Office and Director of Security Office. He obtained the certificate of “Secretary of the Board of Directors” of Shenzhen Stock Exchange in 1998. Mr. He was appointed to Secretary of the First and the Second Board of Directors of our company in April 1998. When the Board of Directors changed on June 19, 2004, he was appointed to Secretary of the Third Board of Directors again. (III) Particulars about the directors and supervisors who take jobs in entities other than shareholding companies Name and position in Name of companies taking jobs Relation with the Company Position the Company Hangzhou Relian International Controlled Subsidiary of the Parent Legal Chairman Nie Trading Co. Company representative Zhonghai Zhejiang Tianyu Share Controlling Shareholding subsidiary of the Legal Co., Ltd. Company representative Hangzhou Steam Turbine Controlled Subsidiary of the Parent Director Technologies Co., Ltd. Company Hangzhou Steam Turbine Controlled Subsidiary of the Parent Legal Technologies Co., Ltd. Company representative Hangzhou Relian International Controlled Subsidiary of the Parent Director Vice Chairman Wang Trading Co. Company Hongkang Hangzhou Steam Turbine Subsidiary controlled by the parent Director Environmental Engineering Co., Ltd. company and shares held by the Company Hangzhou Nanfangtongda Gears Co., Controlled Subsidiary of the Parent Director Ltd. Company Hangzhou Steam Turbine Controlled Subsidiary of the Parent Supervisor Vice Chairman Jin Technologies Co., Ltd. Company Fujuan Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Director Technology Development Co., Ltd. Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Legal Technology Development Co., Ltd. representative Hangzhou Steam Turbine Machinery Controlled subsidiary of the Company Legal Director, GM Yan & Equipment Co., Ltd. representative Jianhua Hangzhou Steam Turbine Controlled subsidiary of the Company Director Supplementary Machine Co., Ltd. Hangzhou Zhongneng Steam Turbine Controlled subsidiary of the Company Director Power Co., Ltd. Hangzhou Steam Casting Co., Ltd. Controlled subsidiary of the Company Director Hangzhou Zhongneng Steam Turbine Controlled subsidiary of the Company Legal Director, Standing Vice Power Co., Ltd. representative GM, Li Lie Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Director Technology Development Co., Ltd. Hangzhou Steam Casting Co., Ltd. Controlled subsidiary of the Company Director Hangzhou Steam Casting Co., Ltd. Controlled subsidiary of the Company Legal representative Director and chief Hangzhou Steam Turbine Subsidiary controlled by the parent Director accountant Bo Ronghua Environmental Engineering Co., Ltd. company and shares held by the Company Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Supervisor Technology Development Co., Ltd. Zhejiang Tianyu Share Controlling Shareholding subsidiary of the Supervisor Co., Ltd. Company Director, Chief Hangzhou Zhongneng Steam Turbine Controlled subsidiary of the Company Director Engineer, Ye Zhong Power Co., Ltd. Shenzhen Dianlue Investment Co., None General Ltd. Manager Independent Director Shenzhen Youlian Shijun Enterprise None President Hua Xiaoning Management Consulting Co., Ltd. Shenzhen Tianma Micro-electronic None Independent Co., Ltd. Director 12 Shenzhen Fyata (Group) Co., Ltd. None Independent Director Hangzhou Relian International Controlled Subsidiary of the Parent Supervisor Chief Supervisor Chu Trading Co. Company Shuilong Hangzhou Steam Turbine Subsidiary controlled by the parent Director Environmental Engineering Co., Ltd. company and shares held by the Company Hangzhou Steam Turbine Controlled Subsidiary of the Parent Supervisor Technologies Co., Ltd. Company Supervisor Shao Linna Hangzhou Steam Turbine Subsidiary controlled by the parent Supervisor Environmental Engineering Co., Ltd. company and shares held by the Company Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Supervisor Technology Development Co., Ltd. Hangzhou Nanfangtongda Gears Co., Controlled Subsidiary of the Parent Supervisor Ltd. Company Vice GM Yan Jinghe Hangzhou Steam Turbine Controlled subsidiary of the Company Director Supplementary Machine Co., Ltd. Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Director Technology Development Co., Ltd. Hangzhou Steam Turbine Controlled subsidiary of the Company Legal Vice GM Yu Supplementary Machine Co., Ltd. representative Changquan Zhejiang Steam Turbine Packaged Controlled subsidiary of the Company Director Technology Development Co., Ltd. Hangzhou Steam Turbine Subsidiary controlled by the parent Supervisor Environmental Engineering Co., Ltd. company and shares held by the Company (IV) Annual remuneration of directors, supervisors and senior executives. 1. Decision making procedures and basis of remuneration for directors, supervisors and senior executives The remuneration of directors (excluding independent directors), supervisors and senior executives are set by the object, principle, standard and system of assessment in accordance to “The assessment and remuneration rules” adopted by the shareholders’ general meeting of 2002. As approved by the 4th meeting of the 3rd term of Board, the assessment method was revised (for details please find Announcement Lin 2005-03 published by March 1st 2005 issue of Securities Times), and implemented by the Assessment and Reward Commission. 2. The total of remunerations of the top 3 directors and top 3 senior executives (including basic wage, bonus, welfare, allowance, and others) In year 2004, the total remunerations of the directors, supervisors and senior executives were amounted to RMB7.1753 million the top 3 directors are totalled to RMB1.9987 million. The top 3 executives are totalled to RMB2.0094 million. 3. Allowance and others of the independent directors As approved by the shareholders’ meeting of 2003 held on June 19th 2004, the annual allowance for independent directors was increased from RMB40 thousand each up to RMB60 thousand each (tax included). The independent directors take no extra payment other than travelling expenses for attending of board meetings. 4. Distribution of annual remuneration The distribution of annual remunerations of directors, supervisors and senior executives was as: 600K-690K – 8 people, 500K-590K – 2, 300K–390K - 1, 100K–150K –1, 60K-70K 2. 5. Directors and supervisors not taking remuneration from the Company Supervisor Shao Linna takes no remuneration from the Company. She get salary from Hangzhou Steam Turbine Power Group Co., Ltd. 13 (V) Directors, supervisors and senior managements who resigned from the positions and reason Name Position Reason of resigning Yao Fusheng Independent Director For over pressure from business responsibilities, applied to quit from election of next term of Board. He Fengdi Employee Supervisor Didn’t listed in the nominees of employee supervisor when altering the union. (VI) Engaging and dismissing of managers, vice managers, financial director, and secretary of the Board. Following with the switching of Board, the Company renewed the engagement with the senior executives. All of the senior executives were extended for their job term. II. Particulars about the employees The total number of employees at the end of 2004 was counted to 2261. Which is including 1547 of production people, 129 of sales people, 650 of technicians (including engineering and technicians), 25 of financial people, 99 of executive people. 584 of the employees are above college education, takes 25.83% of the total; 302 of technicians with over intermediate certifications, takes 13.36% of the total; 89 of senior certifications, takes 13.69% of the total technical people. At the end of year 2004, the total number of employees has increased by 245 comparing with year 2003 these were because the Company has recruited a group of college and university graduates and retired soldiers following with the expanding of production. In the mean time, the company established several controlled subsidiaries through capital restructuring, and absorbed some technical mainstays, which caused the increasing of employees. 49 employees retired in the report term. There were totally 284 employees retired since 1998 to the end of 2004. According to the government document [2004]6 “The governmental opinion on socializing of retirement service” the retired employees of the Company have been adopted by the social service system (belongs to the area where they were registered as residents). Chapter V. Management Structure I. Comparison of the Practical Management Structure of the Company with the Requirements of China Securities Regulatory Commission 1. The Company is following closely with the “Listed Company Management Standard”, “Instructions for the Article of Association of Listed Companies” and “Standard of Shareholders’ General Meeting of Listed Company” and performed self-inspection. No major discrepancy was found so far. 2. In viewing of further improve the management of company, the Board has approved “Revising of Accounting Policies and Accounting Estimations”, “Management of Directors and Supervisors Sent to External Parties”, “Management of Controlled and Shareholding Subsidiaries”, “Management of Related Transactions” as well as “Management of Internal Auditing”. For details of these please refer to the announcement Lin 2004-10 published by May 18th 2004 issue of Securities Times and Lin 2004-23-24-25-26 published by Sept. 30th 2004. 3. In the report term, the Company performed special self-verification regarding “external guarantee”, “invalid occupation of capital by related parties”, “utilizing of fund raised”, “financial proxy”, and “capital restructuring”. As the result, no violation of any regulations was found regarding the above aspects. 14 II. Particulars about the independent directors’ performing of duties. In the spirit of responsible for the shareholders of the Company, the independent directors executed their duties in defending of the mid-small shareholders’ benefit following with the laws and regulations stated by “The Company Law”, “The Security Law”, “Management Rules of Public Companies”, and “The Instructions on Setting Independent Directors in Public Companies”. They devote themselves in understanding of the company operation by taking part in the Board meeting and Shareholders’ General Meeting. They back the Board up in making fair and scientific decisions for the company. The independent directors issued independent opinions respectively on the proposal of adjusting the depreciation age of fixed assets adopted by the 15th meeting of the 2nd term of Board; the proposal on joint investment with related parties adopted by the 3rd meeting of the 3rd term of Board; the proposal on drawing of 3 reserves and revising of “Remuneration Management of Senior Executives” adopted by the 4th meeting of 3rd term of Board; the annual remuneration for senior executives in year 2004; the capital occupation due to the controlling shareholder and other related parties; as well as the daily related transactions. 1、 Independent Directors’ presenting of board meetings Name of Times of board Present Present Abse Note Independe meetings shall ed ed by nted nt Director presented in the persona proxy report term lly Yao 4 2 2 0 He’s the independent director of the 2nd term of Fusheng Board; presented only the meetings of the 2nd term of Board, among which, he entrusted another to vote on the 1st provisional board meeting of 04, and 16th meeting of the 2nd term of Board. Zhang 10 10 0 0 He’s the independent director of the 2nd and 3rd Mingguang term of Board. Presented all of the meetings of the report term. Zhou 10 10 0 0 He’s the independent director of the 2nd and 3rd Zhaoxue term of Board. Presented all of the meetings of the report term. Hua 10 10 0 0 He’s the independent director of the 2nd and 3rd Xiaoning term of Board. Presented all of the meetings of the report term. Qi 6 5 1 0 He’s the independent director of the 3rd term of Guoning Board. Presented only the meetings of the 3rd term of Board, he entrusted another to vote on the 2nd meeting of the 3rd term of Board. 2、 Independent Directors’ presenting of special committee meetings Name of Times of present Present Abse Title of the meeting Independent meetings shall ed ed by nted Director presented in the persona proxy report term lly Yao Fusheng 2 1 1 0 The 4th and 5th meeting of the 2nd term of strategy committee. Entrusted another to present the 5th meeting of the 2nd term Zhang 11 11 0 0 The 4th and 5th meeting of the 2nd term of Mingguang strategy committee, the 3rd and 4th meeting of nominating committee, the 5th 15 of auditing committee, the 6th and 7th reward & assessment committee, the 1st and 2nd of the 3rd strategy committee, the 1st auditing committee, the 1st reward and assessment committee. Zhou Zhaoxue 7 7 0 0 The 3rd and 4th of the 2nd nominating committee, the 5th of 2nd auditing committee, the 6th and 7th reward and assessment committee, the 1st of 3rd auditing committee, the 1st of 3rd reward and assessment committee Hua Xiaoning 11 10 0 1 The 4th and 5th meeting of the 2nd term of strategy committee, the 3rd and 4th meeting of nominating committee, the 5th of auditing committee, the 6th and 7th reward & assessment committee, the 1st and 2nd of the 3rd strategy committee, the 1st reward and assessment committee. He absent from the 1st meeting of the 3rd auditing committee Qi Guoning 2 2 0 0 the 1st and 2nd meeting of the 3rd strategy committee 3、 Objection or amending of resolutions by the independent directors Object of the Decision Objectio Title of the meeting Name of the Reason for the n or Independent objection or amending amendin Director g Issuing of B shares to deferred The 5th meeting of the Zhang Preparation work was particular parties 2nd strategy committee Mingguang, Hua not sufficient for the Xiaoning project The proposal on investing Denied The 16th meeting of the Zhang Don’t agree to invest on Zhejiang Tianhang 2nd term of board Mingguang, Hua in enterprises related Heating Equipment Co., Xiaoning, Zhou to manufacturing of Ltd. Zhaoxue steam turbine parts in way of shareholding. It must be controlling shareholding. 2 basic managerial rules Amend The 2nd meeting of the Zhang Some of the terms including “Management of 3rd term of board Mingguang, Hua need to be further out sending directors and Xiaoning, Zhou improved. supervisors” Zhaoxue, Qi Guoning III. Particulars about the separation of business, personnel, assets, organization, and accounting with the controlling shareholder 1. Separation of business: The designing, manufacturing and marketing of industrial steam turbines were independent from that of the parent company (the Group). Some of the subsidiaries of the Group are running marketing businesses of industrial steam turbines. The purchasing of products and accessories from the Company was on ordinary prices offered to other dealers. Before June 1st, 2002, the casting company of the Group was providing roughcasts to the Company, and the supplementary machinery company of the Group was providing supplementary equipments to the Company. For the details about the transactions of steam turbines, 16 roughcasts and supplementary equipments during the report term please refer to the “Significant Associated Transactions” carried in the chapters of “Significant Events” and “Financial Statements”. 2. Separation of personnel: For the report term, the positions of Chairman and Vice Chairman of the Company were taken by the Chairman and Vice Chairman of the Group. None of the managements takes any job in the Group. The accounting staffs take no job in the Group or other associated companies. The Company was basically independent in personnel and salary management. 3. Integrity of assets: The properties of production systems, supplementary systems and equipments, industrial properties, and non-patent technologies are basically independent out of the Group. The using of trademark and staff transportation services are contracted to the Group with agreement of associated transactions. The Company has its own systems of production, supplying and sales with no competitive relationship with the Group. For the details about the transactions of trademark using and staff transportation services please refer to “Significant Associated Transactions” carried in the chapters of “Significant Events” and “Financial Statements” 4. Independency in organization: The Company is completely independent out of the Group in organization. It has its own managing and operation system. Mid-level managements were engaged by the managerial level and subject to the economical responsibility inspection. 5. Independency in accountancy: The Company was configured with its own accounting department and standardized accounting system. The Company opened its own bank account and undertook taxes according to the law. IV. Motivating and assessment systems for the senior executives The Company adopts “Annual Salary Assessing System” for the directors, supervisors and senior managements. The plan was first raised by the Supervisory Committee, and implemented upon the approval of the first provisional shareholders’ general meeting of 1998. It was modified for 3 times after that and put into operation upon the approval of the shareholders’ general meeting of 2000, 2001 and 2003. Upon the establishing of Reward & Assessment Committee been established, an assessment system were built under the principle of “motivation and obligation, contribution and rewarding, executive assessment and democracy assessment”. The “credit obligation assessment system” and “economical obligation assessment system” were established. The committee conducted assessment on the senior executives in the report term. For details about the “Assessment and Reward of Senior Executive (revised) ” please refer to the public notice Lin 2005-3 published with March 1 2005 issues of Security Times. Chapter VI. Particulars about the Shareholders’ Meeting The Company held one shareholder’s meeting in the report term. The followings are the details. (I) Notifying, calling and holding of the meeting The Company published the public notice on holding of the shareholders’ general meeting 2003 by May 18th 2004 issues of Securities Times and Hong Kong Commercial Daily. The Board made resolution on the holding of meeting and informed all of the shareholders to presented the shareholders’ meeting 2003 at 9:00 AM June 19th 2004 in the meeting room of Hangzhou Huagang Hotel (No.1 Yang Gongdi, Hangzhou). The agenda and proposals were published in the public notice and disclosed sufficiently according to the Opinion on Holding of Shareholders’ Meeting for Listed Companies. The Shareholders’ meeting 2003 was held at 9:00 AM June 19th 2004 in the meeting room of Hangzhou 17 Huagang Hotel (No.1 Yang Gongdi, Hangzhou). 9 shareholders and proxies presented the meeting, including 1 domestic shareholders, representing 140,000,000 of state-owned shares, takes 63.64% of the total capital share, and 8 of B-share holders and proxies, representing 8,462,669 of current B-shares, takes 10.58% of the total current B-shares. The shares presented in the meeting were totaled to 148,462,669 which was counting 67.48% of the total capital share. The holding of the meeting was complying with the Company Law of PRC and relative regulations setout by the Article of Association regarding legal voting number. The directors, supervisors and senior executives presented the meeting (independent director Yao Fusheng absent for business). The Board of Directors also invited delegates from the provincial government and city government, news agencies, lawyers and the domestic and overseas CPAs to presented the meeting. (II) Resolutions adopted or denied in the meeting; News press and time of the information disclosed. The meeting was hosted by Chairman Nie Zhonghai. 9 proposals were examined by the meeting. Except for “The proposal of revising the Article of Association” which is a “Special Proposal” only can be adopted by over 2/3 of the voting rights presented the meeting, the rest of 8 proposals are common proposals, which can be passed by over half of the votes presented the meeting. The shareholders and proxies examined and passed the following proposals one after another: 1. The Board of Directors’ working report for year 2003. Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 2. The Supervisory Committee work report for year 2003. Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 3. The General Manager’s Work Report for Year 2003. Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 4. The Financial Report 2003 of the Company; Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 5. Dividend distribution plan for year 2003; Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 6. The proposal of revising the Articles of Association of the Company. Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 7. The proposal of extending the contracts with PriceWaterHouseCoopers Zhongtian CPA and Zhejiang Orient CPA as the international and domestic auditors respectively. Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 8. The proposal of adjusting the depreciation age. Voting result: 140,000,000 of domestic shares vote affirmative, 8,062,705 of foreign shares vote affirmative, counted 99.73% of the total shares presented the meeting. shares objection counted for 0.27% of the shares presented, 0 shares waive. 6. The proposal of increasing the allowance for the independent directors. Voting result: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 18 The above resolutions was published by June 22nd 2004 issues of Securities Times and Hong Kong Commercial Daily (Lin 2004-11). (III) Altering of Directors and Supervisors In the shareholders’ meeting 2003, the members of the 3rd term of board were elected by normal voting system, as well as the supervisor of the 3rd term of supervisory committee representing shareholders. Each of the nominees must gain over half of the votes presented the meeting to win. 1. As elected by the meeting, Nie Zhonghai, Wang Hongkang, Jin Fujuan, Yan Jianhua, Li Lie, Ye Zhong, Bo Ronghua, Zhang Mingguang, (independent director), Zhou Zhaoxue (independent director), Hua Xiaoning (independent director), Qi Guoning (independent director), totally 11 people was elected the directors of the 3rd term of Board. Their job term will be 3 years. The details are as the followings: Nie Zhonghai: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Wang Hongkang: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Jin Fujuan: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Yan Jianhua: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Li Lie: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Ye Zhong: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Bo Ronghua: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Zhang Mingguang: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Zhou Zhaoxue: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Hua Xiaoning (independent): 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Qi Guoning (independent): 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. 2. As elected by the meeting, Chu Shuilong, Shao Linna, and Zhang Yougen were elected the supervisors of the 3rd term of committee representing the shareholders for job term of 3 years. The details are as the followings: Chu Shuilong: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Shao Linna: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. Zhang Yougen: 140,000,000 of domestic shares vote affirmative, 8,462,669 of foreign shares vote affirmative, counted 100% of the total shares presented the meeting. 0 shares objection, 0 shares waive. This shareholders’ meeting was testified on site by Lawyer Huang Lianxi, and Liu Bin from Zhejiang Tiance Law Firm and issued the following statement of opinion: The lawyers takes for: The calling and holding procedures as well as the qualification of delegates and voting procedures of the shareholders’ meeting 2003 are of complying with the laws, regulations and 19 provisions of the Article of Association, the results and resolutions adopted by the meeting are legal and valid. Chapter VII. Reports of the Board of Directors (I) Discussion and Analyze on Important Items In year 2004, under the leadership of the Board of Directors, the company has made eight following achievements: 1. Over-fulfill every examination task that the Board of Directors puts forward in an all-round way Until the end of December of 2004, the home company has finished 227 industry steam turbines, 1,537,800 kilowatts, with the goods output value of RMB 986,000,000, the number of steam turbines , the counting of kilowatt and the output value increase by 83.04% , 84.87 and 119.5 compared with the same period of last year separately; the income from sales is RMB 977,826,000, increased by 122.27% compared with the same period of last year; total profit is 2,546,219,000, increased 262.31 compared with the same period of last year; accepted contract RMB 2,520,000,000, increase by 52.27% compared with the same period of last year; retrieved payment is RBM 1,320,000,000, increase by 71.21%; overall labor productivity is RMB 305,900 per capita, increase by 93.23%; finished 201 technological reform and skill measure projects, pay the bill the fund of RMB 96,700,000. Company's business scale, asset quality, profit ability, developing ability is promoted in an all-round way; the comprehensive benefit index continues ranking No.1 among the domestic steam turbine trade. 2. Placed a sturdy foundation on realizing the “Double Goal” in year 2005 On the reality of sharply increasing industry steam turbine order, and in order to meet the user's needs, the Board of Directors proposed the following at the beginning of the year: Guarantee that the total amount of the output will " double " than 2003 in 2004, strive to make the total amount of output of 2005 realize the goal of " doubling " on the basis of 2004. In order to implement this goal, the company managers catch “the project of the bottleneck" tightly, break through item by item, and has made the achievements. First, break through "general assembling bottleneck". Expand the output, through the channels, such as "outsourcing ", etc., utilizing social resources to solve the productivity insufficient problem partly, but assembly must be finished by ourselves, so, the trial general assembling extension project becomes the company ‘s "project of the first" of 2004, it has been Completed and went into operation on December 10. Second, break through “production place bottleneck”. Through moving and adjusting the relevant workshop, warehouse, offices, vacate thousands of square meters of working place, meet the production demand to the maximum extent. Third, break through “equipment bottleneck”. nearly 30 sets of great key equipment that are purchased both at home and abroad successively being put into operation in 2004 has made the equipment production capability increased by nearly 70%. Fourth, break through "outsourcing bottleneck". The outsourcing amount increased by a large margin, it can meet the demand that the total amount of the output doubles in 2005 basically. Fifth, break through “electricity utilizing bottleneck ". The company has finished the construction of "private power station" before the coming of the summer of Electric Peak, and tided over the electricity shortage steadily. Sixth, break through "Human resources bottleneck". The company will distribute and arrange 168 workers altogether in 2004, will recruit all kinds of 196 professional personnel and 102 of vocational technical school placement internship students, and it is the year that has allocated and employed the most staff since the company is listed. 3. Move forward system reforms of subsidiary companies, realize the process restructure. In year 2004, the company has accomplished the system reform of “Zhongneng Company”, “Cast and forge company”, “Supplementary Machine Company” and “Mechanical Equipment Company”. These subsidiary companies are originally a department in the production chain of our company, through the production right diversification reform, the ones that have not merely realized production process restructure, and have excited the motive power of enterprise's development. Hangzhou Turbine Power Co., Ltd. has finished 45 steam turbines/95624 kilowatts/RMB 55,931,000 from March to December, accepting the contract of RMB 256,000,000, selling RMB 90,156,000, and the profit is RMB 8,793,400. Every index exceeds the goal made by the Company’s Board of Directors at the beginning of the year. Hangzhou turbine casts and forges Co. Ltd. realized selling RMB 69,049,300, profit RMB 7,615,500, and 4000 tons of castings from May to December. The steam turbine cylinder finished per month improves nearly 20 sets from the 7 to 8 sets 20 before the reforming. Turbine complementing machine Co., Ltd. of Hangzhou is listed in December, realizing selling RMB 6,794,400 that month, the profit is 1,501,600. After making the simulation independent accounting of subsidiary factory in the blade workshop, under the situation of not increasing basically in the equipment, personnel, place, it has realized that the output doubles. 4. Progress depending on the science and technologies, strengthen the technological reserve In 2004, the company has acquired great achievements on new product development, new craft promotion, information technical application, product quality guarantee, etc. "Large-scale super critical value steam turbine feed water pump of power generating boiler" has become the significant products of "Advanced Manufacturing Industry” in Zhejiang Province; scientific and technical result of 600MW half capacity boiler feed pump steam turbine has passes the provincial-level appraisal. "3 in 1” quiet blade is popularized on a large scale; application of the rotor processing with the combination of the advanced cutter and the newly introduced equipment, can improve produce capability in double; Implementation of CAD/CAPP/PDM project, taking accelerating technology and preparing the speed as purport, make the designer design interconnectedly and interdynamically through the network platform, design efficiency has improved greatly; The company has passed the check of ISO9000 quality system, the dependability index of product quality is promoted by a large margin; Quality Guarantee Department, through the cultivation of outsourcer's training, guiding and examining , granting the emeritus card exempt from inspection , has improved the quality assurance ability of the outsourcer. The company has strengthened the technological reserve on the basis of market prediction. Development of "the three new products", enable us to take the lead in intruding upon the new fields of “Large air-seperation driving”, “large-scale ethylene driving”, “large-scale super critical value power generating boiler feed pump driving” etc. This has proved again that we have stronger "Market-oriented” research and development ability 5. Open up the overseas market, expand the market share. In 2004, the company has spent big strength opening up the overseas market. The company has reformed the foreign trade function system, set up independent steam turbine foreign trade agency, made the new examination mechanism, given the policy, given the pressure, impelled foreign trade personnel to turn from “waiting for business" into “acquiring business”, going into a lot of countries of Asia, Europe, South America and other places and carrying on market investigation, researching, and looking for the suitable agency, promoting product distribution. Through the efforts in the foreign trade department of the company, by the end of December, the accepted overseas order is 25 million dollars altogether, increased by 212% compared with the same period of last year. 6. Consolidate the foundation of managing, improve the incentive mechanism In 2004, the company strengthened adjustment of the organization and cadres, cancelled the physics and chemistry department, spare part department and personnel organization department, and established foreign trade department, quality guarantee department and human resources department. The great adjustment of the middle level cadre, making the young cadre with strong ability can show their talent. Recruiting a middle level cadre becomes a system publicly, and it is supported by staff and received favorable comment. Company's staff's distribution system reform continues moving forward. After implementing of the marketing line, and the research institute payrolls contracted responsibility system, the production line carried on the salary total value contracted responsibility system on the examining foundation of production coefficient, production number, sales amount and goods volume. It has excited the staff's production enthusiasm greatly. 2004, the company has also strengthened technical training of the staff, independently or working with the relevant higher education schools, opening up the numerical control technology class, Graduate student's class for Projects master and spoken English class, which has greatly improved the staff's technology and professional ability. 7. Strengthen the relation with persons who are correlated with of the interests, try hard to realize "Win together" 2004, the company pays close attention to the relation with user, supplier, cooperating trader. The company positively communicated and exchanged with the persons who are correlated with all interests, established the long-term strategic partnership relation of understanding, supporting each other. The company has 21 already become the equipment strategic partner's supplier of China Petrochemical Industry. 8. Do corporate culture construction well, build the atmosphere of "doing business harmoniously” 2004, the company was fruitful in enterprise's cultural construction, the company launched the theme educational activities of "not having any excuse", strengthening the confidence of the goal that "the total amount double" in the staff, improving enterprise's administrative execution ability, which has played a positive role. (II) Company's operation situation 1. Main business scope and operation state The scope of key business of the Company: The design and manufacturing of steam turbine, auxiliary equipment and spare parts and components, sales of self-manufactured products and the provision of relevant after-sales service. The industry steam turbine that our company produces varies according to the driving objects, two big classes can be divided into: industry driving steam turbine and industry electricity generating steam turbine. Industry driving steam turbine is mainly used in rotatory machinery, compressor, air-blower, pump, squeezer, etc. So it is widely used in industrial fields, such as oil refining, chemical industry, chemical fertilizer, building materials, metallurgy, electricity, light industry, environmental protection, etc. It is the key power equipment in all kinds of large-scale commercial plants. Industry electricity generating steam turbine is for driving generator mainly, and offer heat energy at the same time. So it is widely used in the enterprise private station of every industrial department, regional cogeneration project of heat and power, and such fields as gas - the steam turbine unites the circulation hydropower station, hydropower station of the municipal refuse. In report period, compared with the first report period the core business and structure, profit ability of our company have not changed. 2. The major business profit composition analyzing according to the product category and area The composition of major business according to the product category can be divided as follows: In RMB 0’000 Major Major Rate of business margin Products Major Major rate of business cost increasin business business margin income increasing g and turnover cost (%) increasi and decreasin decreasing g ng and compared compared decreasi with that of with that ng last year of last (%) year (%) compare d with that of last year (%) Industrial steam 93,123 55,590 40.30% 127.85% 121.82% 1.62% turbine Casting 256 230 10.16% -36.63% -44.71 13.13% products Auxiliary 26 18 30.77% -94.63% -94.04% -6.83% machinery Others 4,378 2,332 46.73% 95.84% 129.53% -7.81% Total 97,783 58,170 40.51% 122.27% 117.09% 1.42% [Note] “Others” in products category refers to spare parts of steam turbines, localization of imported steam turbines, and steam turbine upgrading, etc. 22 (2) The composition of major business according to area In RMB 0’000 Area Major Major rate of major major rate of business business margin (%) business business cost margin turnover cost income increasing increasin increasing and g and and decreasing decreasin decreasing compared g compared with that of compared with that of last year (%) with that last year (%) of last year (%) Domestic 96,242 56,987 40.79% 127.04% 123.96% 0.82% Abroad 1,541 1,183 23.23% -3.99% -12.37% 7.36% Total 97,783 58,170 40.51% 122.27% 117.09% 1.42% 3.Operations and achievements of the major holding and joint stock company In RMB 0’000 Name of companies Business nature Regis Fouda Equity Gross Net asset 2004 年度 tered tion portion Assets till till the end the end of of 2004 capita date of the 2004 Net profit of l Compa 2004 ny Zhejiang Steam Turbine Packaged Technological 3160 2001.1 95% 4061.50 3501.99 288.52 Technology Development Co., Ltd. development of automatic control and instrument control Hangzhou Steam Turbine Contracting of 2000 2000.4 45% 2327.16 1987.74 -51.03 Environmental Engineering Co., Ltd. environmental protection projects Zhejiang Tianyu Holding Company Industrial investment, 10000 2004.12 30% 10000 10000 0 Ltd. Enterprises planning Hangzhou Zhongneng Steam 1000 2004.2 51% 8385.55 1414.92 414.92 The steam Turbine Power Co., Ltd. turbine designing and making Hangzhou Steam Casting Co., Ltd. Iron and steel casting 2200 2004.3 51% 5114.59 2693.23 493.23 2064 2004.10 88% 4909.46 2155.07 91.07 Hangzhou Turbine steam turbine complementing machine complementing Co., Ltd. machine making [Note 1] In report period, the impact on net profit of our company from above-mentioned six holding and joint stock companies' investment profit has not been up to 10%. [Note 2] The Company has finished its stock right transferring to Hangzhou Keximeng Science Technologies Co., Ltd. (hereafter referred to as "HangZhou Keximeng") on September 26, 2004. “Hangzhou Keximneg” was established in March of 2000, the registered capital was RMB 10,000,000, among them our company provided funds of RMB 3,450,000, accounts for 34.5% of the total value of the registered capital. Because this company suffers the loss for a long time, and to turn losses into profits is hopeless; The Company’s second provisional meeting of Board of Directors of 2003 has made the resolution, proposed to reform the system and restructure it. (As shown in the company's provisional announcement No. 2003-20 on "securities Times Daily Magazines" on September 5, 2004.) On June 29 2004, with Mr. Chang Liang (staff of Hangzhou Keximeng) signing "Stock Right Transfer Agreement of Hangzhou Keximeng Science Technologies Co., Ltd.", it is agreed to transfer the 34.5% stock 23 right of “Hangzhou Keximeng” held by our company, to Mr. Chang Liang at a price of RMB 86.250. According to this “Stock Right Transfer Agreement”, only if Mr. Chang Liang had paid off the stock right transferring funds, can he enjoy the rights and interests of these stock rights, and undertake the shareholder's obligation. It was on September 26, 2004 that Mr. Chang Liang paid of the above-mentioned funds. The company's fourth provisional meeting of board of directors of 2004 examined and approved this stock right transfer. Because our company has fully drawn total RMB 1,717,300 which invested on the reducing value of long-term investment preparation to Hangzhou Keximeng on September 30, 2004. It is reflected in company's balance sheet by December 31 , 2003 that the net value of long-term investment on Hangzhou Keximeng is 0. [Note 3] The company has partly drawn “Long-term Investment Value Reducing Reserve" on Hangzhou Turbine Environmental Engineering Co., Ltd. Turbine Environmental Engineering Co., Ltd. of Hangzhou was established in April of 2000, registered capital is RMB 20 million yuan, among them our company provides funds of RMB 9 million yuan, accounts for 45% of the registered capital. Seeing that this company has already suffered the loss for two years in succession, according to the related rules of Enterprise's Accounting System on Long-term Investment Value Reducing Preparation, in order to reflect the prudent accounting principle, dissolve the business risk, suggested by the motion of company’s First Session of Third Board of directors’ Auditing Commission Meeting, the company’s the fourth Session of Third Board of Directors approved, according to measure and calculate in real situation, that the draw be RMB 1,800,000 for the Long-term Investment Value Reducing Preparation of 2004. (As shown in the company's provisional announcement No. 2005-01 on "securities Times Daily Magazine" on March 1, 2005.) [Note 4] in report period, the business performances of above-mentioned six holding and joint stock companies are as follows: (1)Zhejiang Turbine Complete Set Technology Development Co., Ltd., manages the related automatic control of the steam turbine, instrument controlling equipment and steam turbine complete project. In report period, it has realized the income of RMB 43,131,600 yuan, total profit RMB 4,702,200 yuan, and net profit RMB 2,885,200 yuan. (2) Hangzhou Turbine Environmental Engineering Co., Ltd., manages the The environment and water treatment project contraction, environmental protection equipment, etc. In report period, it has realized the income of RMB 6,182,200 yuan, total profit RMB 505,200 yuan, and net profit RMB 510,300 yuan. (3)Zhejiang Tianyu Share Controlling Co., Ltd., mainly manages industry investment, enterprise planning etc. Establish in December of 2004, there is not a business performance yet in report period. (4)Hangzhou Zhongneng Turbine Power Co., Ltd., manages mainly designing,producing and contracting small and medium sized thermoelectric steam turbine project. From March to December of 2004, it has realized the income of RMB 90,156,000 yuan, total profit RMB 8,793,400 yuan, and net profit RMB 4,149,200 yuan. (5)Hangzhou turbine casts and forges Co., Ltd., manages mainly casting iron and steel. From May to December of 2004, it has realize the income of RMB 69,049,300 yuan, total profit RMB 7,615,500 yuan, and net profit RMB 4,932,300 yuan. (6)Hangzhou Turbine Complementing Machine Co., Ltd., manages the making the complementing machine of steam turbine mainly.In December of 2004, it has realized the income of RMB 6,794,400 yuan, total profit RMB 1,501,600 yuan, and net profit RMB 910,700 yuan. 4. The situation of main supplier, customer In RMB 0’000 Total amount Proportion (%) Purchasing from first five 13,600 Account for 18.30% of purchase proportion of total suppliers value 24 Selling to first five customers 37,923 Account for 38.78% of sales proportion of total value 5. Problems and difficulties in management and solutions During the report term, with the speeding up of domestic “urbanization, privatization and industrialization” course, and speedy increase of electricity consumption, a new round of upsurge of rushing to purchase the electric equipments has been raised everywhere, so as to expedite the construction of electricity projects. As a result, the steam turbine market is in short supply. So, the conflict between great market requirement and insufficiency of manufacture ability has been the biggest problem for all the steam turbine manufacturers in China. In order to solve this problem, our company takes the following measures: First, devote more efforts to technological transformation. Since the last half year of 2002, our company has continuously invested RMB 300 million in technological transformation and output increase. To predict, all the technological transformation projects can finish and put into production and then take effects. Second, improve ability of outside expansion and processing. Since the last half year of 2003, the company has devoted more efforts to outside expansion and processing of the spare parts. The sales of domestic spare parts suppliers has increased and we went abroad to looking for cooperation partners of outside expansion and processing of spare parts. We predict that about 50% out our new products must rely on outside cooperation. Third, improve output ability of units and spare parts by means of capital operation. The company has approved to set up such related subsidiary companies as “cast and forge company”, “complementing machine company”, “Zhongneng Steaming Power Company” and “steaming turbine fittings company”, etc. by means of private capital infusion, so as to increase the output ability of units and key spare parts in the mode of “specialized cooperative producing of spare parts”. The practice in 2004 shows remarkable results of this measure. Fourth, push the reform of distribution system forward. At present, the company makes the scheme of distribution system reform whose core is “achievements related and cost controlled”. As the output increases, the income of employees increases, too. So the enthusiasm of staff will be fully aroused. Fifth, realize working in three time periods. On the premise of fulfilling all the security measures, the staff will continuously work on key process and key points in three time periods, so as to alleviate produce bottleneck and improve output ability. 6. Narration of profit prediction The company respectively issued “Announcement on predicted achievement increase in 2004” on Security Times on June 23, 2004 (please read the Company’s No. 2004-14 announcement) and predicted profit situation of this year in Report in the Third Quarter of 2004 of the Company. Now the actual net profit is RMB 174,190,581.58 and the profit of each share is RMB 0.7918, not lees than 10% of what we have predicted and not higher than 20% of what we have predicted. Therefore, the Company doesn’t need to make additional explanation. (III) Investment situation during the report term 1. Use of collected funds During the report term, the Company didn’t collect funds. The funds collected last time has been used up in 2002. 2. Progress and income of important programs invested with non collected funds (i) During the report term, the Company invested RMB 135 million in technological transformation, which is 54.39% higher than that of last year. The main purpose of this investment is to improve output ability of industrial steam turbine. We’ve introduced the following 4 equipments: German D160 numerical controlled rotor lathe, Italian D160numerical controlled rotor machine tool center, GermanΦ3.5m numerical controlled stand lathe and CzechicΦ200 numerical controlled processing center. These equipments have been fixed by the end of 2004 and can put into production in the first and the second quarter of 2005. (ii) During the repot, the Company has invested totally RMB 64.56 million to set up 3 subsidiary holding 25 companies and 1 shared company. The details are as follows. A. RMB 5.1 million was invested to set up Hangzhou Zhongneng Steaming Power Co. Ltd. This company is transformed from Hangzhou Heat Energy Power Co., Ltd., a subsidiary holding company of former Hangzhou Steaming Power Co., Ltd. The 14th Session of the second Board of Director has approved to participate the transform of the company with the precondition of share holding (please read No. 2003-28 Announcement issued in Security Times on October 28, 2003). After transform, the new company was named “Hangzhou Zhongneng Steaming Power Co. Ltd.” Among the total registration capital of RMB 10 million, the company has invested RMB 5.1 million, which was 51% of the total registration capital. 12 natural persons, including Li Ximing, Xian Jinfa and so on (they are all technological and managing cadremen of former Hangzhou Heat Energy Power Co., Ltd.), have invested RMB 4.9 million, which was 49% of the total registration capital. All parties invested in cash. Company’s address: Rm 357, Shiqiao Rd., Hangzhou. Legal representative: Li Lie. Product range: designing and manufacturing of steam turbine and its accessories and contracting technological consulting of middle and small fire electricity generation projects. The company was set up on February 27, 2004 with approval of Hangzhou Administration Bureau of Industry and Commerce. B. RMB 11.22 million was invested to set up Hangzhou Steam Foundry and Forging Co., Ltd. This company is set up by our Company and Mr. yang Lianrong, the actual controller of Hangzhou Kaixin Steel Casting Co., Ltd. The 11th Session of the second Board of Director of our company has approved to invest about RMB 20 million to set up this company (please read No. 2003-27 Announcement issued in Security Times on October 22, 2003.) Among the total registration capital of RMB 22 million, the company has invested RMB 11.22 million, which was 51% of the total registration capital. Yang Lianrong, a natural person, has invested RMB 10.78 million, which was 49% of the total registration capital. All parties invested in cash. Company’s address: Tangqi Industrial Estate, Yuhang Dist., Hangzhou. Legal representative: Bo Ronghua. Products range: manufacturing of colophony sand casting steel, colophony sand casting iron and. The company was set up on March 1, 2004 with approval of Hangzhou Administration Bureau of Industry and Commerce. C. RMB 18.24 million was invested to set up Hangzhou Steam Turbine Accessories Co., Ltd. This company is transformed from Accessory Branch Company, our subsidiary company. The 14th Session of the second Board of Director of our company has approved to invest about RMB 13 million to set up this company. At that time, The Board decided that the registration capital was RMB 24 million, among which our company invested RMB 13 million, which was 51% of the total registration capital, and the natural persons (they are all managers and technological and sales cardremen of Accessory Branch Company) invested the rest RMB 11 million (please read No. 2003-28 temporary Announcement issued in Security Times on October 28, 2003). Later, because the natural persons cannot invest the same capital in the decision, the Meeting of general manager office of our company proposed and the third temporary Board of Directors of 2004 approved that our company invested RMB 18.24 million. The registration capital of this company is RMB 20.64 million, among which our company invested RMB 18.24 million, which was 88.37% of the total registration capital. 5 natural persons, including Li Shijie, etc. (they are all managing and technological cardremen of Accessory Branch Company), invested RMB 2.4 million, which was 11.63% of the total registration capital. All parties invested in cash. Company’s address: Rm. 357, Shiqiao Rd., Hangzhou. Legal representative: Yu Changquan. P range: manufacturing of set equipments and fittings of steam turbine accessories and heat exchangers. The company was set up on October 12, 2004 with approval of Hangzhou Administration Bureau of Industry and Commerce. D. RMB 30 million was invested to set up Zhejiang Tianyu Holding co., Ltd. The third Session of the third Board of Directors of our company improved to invest RMB 30 million to set up Zhejiang Tianyu Holding Co., Ltd. This company is invested by our company, Hangzhou Caikai Investment Co., Ltd. (subject to Hangzhou Finance Bureau), Zhongda Real Estate Co., Ltd. (the subsidiary company of Zhejiang Zhongda Group Co., Ltd.) and Ningbo Hesheng Group Co., Ltd. (a private enterprise). The registration capital of this company is RMB 100 million. Our company and Hangzhou Caikai Investment Co., Ltd. respectively invested RMB 30 million, which was 30% of the total registration capital, and Zhongda Real Estate Co., Ltd. and Ningbo Hesheng Group Co., Ltd. respectively invested RMB 20 million, which was 20% of the total registration capital. All parties invested in cash. Company’s address: Rm. 155, Qingchun Rd., Hangzhou. Legal representative: Nie Zhonghai. Products range: industrial investment, enterprise scheme and management and other legal programs which don’t have to submit for approval. The company was set up on December 7, 2004 with approval of Hangzhou Administration Bureau of Industry and Commerce. 26 (IV) Finance situation during the report term 1. The form of main changes of financial data during the report term: In RMB 10 thousand Target Project December 31, December 31, 2003 Increase and Reasons of 2004 Decrease Increase and Proportion of 2003 Decrease to 2004 Total Asset 175,450 102,238 71.61% Please read Section 2 of the Annual Report (III) (Note 3) Shareholder’s 64,639 51,275 26.06% Please read Section Interests 2 of the Annual Report (III) (Note 4) Profits of Main 39,440 17,109 130.52% It results from Business increase of sales income Net Profit 17,419 4,400 295.89% Please read Section 2 of the Annual Report (III) (Note 2) Net Increment of 27,436 11,455 139.51% It results from Cash and Cash increase of orders and advance Equivalents receipts 2. During the report term, there is not big asset loss or loss resulted from related responsibility of external surety. 3. Explanation on changes of accounting estimation of our company During the report term, the company changed the accounting standard of depreciation of fixed assets. The Company adopts average age method in accounting of fixed asset depreciations. With ignoring of impairment provisions of the fixed assets, the depreciation rates are determined upon the categories, predicted serving life, and predicted net scrap value rate (4% of original value) of the fixed assets. Currently the following depreciation scheme is adopted: Category of Fixed Assets Depreciation Age（Year） Annual Depreciation（%） Houses & Buildings 40 2.4 Machinery & Equipment 14-18 5.3-6.9 Office Facilities 5-10 9.6-19.2 To meet with the demand of market, the Company will increase the productivity dramatically. Following with the increasing of productivity, physical consume of fixed assets is becoming greater. This is certainly leading to value losing of the fixed assets. In the mean time, along with the progress of science and technology, the intangible loss of the fixed asset is also increasing. In this point of view, the old depreciation scheme will not benefit the Company’s long-term development. For the purpose of consolidate the capital base of the Company, reflect the cautious principle of accounting, strengthen the ability of anti-risk, speed up the Company’s development, it is necessary to adjust the depreciation scheme of the fixed assets. The fifth meeting of audit committee of the Board of Director discussed and agreed and the 15th meeting of the second Board of Directors discussed and approved and 2003 Shareholders’ General Meeting discussed and approved to adjust the accounting standard of depreciation of fixed assets. The new standard is as follows. 27 Category of Fixed Assets Depreciation Age（Year） Annual Depreciation（%） Houses & Buildings 20-30 3.2-4.8 Machinery & Equipment 8-15 5.4-12 Office Facilities 5 19.2 (Please read the details in No. 2004-2 temporary Announcement issued in Security Times on April 15, 2004 and No. 11 Announcement issued in Hong Kong Commercial Daily on June 22, 2004.) (V) Great changes have taken place in manufacture and management situation, macroscopical policies and regulations, and they have affected or are affecting or will affect finance and managing achievements of the company. During the report term, although we have made good managing achievements, the Board of Directors need to specially remind investors to pay attention to the risks of the company running owing to the following things which happened or are happening or will happen. 1. Our industrial steam turbine is invested product. Its market requirement is closed linked with national macroscopical economical situation, especially national investment policies. During the report term, our country has issued a series of “macroscopical adjustment” policies. The implementation of these policies will take great effects on manufacture and management of our company. 2. With the more and more efforts of national macroscopical adjustment, especially after the State Council issued Emergent Notification on Suggestion to Strictly Refrain Disorderly Building Projects of Power Station transmitted from National Development and Reform Commission, the management of our company will be influenced by the following two aspects: The first is order receipt. Because of “clearing projects which are been built”, some of our projects might be postponed or even canceled, which will affect the number of orders of our company. The second is payment reclaim. Because of “improving financial adjustment and credit management ”, some users might be in shortage of money, and thus, it will be more difficult for us to ask for payment and accounts receivable will increase. 3. Our steam turbine is a long periodic product. The average manufacturing period is about 6 to 12 months. Therefore, orders received this year will transform to sales the next year. The present orders show that the main conflict we will be faced with in 2005 to 2006 will still be conflict between “limited output ability and great market requirement”. 4. Following with the ending of the 3 years transition period of WTO, the international enterprises speedup and enhanced the invasion in Chinese market. Most of them chose to cooperate with domestic steam turbine manufacturers to establish joint ventures. The leading position of the Company is facing a severe test. 5. Because of the shortage of electricity in Hangzhou, our company equipped 5 diesel dynamotors so as to ensure well running of production. So the cost of electricity will greatly increase. Meanwhile, in order to improve output ability, we will increase investment to technological transformation and expand outside cooperative processing. Because more staff work overtime, the cost of labor forces will increase too. All the facts mention above will take negative effects on increase of gross profit of our products. Therefore, the Board of Directors specially reminds investors to take above-mentioned uncertain factors into sufficient consideration and pay close attention to investment risks while invest stocks of our company.. 28 (VI) Zhejiang East CPA and PriceWaterHouseCoopers CPA issued standard audit report of non stress items and non reserved opinion of the Annual Financial Report in 2004 of our company. The Board of Directors doesn’t need to explain any item. (VII) Managing plan in 2005 1. Managing plan of the company in 2005 (i) Ensure accomplishment of manufacturing and managing task and meet market requirement. The conflict between “limited output ability and great market requirement” is still obvious. In 2005, the company has decided the task of industrial steam turbine manufacture, namely, 310 steam turbines/2.5 million kw./RMB 191,300 and the number of steam turbines, the number of kw. and porudct value are respectively 36.56%, 62.57% and 94.02% higher than those of 2004. Such thing never happened in the company’s history of 47 years. Although the company has make much preparation in 2004 for “double output ability” in 2005, there are still lots of choke points and difficulties. The company requests all the staff to carry forward the spirit of “holding together and working hard, constantly working”, and achieve the goal of “double output ability”. (ii) Improve sense of crisis, pressure and responsibility, and spare no effort to occupy the market. In 2005, the competition of domestic steam turbine market becomes flintier. On one hand, with the adjustment of national macroscopical economical policies, overheated steam turbine market requirement will be restrained. On the other hand, all the manufacturers will devote more efforts on technological transformation of steam turbine and expedite cooperation with big foreign companies so as to improve supply ability. The situation of shortage of steam turbine will change and the competition will be flintier. Therefore, the company requests all the staff to see clearly present situation, improve sense of crisis, pressure and responsibility and stoutly protect our preponderant position in domestic industrial driving steam turbine market. We need to improve contact and communication with such fields as domestic petrochemistry, electric power and metallurgy, establish outstanding strategic partner relations, and continue to regard such driving projects as petrochemistry and metallurgy as key sales objects and spare no efforts to occupy the market. We must grasp the opportunity of preferential development of “recycle economy”, try our best to develop such programs as rest heat use of cement industry, cooperative supply of heat and electricity, cooperative recycle of steam turbine and gas turbine, and increase occupancy of our products in these fields. We must pay attention to domestic and international market. On the basis of keeping stable in Indian electricity market, we must enter into such driving fields as petrochemistry, metallurgy and timber. We will actively develop such potential markets as Turkey, Bengal, Vietnam, Burma and Russia, and increase share of international market by seeking famous international agent, BOT or joint venture. (iii) Increase investment on research, expedite technology development and improve core competition ability. Technological transformation is always the base of our leading position in domestic market. In order to further expedite technological development, the company decided to increase the expense of research and development to 30% of sales income. The expense will be used in new product development, new technology research and technological achievement transfer. We must continue to optimize technology introduction and expedite the research process of “exercising Tri-element flow technology to improve efficiency of 600MW power station water supply turbine” of postdoctoral workstation. By using the carrier of our national “technology center”, we will take the road of “produce, study and research”, research and develop industrial driving steam turbines with large capability and high rotate speed. We will push building of enterprise information-based program forward, actively search measures to inspirit technicians to innovate and establish a strong group with great creation ability. (iv) Change extensive economy into intensive economy and improve standard of enterprise operation and management. With the rapid increase of economic volume and output ability, the mode of management must be changed from extensive way to intensive way. It’s not only external requirement of company’s development to improve standard of enterprise operation and management, it’s also important guarantee for achievement of “double output ability” in 2005. Therefore, the company will continue to 29 improve distribution and inspiritment system and examination system. The income distribution of the staff will be linked with operation target and work achievement. Encouragement salary system will be established and those who make great achievements in technology, sales, management and manufacture, or who tackle key technological problem or make great technological achievement will be put a premium on. Thus, it will inspire enthusiasm and creation of the staff. The company will put HR management forward, improve training of cardreman, pay attention to cultivation of talents and use of social human resources, and introduce all kinds of talents we need. Moreover, the company will enhance all the basic managing work, actually do well in energy saving, income increasing, cost decreasing and checking, and improve economic efficiency. Aiming at increase of outside cooperative processing, the company will improve technological guide and service, and ensure improvement of those products. Aiming at the facts that output increases and workshop is not enough, the company will take effective ways to improve management of workshop and safe production, and put an end to injury and death. Meanwhile, the company will strengthen cultural construction and try to create a cultural atmosphere of “harmony, correspondence, decentness and aspirant”. 2. Explanation on profit prediction of the company in 2005 The Board of Directors tables a general requirement to running goal in 2005, namely, the output in 2005 must double on basis of that in 2004. The gist of the goal is as follows: In 2005, the company has decided the task of industrial steam turbine manufacture, namely, 310 steam turbines/2.5 million kw./RMB 191,300 and the number of steam turbines, the number of kw. and porudct value are respectively 36.56%, 62.57% and 94.02% higher than those of 2004. There are many uncertain factors which may influence profit increase, including markup of energy and raw materials, outside processing of massive spare parts and increase of cost of labor forces, etc. Therefore, it’s difficult to predict specific data of profit in 2005. However, the company will strictly execute information exposal regulation issued by China Securities Regulatory Commission, and predict the achievement situation of the next report period in annual report. We appeal all the investors to pay attention to it. The Board of Directors predicted that the achievements in the first quarter of 2005 will be 50-100% higher that that in the same period of last year. (In the first quarter of 2004, the net profit is RMB 33,115,894.35 and each share gets RMB 0.15.) (VIII). Daily Routine of the Board of Directors 1. The Meeting and resolution contents during the report term During the report term, the Board of Director held 10 meetings. The details are as follows. (i) The first temporary meeting of the Board of Directors of 2004 was held in the meeting room of Hangzhou Steaming Power Group Co., Ltd. (Rm. 167, Huanchengbei Rd., Hangzhou) in the morning of March 4, 2004. 11 directors should attend the meeting. 9 directors attended the meeting. Yao Fusheng, an independent director, was absent because of business and he consigned Zhang Mingguang, an independent director, to vote. Li Lie, a director, was absent because of business and he consigned Bo Ronghua, a director, to vote. All the supervisors and other senior managements of the Company presented at the meeting. The meeting discussed the project about investment and development of real estate of Zhuji Zhanjiashan residential center and agreed to participate in field bid of the project. Because it was uncertain whether the bid will succeed, the resolution of the meeting will not announce to the public. After voting, the proposal was approved, with 11 agreements, 0 blackball and 0 abstention. (Among this, Yao Fusheng consigned Zhang Mingguang to exercise the right to vote of agreement and Li Lie consigned Bo Ronghua to exercise the right to vote of agreement to the proposal.) The company failed in the filed bid of this project finally. (ii) The 15th meeting of the second Board of Directors was held in No. 2 Meeting Room of Hangzhou Xihu Hotel in the morning of April 13, 2004. 11 directors should attend the meeting. 11 directors attended the meeting. Except He Fengdi, a worker’s supervisor who was absent because of business, all the supervisors and other senior managements of the Company presented at the meeting. The meeting respectively heard the annual report of 2003 of Chairman of the Board, General Manager and General Accountant, recent working report of Audit Commission of the Board and Salary and Examination Commission of the Board, and explanation about the proposals. 30 The meeting discussed and approved the following resolutions by means of registered ballots: a. Discussed and approved 2003 Annual Report and its abstract, and agreed announcement. b. Discussed and approved 2003 Work Report of the Board of Directors. c. Discussed and approved 2003 Work Report of General Manager. d. Discussed and approved 2003 Accounting and Financial report. e. Discussed and approved 2003 Profit Distribution System. f. Discussed and approved the proposal to revise “Corporation Constitution”. g. Discussed and approved the proposal to adjust time of depreciation of fixed assets. h. Discussed and approved the proposal to retain Zhejiang East CPA and PriceWaterHouseCoopers CPA as international and domestic audit organization in 1004. After item-to-item voting, the results of above-mentioned proposals are: 11 agreements, 0 blackball and 0 abstention. (Please read No. 2004-2 temporary announcement issued in Security Times and Hong Kong Commercial Daily on April 15, 2004.) (iii) The second temporary meeting of the Board of Directors in 2004 was held in a way of message. From April 17 to April 21, all the directors, supervisors and senior managements of the Company checked and approved the report of the first quarter in 2004, and tabled written revising opinion. The meeting discussed and approved the report of the first quarter in 2004 in a way of registered ballots, and agreed announcement. After voting, the proposal was approved, with 11 agreements, 0 blackball and 0 abstention. (iv) The 16th meeting of the second Board of Directors was held in the meeting room of Babaili Hotel on May 15, 2004. 11 directors should attend the meeting. 10 directors attended the meeting. Yao Fusheng, an independent director, was absent because of business and he consigned Zhang Mingguang, an independent director, to vote. All the supervisors and other senior managements of the Company presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. a. Discussed and approved the proposal on nomination of candidate directors of the third Board (including independent directors); b. Discussed and approved the proposal on raising allowance of independent directors; c. Discussed and approved Management of Change of Accounting Policies and Accounting Estimation; d. Discussed and approved the proposal on holding annual Shareholders’ General Meeting of 2003. After item-to-item voting, the results are as follows: Item A, Item C and Item D got 11 agreements, 0 blackball and 0 abstention. (Among these, Yao Fusheng consigned Zhang Mingguang to exercise the right to vote of agreement). Item B got 7 agreements, 0 blackball and 4 abstention. (Among this, 3 independent directors, Zhang Mingguang, Zou zhaoxue and Hua Xiaoning, voted for abstention. Yao Fusheng consigned Zhang Mingguang to exercise the right to vote of abstention.) (Please read No. 2004-5 temporary announcement issued in Security Times and Hong Kong Commercial Daily on May 18, 2004.) (v) The first meeting of the third Board of Directors was held in the meeting room of Hangzhou Huagang Hotel (Rm. 1, Yanggong Causey, Hangzhou) on June 19, 2004. 11 directors should attend the meeting. 11 directors attended the meeting. All the supervisors and other senior managements of the Company presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. a. Elected Nie Zhonghai Chairman of the third Board of the Company; Elected Wang Hongkang and Jin Fujuan Vice Chairman of the third Board; b. Retained Yan Jianhua as General Manager of the Company; c. Retained Li Lie as Executive Deputy Manager of the Company; Retained Yan Jinghe and Yu Changquan as Deputy Manager of the Company; Retained Bo Ronghua as General Accountant of the Company; Retained Ye Zhong as General Engineer of the Company; d. Retained He Jianhang as Secretary of the Board of Directors; Retained Zhou Yongmei as representative of security business; e. Retained Qi Guoning as Deputy Director of Strategy Commission of the Board of Directors. After item-to-item voting, the results of above-mentioned proposals are: 11 agreements, 31 0 blackball and 0 abstention. (Please read No. 2004-12 temporary announcement issued in Security Times on June 22, 2004.) (vi) The third meeting of the Board of Directors in 2004 was held in a way of message on July 11, 2004. 11 directors should attend the meeting to discuss and vote. 11 directors attended the meeting to discuss and vote. The meeting discussed the proposal on raising investment to Hangzhou Steam Turbine Accessory Co., Ltd. According to the resolution on setting up Hangzhou Steam Turbine Accessory Co., Ltd. discussed and approved in the 14th meeting of the second Board of Directors held on October 26, 2003, the meeting decided that the registration capital was RMB 24 million, among which the Company invested RMB 13 million, which 51% of the total registration capital, and the natural persons (they were operator and technological and business cardremen ) invested the rest RMB 11 million, which was 49% of the total registration capital. Because the natural persons cannot invest the same capital in the decision, in June 2, 2004, the Meeting of general manager office of our company proposed and suggested that our company invested RMB 18.24 million to Hangzhou Steam Turbine Accessory Co., Ltd. The proportion of investment increased to 88.37% from 51%. After voting, the proposal was approved, with 11 agreements, 0 blackball and 0 abstention. (vii) The second meeting of the third Board of Directors was held in the No. 1 meeting room of new office building of the Company on August 15, 2004. 11 directors should attend the meeting. 10 directors attended the meeting. Qi Guoning, an independent director, was absent because of business and he consigned Zhang Mingguang, an independent director, to vote. Except for Zhang Yougen, a supervisor who was absent because of business, other supervisors and senior managements of the Company presented at the meeting. After discussion of each proposal, the following resolutions were made: a. Discussed and approved 2004 Semi-annual Report and its abstract; Agreed announcement; After voting, the report was approved, with 11 agreements, 0 blackball and 0 abstention. b. The meeting discussed Measures on Management of Outside Sent Director of the Company and Measure on Management of Holding Subsidiary Company. The meeting held that it was necessary for standardization of company investment to enact the two regulations. The meeting suggested do further revising on the “Two Measures” and submit to the next Board to discuss. c. The meeting discussed proceeding of enhance internal audit of the Company and required managements to set up internal audit organization of the Company as soon as possible. (Please read No. 2004-16 announcement issued in Security Times on August 18, 2004.) (viii) The third meeting of the third Board of Directors was held in the No. 1 meeting room of new office building of the Company on September 28, 2004. 11 directors should attend the meeting. 10 directors attended the meeting. Wang Hongkang, the Deputy Chairman of the Board, was absent because of business and he consigned Nie Zhonghai, Chairman of the Board, to vote. All the supervisors and senior managements of the Company presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. a. Discussed and approved Report on Time-limited Correcting of Inspection Problem; b. Discussed and approved the proposal on investing RMB 30 million to set up ZHejiang Tianyu Holding Co., Ltd.; c. Discussed and approved the proposal on investing RMB 7.8 million to restructure Hangzhou Steam Turbine Machinery Co., Ltd.; d. Discussed and approved Measures on Management of Outside Sent Director of the Company; e. Discussed and approved Measure on Management of Holding Subsidiary Company; f. Discussed and approved Measure on Management of Related Transactions of the Company; g. Discussed and approved Measure on Management of Internal Audit of the Company. After item-to-item voting, the results are as follows: Item A, Item B, Item D, Item E, Item F, and Item G got 11 agreements, 0 blackball and 0 abstention. (Among these, Professor Wang Hongkang consigned Nie Zhonghai to exercise the right to vote of agreement). For the sake of “related parties investing together”, 5 related directors, including Nie Zhonghai, Wang Hongkang, Jin Fujuan, Yan Jianhua and ye Zhong gave up their rights to vote on Item C. After voting of other 32 6 directors, Item C was approved with 6 agreements, 0 blackball and 0 abstention. (Please read No. 2004-18, 20, 21, 22, 23,24, 25, 26 announcement issued in Security Times respectively on September 30, 2004 and October 13, 2004.) (ix) The fourth temporary meeting of the Board of Directors in 2004 was held in a way of message on October 11, 2004. 11 directors should attend the meeting to discuss and vote. 11 directors attended the meeting to discuss and vote. The meeting discussed the proposal on transferring 34.5% of shares of Hanghou Cocim Technology Co., Ltd. held by our Company to Mr. Chang Liang (an employee of Hanghou Cocim Technology Co., Ltd.). According to the resolution of the second temporary meeting of the Board of Directors in 2003, all the shareholders of Hanghou Cocim Technology Co., Ltd. has accomplished reorganization of that company and our company has signed Agreement on Share Transfer of Hanghou Cocim Technology Co., Ltd. with Mr. Chang Liang. At present, we have received all the payment of transferred shares and the agreement has taken effect. Our company don’t hold any share of Hanghou Cocim Technology Co., Ltd. After voting, the preposal was approved, with 11 agreements, 0 blackball and 0 abstention. (x) The fifth temporary meeting of the Board of Directors of 2004 was held in a way of message. On October 20, to October 27, all the directors, supervisors and senior managements checked and approved the third Quarterly Report of 2004, and table written revising opinion on this report. The meeting voted and approved the third quarterly report of 2004 in a way of registered ballots and agreed announcement. After voting, the report was approved, with 11 agreements, 0 blackball and 0 abstention. 2. The Board’s implement of resolution of Shareholders’ General Meeting During the report term, the Shareholders’ General Meeting didn’t authorize anything special to the Board of Directors and the Company didn’t carry out plans on share distribution and new share issue. During the report term, the implement situation of profit distribution scheme is as follows: The Shareholders’ General Meeting of 2003 which held on June 19, 2004 discussed and approved profit distribution scheme of 2003 submitted by the Board of Directors, namely, on the base of the total 220,000,000 capital stocks on December 31, 2003, the Company distributed cash bonus of RMB 2.00 for every 10 shares to all the shareholders. The Company issued announcement on bonus distribution respectively in Security Times and Hong Kong Commercial Daily on June 28, 2004. The objects wear holders of state share of our Company and all the holders of B Share registered in Shenzhen Office of China Securities Depository & Clearing Corporation Ltd. after Shenzhen Stock Exchange closed in the afternoon of July 2, 2004. The ultimate Trade Date of B Share was July 2, 2004 and Ex-Dividend Date is July 5, 2004. When converting dividend of B Share to Hong Kong dollar, the standard rate of exchange is middle rate (HK $1=RMB 1.0610) which issued by Bank of China on the first business day after the Shareholders’ General Meeting of 2002 (June 21, 2004) finished. The bonus of holders of State shares will be distributed by the Company and the bonus of holders of B Share has been transferred to their bank accounts. (IX) Profit distribution scheme or scheme about transferring public funds to share capital 1. Profit distribution scheme In accordance with the Articles of Association of the Company, the “net profit” adopted in the profit distribution will be basing on the lower one of the financial results audited by the overseas auditor and the domestic auditor. Therefore the 2004 Financial Statement issued by Zhejiang Oriental Certified Public Accountant is prevail, and the net profit of the year is RMB 74,190,581.58, with drawing of statutory common reserves of RMB 19,190,599.84 (RMB 18,372,872.74 for the parent company), and drawing of statutory public welfare fund of RMB 19,044,554.97 (RMB 18,372,872.74 for the parent company), plus the profit of RMB38,974,656.75 practically not distributed in the previous year, the profit distributable is 33 amounted to RMB174,930,083.52. The Board of Directors proposes: basing on the total capital share of 220,000,000 shares at the end of year 2004, RMB 7.00 (tax included) will be distributed as cash dividend upon each 10 shares. Dividend for B share holders will be translated to and distributed in Hong Kong Dollar at the middle exchange rate between HKD and RMB published by the People’s Bank of China at the 1st bank day next to the date when the profit distribution plan was adopted by the Shareholders’ General Meeting 2004. The profit distributed in this time is amounted to RMB 154,000,000.00. The retained RMB 20,930,083.52 of profit practically not distributed will be carried over to the next fiscal year. The above-mentioned profit distribution scheme needs to be discussed and approved by the Shareholders’ General Meeting 2004. 2. No capitalization of reserves will be performed for year 2004. (X) Others 1. According to regulations of The Notice about Standardizing the Capital Intercourse between the Listed Company and the Related Parties & Several Problems about the Listed Company Offering External Collateral, inspect capital usage situation of shareholders and other related parties. (i) Special statement of Zhejiang East CPA: ZJEAOR[2004]439 To: All shareholders of Hangzhou Steam Turbine Co., Ltd.: We accept the trust to audit the condition that the 2004 holding shareholders in Hangzhou Steam Turbine Co. Ltd. (ST Ltd for short) and other related parties occupy the company capital. It is the liability for the manage authority of ST. Ltd. to offer authentic legal and complete materials. Our liability is to state special suggestions on the above particulars. We conduct the audit according to the Guideline about independent audit for Registered Accountant, and during this period, we carry out the necessary procedures of inspecting the account records randomly under the practical situation in ST Ltd. According to the requirements in The Notice about Standardizing the Capital Intercourse between the Listed Company and the Related Parties & Several Problems about the Listed Company Offering External Collateral issued with [2003] No.: 56 by China Stock Monitor and Management Committee & The state-owned Assets Monitor and Management Committee of The State Department, special explanations noticed in our audit work about 2004 ST Co Ltd. capital occupation by the shareholders & related parties are given as follows: Table about the capital occupation by the 2003 shareholders in ST Ltd and other related parties In RMB Ten Thousand Relation between Real cash Accumul Corresponde Real cash Accumulat the party amount in ated Occupy Occup The party occupying the nt items in amount in ed amount occupying the the amount pattern ation capital account the end of for debit capital & the beginning for credit s reason report term side listed company of term side Tentati Transa Other ve ction 150.00 150.00 0 Hangzhou Steam Turbine Holding receivables receiva interc Power Group Co., Ltd. shareholder bles ourse Purcha Produ Receivables 1,021.44 1,026.11 660.33 665.00 se ction Southern Sales Company Subsidiary to Purcha Produ of Hangzhou Steam holding Receivables 234.97 389.29 2.00 156.32 se ction Turbine Power Group shareholders Light and chemical industry and metals Subsidiary to Purcha Produ operation department of holding Receivables 0 6.08 0 6.08 se ction Hangzhou Steam Turbine shareholders Power Group 34 Tentati Transa Other ve ction Hangzhou Steam Turbine 0 1.97 5.14 7.11 Joint stock receivables receiva interc Environment Protection bles ourse company Co., Ltd. Purcha Produ Receivables 0 3.00 62.75 65.75 se ction Transa Subsidiary to Hangzhou Steam Power 10,912.1 ction holding Receivables 1,930.90 0 12,843.06 Sale Group Co., Ltd. 6 interc shareholders ourse Produ Receivables 58.60 0 161.94 103.34 Sale ction Subsidiary to Hangzhou Steam Turbine Tentati Transa holding and Machinery Co., Ltd. Other ve ction shareholders 1.75 12.29 10.54 receivables receiva interc bles ourse Staff Technology Subsidiary to Association of Hangzhou Purcha Produ holding Receivables 12.40 12.40 Steam Power Group Co., se ction shareholders Ltd. Subsidiary to Hangzhou Southern Purcha Produ holding Receivables 2.47 2.47 Service Co., Ltd. se ction shareholders Tentati Transa Hangzhou Steam Turbine Subsidiary to Other ve ction and Vehicle Sales Service holding 0.29 0.29 receivables receiva interc Co., Ltd. shareholders bles ourse Subsidiary to Hangzhou Heat Energy Purcha Produ holding Receivables 259.15 259.15 Power Co., Ltd. se ction shareholders Tentati Transa Subsidiary to Hangzhou 4th Machinery Other ve ction holding 0.00 School receivables receiva interc shareholders bles ourse Tentati Transa Other ve ction Subsidiary to receivables receiva interc Hangzhou Southern Gear holding bles ourse Speed Reducer Co., Ltd. shareholders 进度 Prepayment 43.92 174.6 384.02 514.70 Sale 款 Tentati Transa Other ve ction Subsidiary to 3.98 3.98 Hangzhou Steam Turbine receivables receiva interc holding Industrial Co., Ltd. bles ourse shareholders Purcha Produ Receivables 0.43 18.53 18.10 se ction Transa Subsidiary to Hangzhou Hangfa Group ction holding Prepayment 1,331.00 1,850.50 519.50 Sale Co., Ltd. interc shareholders ourse Transa Subsidiary to Hangzhou Relian Import ction holding Prepayment 632.76 1,338.18 705.42 Sale and Export Co., Ltd. interc shareholders ourse Tentati Transa Hangzhou Nanling Steam Subsidiary to Other ve ction Turbine Fittings Parts holding 0.47 0.33 0.80 receivables receiva interc Factory shareholders bles ourse This report is only for CSMC and its internal departments & Stock Exchange, not be used for other purposes. There is no responsibility for the RA and his AO in case of misusing the report. Zhe Jiang East CPA China Certified Public Accountant: Liu Xiaosong Hangzhou, China China Certified Public Accountant: Han Houjun April 12, 2005 (ii) Special explanation from the independent directors 35 According to The Notice about Standardizing the Capital Intercourse between the Listed Company and the Related Parties & Several Problems about the Listed Company Offering External Collateral (“Notice” for short), after carefully checking on the implementation and accumulation and capital occupation by the holding shareholders and related parties in 2004, now some relevant particulars are given as follows: By the end of report term, except for the legal operational capital intercourse between the company and the holding shareholders& related parties, there is no evident suggesting that the company capital is occupied by the holding shareholders and related parties. Nor is there external collateral offered by the company. (including that to the holding shareholders and other related parties holding less than 50%shares, or any illegal body and individual.) We announced hereby! Independent directors: Zhang Mingguang, Zou Zhaoxue, Hua Xiaoning, Qi Guoning (signatures) April 12, 2004 2. During the report term, besides original the newspapers such as Security Times and Hong Kong Commercial Daily appointed to disclose the information, our company will issue periodic repot in Shanghai Securities Journal. Chapter VIII. Report of the Supervisory Committee (I) Works of the Supervisory Committee during the report term The Supervisory Committee held 7 meetings during the report term. The details are as follows. 1. The first temporary meeting of the Supervisory Committee of 2004 was held in the meeting room of Hangzhou Steaming Power Group Co., Ltd. (Rm. 167, Huanchengbei Rd., Hangzhou) in the morning of March 4, 2004. 5 supervisors should attend the meeting. 5 supervisors attended the meeting. The secretary of the Supervisory Committee presented at the meeting. The meeting discussed the project about investment and development of real estate of Zhuji Zhanjiashan residential center. After voting, the proposal was approved, with 5 agreements, 0 blackball and 0 abstention. 2. The 11th meeting of the second Supervisory Committee was held in No. 2 Meeting Room of Hangzhou Xihu Hotel in the morning of April 13, 2004. 5 supervisors should attend the meeting. 4 supervisors attended the meeting. He Fengdi, a worker’s supervisor, was absent because of business and cosigned Zhao Ying, a worker’s supervisor, to vote. The secretary of the Supervisory Committee presented at the meeting. The meeting heard 2003 Work Rreport of Zhu Shuilong, Chairman of the Supervisory Committee. The meeting discussed and approved the following resolutions by means of registered ballots: a. Discussed and approved 2003 Annual Report and its abstract, and agreed announcement. b. Discussed and approved 2003 Work Report of the Supervisory Committee. c. Discussed and approved the proposal to revise “Corporation Constitution”. d. Discussed and approved the proposal to adjust time of depreciation of fixed assets. After item-to-item voting, the results of above-mentioned proposals are: 5 agreements, 0 blackball and 0 abstention (among this, He Fengdi cosigned Zhao Ying to exercise the right to vote of agreement.) (Please read No. 2004-03 temporary announcement issued in Security Times and Hong Kong Commercial Daily on April 15, 2004.) 3. The 12th meeting of the second Supervisory Committee was held in the meeting room of Babaili Hotel on May 15, 2004. 5 supervisors should attend the meeting. 5 supervisors attended the meeting. The secretary of the Supervisory Committee presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. 36 a. Discussed and approved the proposal on nomination of candidate supervisors of the third Committee; b. Discussed and approved Management of Change of Accounting Policies and Accounting Estimation; c. Discussed and approved the proposal on holding annual Shareholders’ General Meeting of 2003. After item-to-item voting, the results of above-mentioned proposals are: 5 agreements, 0 blackball and 0 abstention (Please read No. 2004-06 temporary announcement issued in Security Times and Hong Kong Commercial Daily on May 18, 2004.) 4. The first meeting of the third Supervisory Committee was held in the meeting room of Hangzhou Huagang Hotel (Rm. 1, Yanggong Causey, Hangzhou) on June 19, 2004. 5 supervisors should attend the meeting. 5 supervisors attended the meeting. The secretary of the Supervisory Committee presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. Elected Zhu Shuilong Chairman of the third Supervisory Committee . After voting, the election was approved, with 5 agreements, 0 blackball and 0 abstention.. (Please read No. 2004-13 temporary announcement issued in Security Times on June 22, 2004.) 5. The second meeting of the third Supervisory Committee was held in the No. 1 meeting room of new office building of the Company on August 15, 2004. 5 supervisors should attend the meeting. 4 supervisors attended the meeting. Zhang Yougen, a supervisor, was absent because of business and cosigned other supervisor to vote. The secretary of the Supervisory Committee presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. a. Discussed and approved 2004 Semi-annual Report and its abstract; Agreed announcement; b. Discussed and approved change of the worker’s supervisor. After item-to-item voting, the results of above-mentioned proposals are: 5 agreements, 0 blackball and 0 abstention The meeting also discussed Measures on Management of Outside Sent Director of the Company and Measure on Management of Holding Subsidiary Company. The meeting held that it was necessary for standardization of company investment to enact the two regulations. The meeting suggested do further revising on the “Two Measures” and submit to the next Committee to discuss. (Please read No. 2004-17 temporary announcement issued in Security Times on August 18, 2004.) 6. The third meeting of the third Supervisory Committee was held in the No. 1 meeting room of new office building of the Company on September 28, 2004. 5 supervisors should attend the meeting. 5 supervisors attended the meeting. The secretary of the Supervisory Committee presented at the meeting. The meeting discussed and approved the following proposals in a way of registered ballots. a. Discussed and approved Report on Time-limited Correcting of Inspection Problem; b. Discussed and approved the proposal on investing RMB 30 million to set up ZHejiang Tianyu Holding Co., Ltd.; c. Discussed and approved the proposal on investing RMB 7.8 million to restructure Hangzhou Steam Turbine Machinery Co., Ltd.; d. Discussed and approved Measures on Management of Outside Sent Director of the Company; e. Discussed and approved Measure on Management of Holding Subsidiary Company; f. Discussed and approved Measure on Management of Related Transactions of the Company; g. Discussed and approved Measure on Management of Internal Audit of the Company. After item-to-item voting, the results of above-mentioned proposals are: 5 agreements, 0 blackball and 0 abstention. (Please read No. 2004-19 announcement issued in Security Times on September 30, 2004.) 37 7. The second temporary meeting of the Supervisory Committee of 2004 was held in a way of message. 5 supervisors should attend the meeting. On October 20, to October 27, all the supervisors checked and approved the third quarterly report of 2004, and table written revising opinion on this report. The meeting voted and approved the third Quarterly Report of 2004 in a way of registered ballots and agreed announcement. After voting, the report was approved, with 5 agreements, 0 blackball and 0 abstention. (II) Independent Statement of the Supervisory Committee After supervising of the situation about company operation and business decision in 2004, the Supervisory Committee publish the independent suggestion as following: 1. The operation situation of company according to the law (i) In report term, the board of supervisors of the company attended the Shareholders’ General Meeting and all previous directorate meeting as a nonvoting delegate according to the law and supervised the procedure of Shareholders’ General Meeting , proposal item , implementation of resolution ,etc., think : Board of directors and manager's stratum of the company can operate according to " company law", "corporation constitution” , " the company management criterion ", make the great decision in accordance with the science, legal procedure, effective implement to guarantee the operation abiding by laws (ii) The Supervisory Committee has not found any behavior and phenomenon that the company's director , general manager and other senior executives broke out the law, code, corporation constitution or do anything harmful to interests of company and of infringing the stockholder's equity while fulfilling the their duty; (iii) In report term, suggested by independent directors and the Supervisory Committee, the Board of Directors enacts Management of Change of Accounting Policies and Accounting Estimation, Measures on Management of Outside Sent Director of the Company, Measure on Management of Holding Subsidiary Company, Measure on Management of Related Transactions of the Company and Measure on Management of Internal Audit of the Company. Consequently, there are laws to abide by and regulations to track in making the company policy , performing, supervising , administration behavior; (iv) The Supervisory Committee holds that when facing the conflict between “limited output ability and great market demand”, the Supervisory Committee and manager stratum carried out right and effective countermeasure and made outstanding achievements. It shows the professional spirit and the strong ability to deal with market change actively of company policy-making stratum and manager stratum. 2. The financial situation of the company (i) The board of supervisors has listened to the report of the relevant department of the company on company's financial situation and production as well as consulted the relevant information and has not found unusual situation (ii) The Supervisory Committee attended meetings of Audit Commission of the Board of Directors held during the report term and earnestly researched each account dealing proposals which the managements submitted to Audit Commission. The Supervisory Committee thinks that the company’s account dealing shows principle of cautiousness and effectively maintained the benefits of the company and all the shareholders. (iii) In 2004 annual finance report, the company raised the depreciation standard of fixed assets and made preparation for depreciation, devaluation and bad account of long-term investment, “part of stocks” and “individual balance of payment receivable”. The Supervisory Committee thinks: since the former “depreciation standard of fixed assets” has been fulfilled for 6 years and it is not seasoned with present actual loss situation of fixed assets cause by great increase on output ability, it’s necessary to be adjusted. The adjustment decision process is normative and clear, and it has been approved by 2003 38 Shareholder’s General Meeting. As for the preparation for depreciation, devaluation and bad account, it’s purpose is to tamp company’s asset base and improve company’s anti-crisis ability. It’s beneficial to maintain actual interests of middle and small shareholders and can ensure company’s sustainable development. The Supervisory Committee supports this account dealing measure. (iv) During the report term, the company transferred 34.5% shares of Hangzhou Cosim Technology Co., Ltd. The Supervisory Committee thinks: influenced by government policies, Hangzhou Cocim Technology Co., Ltd. didn’t run the company well and had been in loss situation for a long time and it was hopeless to make up the deficits and get surpluses. Therefore, the decision of our company to quit this company is wise. Since our company has made “preparation for long-term investment devaluation”, the share transfer didn’t take material effect on company’s fianace situation in 2004. 3. The fund previously raised has been use up in 2002, during the report term there is no new financing situation; 4. There was no purchasing or selling assets in the report term; 5. Rationality and fairness of company's related transactions The Supervisory Committee has checked the relevant business materials about company’s related transaction and has verified that all related transactions are fairly, openly according to "Related Transaction Contract" signed before. The Supervisory Committee holds that the Board of Directors and manager's stratum can fulfill the obligation of truthfulness conscientiously, the related transactions can go on according to relevant agreements strictly, the price is rational, the procedure is legal and the situation of damaging the shareholder's equity or leading to the losses of company assets has not occurred, 8. Suggestion for the audit report of CPAs company PriceWaterHouseCoopers CPAs Company and Zhejiang East CPAs Company make the standard non-interpretative audit report without reserved opinion, The Supervisory Committee thinks that 2004 Annual Finance Report and related audit report reflect the financial situation and managing achievements of the Company impersonally and truly, 9. Explanation on profit prediction situation The Company issued “announcement on 2004 predicted achievement increase” in Security Times on June 23, 2004 (please read No. 2004-14 temporary announcement) and predicted profit situation of this year in The Third Quarterly Report of 2004 that the net profit was RMB 174,190,581.58 and the profit of each share is RMB 0.792, not lees than 10% of what we have predicted and not higher than 20% of what we have predicted. Therefore, the Company doesn’t need to make other additional explanation. Chapter IX Significant Events (I) During the report term, there is no big lawsuits or arbitration cases. (II) During the report term, there is no purchase, sell of capital or attraction of capital to make a union. (III) Significant related transactions 1. Relevant transactions arising from purchasing commodity, supplying labor: (1). Some branches of Hangzhou Steam Turbine Group are engaged in the sales of industrial steam turbines. They purchased steam turbines and spare parts and components from the Company at the ex-factory price of the Company. In the report period，the amount of this related transaction was RMB 150,612,413.70. (2) Pursuant to several service agreements, HSTG provides the Company with facilities and services such as social services, property management, staff training, transportation and computer service. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the report term, the Company incurred service fees of RMB8,151,085.21 in accordance with the service agreements. (3) Pursuant to several supply agreements, HSTG supplies the Company with certain raw materials (mainly 39 iron and steel), energy and communication facilities. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the report term, the Company purchased raw materials, energy, and communication facilities amounting to approximately RMB16,057,503.29 from HSTG (4) Pursuant to the trademark agreement, HSTG has licensed the Company to use its registered trademark for an annual fee of RMB700,000. For the report term, the Company paid the trademark fee of RMB 700,000 to HSTG. (5) Pursuant to the land rent agreement, the Company uses the land possessed by HSTG of 84964M2. The annual rent of RMB899,220.00 was to be paid by the Company thereof. For the year ended December 31st 2004, the Company is about to pay RMB899,220.00 for the land rent. During the report term, the Company paid the rent of RMB899,220.00. (6) Expenses paid on behalf the Company: the basic medical insurance was paid by HSTG on behalf of the Company. As of the year ended December 31 2004, the Company paid RMB5,241,305.57 under this item. The total amount of above 6 related transactions was RMB181,661,527.77. Refer to Note 8 of the financial statements of this report - "Relation between related parties and other related transactions" for details. As the Company and the Group are living in the same castle the above related transactions are necessary and will continue in viewing of reducing cost and realizing resource sharing. 2. During report term, there is no stock ownership transfer between our company and its relevant relations. 3. Credits, liabilities and guarantee items with the relevant relations: (1) During the report term, there was no non-operational capital interchange between the Company and HSTG and its subsidiaries. there is credit and liabilities transaction when “Hangzhou Steam Turbine Group” and its subsidiary branches are selling the Steam Turbine products. “Hangzhou Steam Turbine Group” owed payment at RMB32,459,001.84 that count for 12.56% of payment receivables by end of term; our company owed “Hangzhou Steam Turbine Group” at RMB5,670,126.02 that count for 54.95% of other payables by end of term. Please refer to Notes 4 “ relevant relation’s balance payable and receivable” in Note 8 “relevant relations and its transactions” in the accounting report for details. (2) During report term, there is no credit assurance between the company and the relevant relations. (IV) Other material related transactions As of the report term, the Company restructured Hangzhou Steam Turbine Machinery Co., Ltd. together with HSTG, Hangzhou Steam Turbine Technologies Co., Ltd., and Hangzhou Steam Turbine Industrial Co., Ltd. Profile of Hangzhou Steam Turbine Machinery Co., Ltd. before the restructuring: The company was incorporated in April 2004, and was reformed from the factory No.570 under HSTG. The registered capital was RMB5 million, among which HSTG invested RMB1.5 million, takes 30% of the, nature person Bian Jinxuan and other 5 persons, invested 3.5 million, takes 70% of the capital. Xu Jia’an was the legal representative. The company was involved in manufacturing and processing of machinery and parts, power plant equipment (steam turbines, boilers, and generators) installation, contracting of power plant engineering, and technical consulting. As of ended Dec. 31, 2004, the company’s gross asset amounted to RMB114,193,100 and net asset of RMB8,451,200, and total profit of RMB3,451,200, net profit of RMB3,451,200. After the restructuring, Hangzhou Steam Turbine Machinery Co., Ltd. was registered to RMB15 million of capital, including: the Company invested RMB7.8 million, takes 52% of the capital share; HSTG invested RMB3 million takes 20% of the capital share; Steam Turbine Technologies Company invested RMB1.5 million to take 10% of the capital share; Steam Turbine Industrial Company invested RMB0.45 million, takes 3% of the capital share; the collective management team of Steam Turbine Machinery (nature persons) invested RMB2.25 million takes 15% of the capital share. The business range will stay unchanged 40 after the restructuring. After the restructuring, the Chairman and the GM were recommended by the Company. All of the subsidiaries of HSTG stopped their business in manufacturing and sales of steam turbine spare parts immediately, all of the sales people and channels were transferred to “Steam Turbine Machinery Co.”. The Board of Directors approves that, the restructuring will further smooth the production and sales of the “main machine” and “spare parts”, which will increase the value of trademark through providing of high level services featured high efficiency, flexible and sensitive. This is satisfying the needs of scale expanding and profitability increasing. As of December 31 2004, the restructuring was in process, the Company has not involved in yet. (“Public notice on joint investment with related parties” was published by Sept. 30th 2004 issues of Securities Times titled Lin-2004-21.) (V) Material Contracts and Implementation 1. The Company did not hold in trust or contract for or lease the assets of other companies nor did other companies hold in trust, contract for or lease the assets of the Company in the report period. 2. There was no credit guarantee between the Company and related parties in the report period. 3. No providing or accepting of cash asset management to or from other parties occurred during the report term. 4. No other material contract engaged in the report term, which may significantly impact the capital. (VI) The commitments of the Company and its shareholders holding over 5% of the Company’s total shares in the report year or extending to the date of this report. HSTG promised on the sum of RMB9.5 million involved in the reforming of Hangzhou Zhongneng Steam Turbine Power Co., Ltd. in the report term. It promised to repay this debt to hangzhou Zhongneng Steam Turbine Power Co., Ltd. before the end of October. The commitment was fulfilled on September 30 2004. (VII) Public Certified Accountants the company hired and fired During the report term, the company employed PriceWaterHouseCoopers Zhongtian Certified Public Accountants to provide auditing service for the abroad financial report, and continue the employment of Zhejiang Oriental Certified Public Accountants to provide auditing service for the home financial report of the company. During the report term, the remuneration for the two auditing organizations are as follows the CPA Year 2004 Remark PriceWaterHouseCoopers RMB450 the company pays no Zhongtian CPA thousand travelling expense Zhejiang Oriental CPA RMB165 The Company pays thousand for travelling expenses Total RMB615 thousand Zhejiang Oriental Certified Public Accountants provides auditing service for the company since 1999 for the home fiscal report. Up to 2004, he has serviced 6 years. PriceWaterHouseCoopers Zhongtian Certified Public Accountants provides auditing service for the company since 2002 for the abroad fiscal report. Up to 2003, he has serviced 2 years. 41 (VIII) In the report period, the Company, the Board of Directors or any director had never been inspected, experienced administrative penalty or been criticized by circulating a notice of criticism by China Securities Regulatory Commission, or condemned in public by Shenzhen Stock Exchange. (IX) The routine inspection of China Securities Regulatory Commission and feedbacks China Securities Regulatory Commission Zhejiang Inspection Office performed routine inspection on the Company from August 23rd to 26th 2004, and issued Zhe-zheng-jian-shang-shi-zi [2004]61 titled “The feedback on the problems discovered in the inspection for Hangzhou Steam Turbine Co., Ltd.” (referred to as “the Notification”. The Company worked out measurement on the problems provided by the Notification. The report on rectifying of problems was examined and passed by the 3rd meeting of the 3rd term of Board held on September 28th 2004. The problems discovered by the inspection of Securities Regulatory Commission and the relative measurements are as the followings: 1. With regarding of company management (1) Internal controlling system Problem 1. The Company has not established an internal auditing system and special auditors to investigate the financial and economical activities of the Company. Rectify: The internal auditing was entrusted to the Auditing & Inspection Office of HSTG originally. According to the resolutions adopted by the 2nd meeting of the 3rd term of Board held on August 15 2004, as well as the resolutions of the General Manager’s conference held on September 7 2004, the Company has decided to setup Auditing and Inspection Office. The Internal Auditing System was approved by the 3rd meeting of the 3rd term of Board. Currently the organization and personnel arrangement have been accomplished. Problem 2. The Article of Association of the controlled subsidiaries need to be improved. Rectify: The securities office of the Company has performed verification on the Article of Association of controlled subsidiaries before the end of September. Opinions been raised on those clauses not complying with the Company Management Rules and Shenzhen Stock Exchange Share Listing Rules”. The shareholders’ meeting will be responsible to follow the revising procedures. (2）Operations of Board of Shareholders, Board of supervisors of Board of Directors Problem 1. On the operation of the board of directors, in some meeting records of board of directors, the signature of the directors is not complete, which does not accord with the relevant regulations of "Corporation by-law". Rectification and improvements: Company directors have already strengthened director's responsibility consciousness, and can sign conscientiously in the meeting records of board of directors. Problem 2, some supervisors do not do one's duty, and have not joined the meeting of the board of supervisors two times in succession, which does not accord with the regulation of "Company Manages Outline". Rectification and improvement: Members of board of supervisors of company have already strengthened supervisor's responsibility consciousness, if really can't join the board of supervisors for some reason, they can make authorize trusting formality conscientiously. (3) The duty of Independent director fulfiling Problem: The independent director did not publish the independent suggestion on the related trade formed between the company and the Holding shareholder, Hangzhou Turbine Motive Force Corporation (Group) through land lease, agreement of trade mark use permit right, service agreement, expenses payment on behalf, and occupation of capital, etc. Rectification and improvements: Most of above-mentioned related trade took shape at the beginning when the company set up, the relevant agreement is signed and carried out till 2007. Partly it is the exchanged fund, which has not been closed at the momnet in the course of system reforming of the relevant subsidiary 42 of the company. The independent director has issued the oral or written advices in the course of reviewing, but has not published the written independent suggestion formally according to the independent director's system regulation. Company's independent director has already accepted the suggestion of the supervising office in Zhejiang, and from 2004 annual report, before company's regular reporting is announced, publish the independent suggestion on above-mentioned related trade fairly and rationally. (4) The related trade decision policy Problem: the company has not set up related trade decision system so far Rectification and improvements: in the meeting of the third Session of Third board of directors meeting on September 28, 2004, the company has sanctioned the newly made "company's related trade management method". 2. On the respect of information announcing Problem 1, Zhejiang turbine complete set technology Development Co., Ltd. of share controlled branch company of your company successively divided by 5 times, the fund of total value RMB 59,500,000 yuan is borrowed and used as short-term turnover with the group and share controlled branch company, turbine Environmental Engineering Co., Ltd. of Hangzhou. About this the company has not carried on the corresponding disclosure of information. Rectification and improvements: since the company's self-checking on the respect of "the holding shareholder and affiliated party fund occupation of listed company " in May of 2002, there is no similar situation to take place again , and will not recur either in the future. Problem 2, company revealed, in the important items of 2003 annual report, and in the provisional announcing of March 23, 2004: The land using right of newly-built factory building of Subsidiary Hangzhou Turbine Casting and Forging Co., Ltd. is sanctioned at the end of February of 2004. But in fact, affected by country's macro adjustment and control policy, the company fails to sign with local land administrative department of the selling agreement so far, which reveals that information tallies with fact. Rectification and improvements: The reason causing the above-mentioned disclosure of information to tally with fact is mainly affected by country's macro adjustment and control policy. The country has suspended the signing work of selling agreement of state-run land use right, which is what the company can't estimate. At present, Hangzhou turbine casting and forging Co., Ltd. has already signed with territory resource office of Yuhang district of Hangzhou of Yutuhe (mao) zi [2004] No. 81 "selling contracts of state-run land use right" on June 18 , 2004. Problem 3, the company had the fixed assets initial value of RMB 151,720,127.43 yuan which is fully withdrawn but still in use by December 31, 2003, which has not carried on corresponding disclosure according to "Enterprise Accounting Criterion Regulation--fixed assets”, and has not revealed the initial house property of RMB 14,912,604.56 yuan, which has not going through formalities of transferring ownership in property right. Rectification and improvements: The company has already carried on the disclosure from 2004 annual report according to the regulations of "Enterprises Accounting Criterion Regulation -- fixed assets". The company’s general assembling workshop land certificate has not passed the formalities of transferring ownership, and it has already finished handling in November of 2004. 3．Problems on Finance The company's security deposit of letter of credit among the currency funds on December 31, 2003, reflects in subject of the deposit of the bank, and reveals on this basis, which does not correspond to the relevant regulations of "Enterprise's Accounting System". Rectification and improvements: The company has already checked and calculated according to the request for "enterprise's accounting system" from 2004 annual report, revealing correctly Problem 2, Company's 2004 Semi-annual Report reveals more than RMB 11 million yuan count receivable for Hangzhou Turbine Group, among which over RMB 9,500,000 is the clearing account before reforming system of share controlled branch company of Hangzhou Turbine Power Co., Ltd. This act of the holding shareholder's non-profit taking up the fund of listed company, in fact, does not accord with the relevant regulations of the stock supervisory committee. 43 Rectification and improvements: “Hangzhou Turbine Group " has closed the above-mentioned clearing account on September 30, 2004, and returned all remaining sum of RMB 9,858,892.66 yuan to in Hangzhou Turbine Motive Force Co., Ltd.. Problem 3, in order to purchase the industrial land of 8.667 hectares located in Tangxi Industrial park, Tangxi Town, the company has paid RMB 7,500,000 as the down payment, which should be reflected as the item of purchase and build fixed assets, intangible assets and other assets cash payment in cash flow statement. However, in the annual report, this was listed in the item of “Other cashes payment related to business activities”, which was not appropriate enough. Rectification and improvements: The company has already worked out the cash flow statement correctly in the accounting statement from 2004 annual report. ("Report on Rectifying and Improving Company's Patrolling and Examining Problems" can be found in the company's provisional Article 2004-20 on "Securities Times" on October 13, 2004) (X) In report period and after this report before release period, major event that the company happens according to article 62 of "Securities Law" and article 17 of "Implementing Regulations on Public Published Stock Company's Information Disclosure"(Trial): 1, The investment item of the share controlled branch company of our company- Hangzhou Turbine Complementing Machine Co., Ltd. on "Zhejiang Tianhan Heat Energy Equipment Co., Ltd." . The board of directors of Hangzhou Turbine Complementing Machine Co. Ltd has made the resolution on October 16, 2004, to approve the company for providing funds of RMB 10 million yuan to invest on "Zhejiang Tianhang Heat Energy Equipment Co., Ltd. ". "Zhejiang Tianhang Heat Energy Equipment Co., Ltd.” is funded and built by Hanzhou Turbine Complementing Machine Co., Ltd. together with natural person Zhou Xinjian, Zhou Xianhong , Cao Zuoming and Wen Mingfu. This registered capital is RMB 30 million yuan, among which Hangzhou Turbine Complementing Machine Co., Ltd. provided funds of RMB 10 million yuan, accounting for 33.33% of the total; Zhou Xinjian provided funds of RMB 11 million yuan , accounting for 36.67% of the total; Zhou Xianhong provided funds of RMB 3 million yuan , accounting for 10% of the total; Cao Zuoming provided funds of RMB 3 million yuan , accounting for 10% of the total; Wen Mingfu provided funds of RMB 3 million yuan , accounting for 10% of the total. This company business scope is: The complementing turbine machine products, heat exchanger, metal structure part, mining machinery, electric apparatus machinery, etc. Company address is Qianlong Economic Area of Deqing Town. Legal representative: Zhou Xinjian. The company is checked and approve to set up by the Administration for Industry and Commerce of the city of Deqing, Zhejiang in November of 2004. This company will bear the medium and small spare part of the steam turbine of our company and processing of sets of the complementing machine of steam turbine mainly. 2, three items of drawing the capital reserve which the board of directors of our company sanctioned Company the fourth Session of thrid Board meeting made the resolution on February 28, 2005, which on the basis of sanctioning the company in 2004 counting and withdrawing capital reserve of bad account according to the relevant standard, increasing total value of RMB 8,905,400 yuan drawing of value reducing capital reserve, among which, drawing RMB 1,800,000 yuan for "Value Reducing Preparation Of Long-Term Investment”; drawing inventory commodity of RMB 858,200 yuan for “Inventories Reduction Preparation”; fully drawing the bad account capital reserve of RMB 6,247,200 yuan of "Specific Remaining Sum Of Account Receivable" (as shown in company's publication of provisional announcement No. 2005-01 on 2005 X monthly X day on "Securities Times") 3, Items of offering guarantee on total value not exceeded of RMB 50 million yuan, which the board of directors of our company sanctioned Company the fourth Session of Third Board meeting make the resolution on February 28 , 2005, sanctioned to offer total value not to exceed RMB 50 million yuan to the share controlled branch company - Hangzhou Turbine Casting and Forging Co., Ltd. , and approved of the guarantee item under three years of time limit 44 of each sum of loan. This loan is used in new factory building construction and equipment purchasing after this company moved mainly. (As shown in company's publication of provisional announcement No. 2005-01 on 2005 X monthly X day on "Securities Times") Chapter X. Documents For Reference 1. Financial report with signatures of legal representative, general accountant, and finance director. 2. Original copy of the Auditors’ Report under the seal of the CPA and signed by and under the seal of certified accountants. 3. All the originals of the Company’s documents and public notices disclosed in the newspapers designated by China Securities Regulatory Commission in the report period; The Company hereby confirms that all the aforesaid documents shall be timely available upon the requirements by China Securities Regulatory Commission, the Stock Exchange and by the shareholders according to the relevant law, regulations and the Articles of Association. Mr. Nie ZhonghaiThe Chairman of Board Hangzhou Steam Turbine Co., Ltd. April 15th 2005 45 Chapter XI, Financial Report AUDITORS’ REPORT 2005/SH-045/FL/AZH To the shareholders of Hangzhou Steam Turbine Company Limited (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying balance sheet of Hangzhou Steam Turbine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2004 and the related income and cash flow statements for the year then ended. These financial statements set out on pages 2 to 24 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2004 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Ltd. Co. 12 April 2005 46 HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in Renminbi thousands except earnings per share data) Notes 2004 2003 Rmb’000 Rmb’000 Sales 976,093 439,041 Cost of sales (586,716) (274,095) Gross profit 389,377 164,946 Other operating profit 7 14,277 8,698 Distribution expenses (20,001) (11,657) Administrative expenses (130,107) (93,974) Operating profit 5 253,546 68,013 Finance income, net 8 3,410 974 Share of result of associates (1,958) (859) Group profit before tax 254,998 68,128 Income tax 9 (70,750) (19,470) Group profit after tax 184,248 48,658 Minority interest 20 (5,023) (32) Net profit 179,225 48,626 Earnings per share 11 - Basic RMB 0.81 RMB 0.22 - Diluted Not applicable Not applicable The accompanying notes form an integral part of these consolidated financial statements. 2 HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2004 (All amounts in Renminbi thousands) Notes 2004 2003 ASSETS Rmb’000 Rmb’000 Non-current assets Property, plant and equipment 12 222,521 170,103 Construction in progress 13 111,006 85,850 Leasehold land 14 54,032 55,216 Investments in associates 15 47,245 9,192 Deferred tax assets 21 4,985 2 439,789 320,363 Current assets Inventories 16 350,783 176,516 Receivables and prepayments 17 458,224 295,957 Cash and cash equivalents 523,233 248,869 1,332,240 721,342 Total assets 1,772,029 1,041,705 EQUITY AND LIABILITIES Shareholders’ equity Share capital 18 220,000 220,000 Reserves 19 242,832 200,542 Retained earnings 197,264 104,329 660,096 524,871 Minority interests 20 24,730 1,722 LIABILITIES Non-current liabilities Long-term liabilities 22 3,296 2,790 Deferred income 23 8,464 9,069 11,760 11,859 Current liabilities Trade and other payables 24 1,046,363 487,361 Current tax liabilities 29,080 15,892 1,075,443 503,253 Total liabilities 1,087,203 515,112 Total equity and liabilities 1,772,029 1,041,705 These consolidated financial statements have been approved for issue by the Board of Directors of Hangzhou Steam Turbine Company Limited on 12 April 2005. The accompanying notes form an integral part of these consolidated financial statements. 3 HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in Renminbi thousands) Note 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES Rmb’000 Rmb’000 Cash generated from operations 25 500,312 239,293 Income tax paid (62,543) (14,629) Net cash generated from operating activities 437,769 224,664 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (101,819) (91,996) Purchase of short-term investments - (56) Purchase of long-term investments (40,100) - Proceeds from disposal of investments - 129 Proceeds from disposal of associated company 87 - Proceeds from sale of property, plant and equipment 1,079 687 Disposal of land use right - 76 Interest received 3,897 1,182 Net cash used in investing activities (136,856) (89,978) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (44,000) (22,000) Dividends paid to the minority shareholder of subsidiary (95) - Cash received from capital contribution 17,040 - Proceeds from long-term liabilities 506 1,860 Net cash used in financing activities (26,549) (20,140) Net increase in cash and cash equivalents 274,364 114,546 Cash and cash equivalents at beginning of year 248,869 134,323 Cash and cash equivalents at end of year 523,233 248,869 The accompanying notes form an integral part of these consolidated financial statements. 4 HANGZHOU STEAM TURBINE COMPANY LIMITE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in Renminbi thousands) Share Share Revaluation Other Statutory To capital premium surplus surplus reserves rese Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rm (Note 18) (Note 19) Balance at 1 January 2003 220,000 96,762 51,263 1,556 37,150 186 Net profit for 2003 - - - - - Appropriation to reserves - - - - 8,921 8, Dividends - - - - - Government grant transfer in (Note) - - - 2,750 - 2, Gain on debts waived (Note) - - - 2,140 - 2, ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯ Balance at 31 December 2003 220,000 96,762 51,263 6,446 46,071 20 Net profit for 2004 - - - - - Appropriation to reserves - - - - 38,227 3 Dividends - - - - - Government grant transfer in (Note) - - - 605 - Gain on debts waived (Note) - - - 3,458 - ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯⎯⎯ ⎯⎯ Balance at 31 December 2004 220,000 96,762 51,263 10,509 84,298 24 Note: The government grant transfer in and gain on debts waived are transferred to reserves according to the Accounting S "Accounting System for Business Enterprises" promulgated by the State of the People’s Republic of China 5 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 1 GENERAL INFORMATION Hangzhou Steam Turbine Company Limited (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) by way of the reorganisation of certain assets and liabilities in relation to the industrial steam turbine production business of Hangzhou Steam Turbine & Power Group Company Limited (“HSTG”), the promoter, and an offering of Domestically Listed Foreign Currency Ordinary Shares (“B Shares”) to foreign investors. Pursuant to a reorganisation based on audited financial statements prepared under generally accepted accounting principles in the PRC (“PRC GAAP”) and valuation by a PRC Valuer, Hangzhou Assets Revaluation Office, HSTG contributed net assets amounting to RMB199,485,673 in exchange for 140,000,000 state-owned shares of the Company with a par value of RMB1 each. The Company was incorporated on 23 April 1998 with share capital of RMB140,000,000, divided into 140,000,000 state-owned shares with a par value of RMB 1 each. The ultimate parent company of the Company is HSTG, a state-owned enterprise incorporated in the PRC. Pursuant to approval document [1998] No. 8 issued by the Securities Administration Committee of the State Council dated 1 March 1998, the Company issued 80,000,000 B Shares with a par value of RMB 1 each at a price of RMB2.26 (the "IPO"). Net proceeds from the IPO amounted to approximately RMB168,330,000. The B Shares were listed on the Shenzhen Stock Exchange on 28 April 1998. On 2 December 1998, pursuant to approval document [1998] No. 745 issued by the Ministry of Foreign Trade and Economic Co-operation of the PRC, the Company was transformed into a foreign invested joint stock limited company. The Company and its subsidiary (hereinafter collectively referred to as the “Group”) are principally engaged in the design, manufacture and sale of industrial steam turbines and other kinds of industrial equipment. The registered office of the Company is located at No.357 Shi Qiao Road, Hangzhou, Zhe Jiang Province, PRC. 2 ACCOUNTING POLICIES (a) Basis of preparation These consolidated financial statements have been prepared based on the management accounts of the Company and its subsidiary. Those management accounts are prepared in accordance with the PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”), which differ in certain respects from International Financial Reporting Standards (“IFRS”). These consolidated financial statements have incorporated adjustments made to the Statutory Accounts in order to conform to IFRS including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. These consolidated financial statements are prepared under the historical cost convention, except that certain property, plant and equipment are carried at re-valued amounts. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. 6 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (b) Group accounting (1) Subsidiaries Subsidiaries are those companies in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date on which control ceases. All material inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost can not be recovered. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Group’s share of the post-acquisition profits or losses of associates is recognized in the consolidated income statement and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. (c) Foreign currency translation The Group companies maintain their books and records in Renminbi, the measurement currency. Transactions in foreign currencies are translated into Renminbi at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. (d) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost or valuation less accumulated depreciation and accumulated impairment loss. Valuation by independent valuers is performed periodically. Any increase in valuation is credited to the revaluation surplus in shareholders’ equity; any decrease is firstly offset against any increase on earlier valuation recorded in revaluation surplus in respect of the same asset and is thereafter charged to the consolidated income statement. Increase in revaluation directly related to a previous revaluation decrease of the same asset that was recognized as an expense is credited to income to the extent that it offsets the previously recorded decrease. 7 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (d) Property, plant and equipment and depreciation (continued) Depreciation is calculated using the straight-line method to write off the cost or revalued amount, after taking into account the estimated residual value, of each asset over its expected useful life. The expected useful lives are as follows: Buildings 20-30 years Machinery and equipment 8-15 years Motor vehicles and office equipment 5 years When the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. When assets are sold or retired, gains and losses on disposal are determined by comparing the proceeds with the carrying amount of the assets and are charged to current year consolidated income statement. The relevant portion of the revaluation surplus realised in respect of previous valuation is realised from revaluation surplus directly to retained earnings. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognized as expense in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. (e) Construction in progress Construction in progress represents plant and properties under construction and equipment under installation and is stated at cost. Cost includes construction, installation, testing and other direct costs, financing costs and exchange differences that are attributable to the assets. Construction in progress is not depreciated until such time as the asset has been substantially completed and reaches the expected usable condition. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. (f) Leasehold land Leases of land acquired are classified as operating leases. The pre-paid lease payments are amortized over the lease period (fifty years) on a straight-line basis. (g) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs to completion and selling expenses. 8 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (h) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for doubtful debts is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (i) Cash and cash equivalents Cash and cash equivalents are carried in the consolidated balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturity of three months or less. (j) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used to determine deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. (k) Government grants Grants from the government are recognised where there is a reasonable assurance that the grants will be received and the Group will comply with all attached conditions. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected lives of the related assets. (l) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group’s local staff are to be made monthly to a government agency based on 34% of the total salary, subject to a certain ceiling, of which 27% is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these defined contributions on an accrual basis. (m) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the receipt of the reimbursement is virtually certain. 9 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 2 ACCOUNTING POLICIES (continued) (n) Revenue recognition Revenue comprises the invoiced value for the sale of goods net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. (o) Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. (p) Impairment of long-lived assets Property, plant and equipment and investments in associates are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. (q) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products of services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. 3 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risks Cash is placed with reputable banks. The majority of the Group’s trade receivables relate to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. As of 31 December 2004, no single customer accounted for greater than 10% of total revenues for the year or trade receivables. 10 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 3 FINANCIAL RISK MANAGEMENT (continued) (ii) Liquidity risks The Group’s policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current requirements in operations. (iii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets or liabilities. (iv) Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. 4 SEGMENT INFORMATION No segment information is presented as the Group operates in one business segment of industrial steam turbines industry and in one geographical segment in the PRC. 5 OPERATING PROFIT The following items have been included in arriving at operating profit: 2004 2003 Rmb’000 Rmb’000 Depreciation on property, plant and equipment 24,081 18,947 Losses/(gains) on sale of property, plant and equipment 125 (126) Costs of inventories recognised as expense 536,438 220,828 Staff costs 143,093 91,272 Included in “Administrative expenses” - Increase in provision for doubtful debts 6,142 22,340 - Increase / (decrease) in provision for inventory obsolescence 101 (2,782) - Amortisation of leasehold land 1,184 1,185 - Amortisation of other non-current assets - 342 6 STAFF COSTS 2004 2003 Rmb’000 Rmb’000 Salaries and wages 100,576 62,473 Contribution to defined contribution pension schemes 11,939 13,153 Others 30,578 15,646 143,093 91,272 Average number of full time employees during the year 2,179 2,005 11 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 7 OTHER OPERATING PROFIT 2004 2003 Rmb’000 Rmb’000 Amoritsation of deferred income 605 2,750 Waived debts 3,458 2,140 Subsidy income 4,411 2,923 Municipal project compensation 4,021 - Others 1,782 885 14,277 8,698 8 FINANCE INCOME, NET 2004 2003 Rmb’000 Rmb’000 Interest income 3,897 1,182 Net foreign exchange gains 209 - Others (696) (208) Finance income, net 3,410 974 9 TAX (a) Income tax 2004 2003 Rmb’000 Rmb’000 Current tax 75,731 26,242 Deferred tax (4,983) (6,772) Share of associates 2 - 70,750 19,470 The Company was transformed into a foreign invested joint stock limited company as approved by the Ministry of Foreign Trade and Economic Co-operation of the PRC (See Note 1). According to relevant PRC tax laws and regulations, foreign invested enterprises are subject to full exemption from income tax for two years and a 50% reduction in the next three years starting from the first profit making year after offsetting available tax losses carried forward from prior years. In addition, foreign invested enterprises which are located in the Coastal Open Economic Zone are subject to a preferential enterprise income tax rate of 24% and a local income tax at the rate of 2.4% on their profits. For the year ended 31 December 2004, the applicable income tax rate for the Company was 26.4% (2003: 26.4%). The Company’s subsidiaries and associates are subject to income tax at 33%. 12 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 9 TAX (continued) (a) Income tax (continued) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the Company as follows: 2004 2003 Rmb’000 Rmb’000 Profit before tax 254,998 68,128 Tax calculated at the standard tax rate of 26.4% 67,319 17,986 Income and expense items which are not taxable or deductible for tax purposes 1,646 1,412 Effect of different tax rates for consolidated subsidiaries 1,785 72 Tax charge 70,750 19,470 (b) Turnover tax Pursuant to the “Provisional Regulations on VAT of the PRC”, the Company is subject to VAT at the rate of 17% and City and County Maintenance and Construction Tax (“CMCT”) and Education Surcharge calculated at 7% and 4% respectively of the VAT payable. An input credit is available whereby VAT previously paid on purchase of semi-finished products or raw materials etc. can be used to offset the VAT on sales to determine the net VAT payable. 10 DIVIDEND The Board of Directors of the Company recommended a dividend in respect of 2004 of RMB 0.7 per share amounting to a total dividend of RMB 154,000,000. The proposal on dividend is subject to approval by the shareholders in the Company’s Annual General Meeting to be held in year 2005. These consolidated financial statements do not reflect this dividend payable and the dividend will not be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2004. The dividends declared in respect of 2003 and 2002 were, respectively, RMB 44,000,000 and RMB 22,000,000. In accordance with relevant regulations of the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the Statutory Accounts and the consolidated financial statements prepared in accordance with IFRS. As of 31 December 2004, the retained earnings before final dividends reported in the Statutory Accounts were approximately RMB 174,930,000 (2003: approximately RMB 82,975,000). 13 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 11 EARNINGS PER SHARE The calculation of basic earnings per share is based on the consolidated net profit for the year ended 31 December 2004 of approximately RMB 179,225,000 (2003: approximately RMB 48,626,000), divided by the weighted average number of shares in issue during the year of 220,000,000 shares (2003: 220,000,000 shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year end. 12 PROPERTY, PLANT AND EQUIPMENT Motor Machinery vehicles and and office Buildings equipment equipment Total RMB’000 RMB’000 RMB’000 RMB’000 Valuation At 1 January 2003 135,472 248,161 33,552 417,185 Additions - 403 1,434 1,837 Transfers - 13,069 1,430 14,499 Disposals (1,416) (515) (1,167) (3,098) At 31 December 2003 134,056 261,118 35,249 430,423 Additions - 189 3,385 3,574 Transfers - 64,988 9,141 74,129 Disposals (16) (5,263) (1,008) (6,287) At 31 December 2004 134,040 321,032 46,767 501,839 Representing: At cost 348 77,068 15,594 93,010 At valuation 133,692 243,964 31,173 408,829 134,040 321,032 46,767 501,839 Accumulated depreciation and impairment losses At 1 January 2003 51,209 168,089 24,345 243,643 Depreciation charged for the year 2,980 13,999 1,968 18,947 Disposals (642) (556) (1,072) (2,270) At 31 December 2003 53,547 181,532 25,241 260,320 Depreciation charged for the year 3,154 17,425 3,502 24,081 Disposals (2) (4,800) (281) (5,083) At 31 December 2004 56,699 194,157 28,462 279,318 Net book value At 31 December 2004 77,341 126,875 18,305 222,521 At 31 December 2003 80,509 79,586 10,008 170,103 14 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 12 PROPERTY, PLANT AND EQUIPMENT (continued) The Company’s property, plant and equipment injected by HSTG as its capital contribution were revalued by Hangzhou Assets Revaluation Office, independent professional valuers, on 30 April 1997 on a replacement cost basis, because market values were not available. The revaluation surplus amounting to approximately RMB38,080,000 was recorded in revaluation surplus. In accordance with the accounting policy as disclosed in Note 2(d), an independent valuation on the property, plant and equipment was performed by Zhejiang Oriental Assets Valuation Co., Ltd. on 30 September 2002 on a replacement cost basis. The net revaluation surplus was approximately RMB 20,171,000, among which, amount of approximately RMB 32,362,000 was credited to revaluation surplus and approximately RMB 12,191,000 was charged to Other operating loss in consolidated income statement. The cost of the property, plant and equipment, acquired since the above mentioned revaluation on 30 September 2002, approximates their fair value. Had the property, plant and equipment been carried at cost less accumulated depreciation, the carrying amounts of each class of asset as of year end would have been as follows: 2004 2003 Motor vehicles Machinery and office Buildings and equipment equipment Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 67,904 215,403 48,633 331,940 260,346 Accumulated depreciation (7,788) (101,342) (28,882) (138,012) (124,298) 60,116 114,061 19,751 193,928 136,048 The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount as of 31 December 2004. 13 CONSTRUCTION IN PROGRESS 2004 2003 Rmb’000 Rmb’000 At beginning of year 85,850 10,163 Additions during the year 99,285 90,186 Transfer to fixed assets (74,129) (14,499) At end of year 111,006 85,850 15 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 14 LEASEHOLD LAND 2004 2003 Rmb’000 Rmb’000 Cost At beginning of year 59,192 59,275 Addition - - Disposal - (83) At end of year 59,192 59,192 Accumulated amortization At beginning of year 3,976 2,798 Charge for the year 1,184 1,185 Disposal - (7) At end of year 5,160 3,976 Net book value at end of year At end of year 54,032 55,216 At beginning of year 55,216 56,477 15 INVESTMENTS IN ASSOCIATES 2004 2003 Rmb’000 Rmb’000 At beginning of year 9,192 10,051 Current year increase 40,100 - Share of results before tax (245) (1,586) Share of tax (2) - 49,045 8,465 (Provision)/reversal of impairment (1,800) 727 At end of year 47,245 9,192 Please refer to Note 29 for related information of associates. 16 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 16 INVENTORIES 2004 2003 Rmb’000 Rmb’000 Raw materials (at cost) 115,057 44,520 Work in progress (at cost) 175,916 89,441 Finished goods (at cost) 62,502 45,146 353,475 179,107 Less: provision for obsolescence (2,692) (2,591) Net book value 350,783 176,516 17 RECEIVABLES AND PREPAYMENTS 2004 2003 Rmb’000 Rmb’000 Trade and notes receivables 345,073 252,172 Prepayments and other receivables 109,018 70,863 Receivables from HSTG (Note 28(3)) 6,604 8,455 Receivables from other related parties (Note 28(3)) 42,253 8,298 Receivables from associates (Note 28(3)) - 50 Less: provision for doubtful debts (44,724) (43,881) 458,224 295,957 18 SHARE CAPITAL 2004 2003 Number of shares Number of shares Amount Amount ‘000 Rmb’000 ‘000 Rmb’000 Authorised, issued and fully paid Unlisted shares of Rmb 1 each: State-owned shares 140,000 140,000 140,000 140,000 Listed shares of Rmb 1 each: Domestically listed foreign currency ordinary shares (B Shares) 80,000 80,000 80,000 80,000 220,000 220,000 220,000 220,000 State-owned shares and B Shares are all ordinary shares and ranked pari passu in all respects with each other. 17 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 19 RESERVES - STATUTORY RESERVES Statutory reserve includes statutory reserve fund and statutory welfare fund. According to the Articles of Association of the Company, 10% of its profit for the year computed in accordance with the PRC accounting regulations (after offsetting any prior years' losses) should be appropriated to the statutory reserve fund. When the balance of such fund reaches 50 % of the Company's registered share capital, any further appropriation is optional. The statutory reserve fund can be utilised to offset prior years' losses or for issue of bonus shares. However, the fund shall be maintained at a minimum of 25% of the registered share capital after any such issue. According to the Articles of Association of the Company, 5% to 10% of its profit for the year computed in accordance with the PRC accounting regulations should be appropriated to the statutory welfare fund. The fund shall be utilised for the collective benefits of the workforce, including the provision of staff quarters or housing. No other distribution shall be made from the fund other than upon liquidation of the Company. For the year ended 31 December 2004, the directors of the Company proposed that 10% and 10% (2003: 10% and 10%) of the net profit as reported in the Statutory Accounts be appropriated to each of the statutory reserve fund and the statutory welfare fund, totalling approximately RMB 36,738,000 (2003: approximately RMB 8,921,000). The resolution is subject to approval by the shareholders in the Annual General Meeting to be held in year 2005. 20 MINORITY INTERESTS 2004 2003 Rmb’000 Rmb’000 At beginning of year 1,722 1,690 Current year increase 18,080 - Share of net profit of a subsidiaries 5,023 32 Dividends paid (95) - At end of year 24,730 1,722 18 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 21 DEFERRED TAX ASSETS 2004 2003 Rmb’000 Rmb’000 At beginning of year 2 (6,770) Charged to consolidated income statement 4,983 6,772 At end of year 4,985 2 Charged to consolidated At beginning income of year statement At end of year Rmb’000 Rmb’000 Rmb’000 Deferred tax assets Provision for doubtful debts 11,580 353 11,933 Provision for obsolescence 684 27 711 Provision for investments in associates - 475 475 Consolidation eliminated unrealized profit - 2,518 2,518 Revaluation loss of property, plant and equipment 2,816 (322) 2,494 15,080 3,051 18,131 Deferred tax liabilities Revaluation surplus of property, plant and equipment (15,078) 1,932 (13,146) Net 2 4,983 4,985 22 OTHER LONG-TERM LIABILITIES 2004 2003 Rmb’000 Rmb’000 At beginning of year 2,790 11,930 Recognized government grants 506 1,860 Government grants transferred out to deferred income (Note 23) - (11,000) At end of year 3,296 2,790 As of 31 December 2004, the Group had long-term borrowings granted by governmental authorities amounting to approximately RMB 3,296,000 (2003: approximately RMB 2,790,000). Such long-term borrowings were unsecured, interest free and had no fixed terms of repayment. After completion and inspection of government granted projects, government grants related to the projects has been transferred to deferred income and are credited to the income statement on a straight line basis over the expected lives of the assets related to the projects. 19 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 23 DEFERRED INCOME 2004 2003 Rmb’000 Rmb’000 At beginning of year 9,069 - Transfer in from government grants (Note 22) - 11,000 Other transfer in - 819 Amortisation to current year income (605) (2,750) At end of year 8,464 9,069 24 TRADE AND OTHER PAYABLES 2004 2003 Rmb’000 Rmb’000 Accounts payable and notes payable 81,583 48,976 Amounts due to other related parties (Note 28(3)) 49,654 45,461 Advance from customers and other payables 915,126 392,870 Amounts due to associates (Note 28(3)) - 54 1,046,363 487,361 20 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 25 CASH GENERATED FROM OPERATIONS 2004 2003 Rmb’000 Rmb’000 Net profit 179,225 48,626 Adjustments for: Minority interests 5,023 32 Income tax 70,750 19,470 Depreciation of property, plant and equipment 24,081 18,947 Amortisation of leasehold land 1,184 1,185 Amortisation of other non-current assets - 342 Amortisation of deferred income (605) - Interest income (3,897) (1,182) Increase in provision for doubtful debts 6,142 22,340 Decrease in provision for inventory obsolescence 101 (2,782) Share of results of associates 245 1,586 Impairment of investments in associates 1,800 (727) Short-term investment gains - (24) Gains on disposal of associate (87) - Loss on sale of property, plant and equipment 125 (126) Operating income before working capital changes 284,087 107,687 Increase in inventories (174,368) (35,688) Increase in receivables and prepayments (168,409) (136,676) Increase in payables and accruals 559,002 303,970 Cash generated from operations 500,312 239,293 26 CONTINGENCIES As of 31 December 2004, the Group had no material contingent liabilities (2003: Nil). 27 CAPITAL COMMITMENTS As of 31 December 2004, the Group had capital commitments for purchase of equipment amounting to approximately RMB 85,027,000 (2003: approximately RMB 30,092,000). 21 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 28 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (1) Related party agreements effective from the date of incorporation of the Company For the year ended 31 December 2004, the Company had the following related party transactions, pursuant to several agreements signed with the parent company-HSTG on 8 October 1997 and effective from the date of its incorporation. Details are as follows: (a) Service agreements Pursuant to several service agreements, HSTG provides the Company with facilities and services such as social services, property management, staff training, transportation and computer service. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2004, the Company incurred service fees of approximately RMB 8,660,000 in accordance with the service agreements (2003: approximately RMB 9,083,000). (b) Supply agreements Pursuant to several supply agreements, HSTG supplies the Company with certain raw materials (mainly iron and steel), spare parts, energy and communication facilities. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2004, the Company purchased raw materials, spare parts, energy, transportation and communication facilities amounting to approximately RMB 13,172,000 from HSTG (2003: approximately RMB 11,929,000). (c) Trademark agreement Pursuant to the trademark agreement, HSTG has licensed the Company to use its registered trademark for an annual fee of RMB700,000. For the year ended 31 December 2004, the Company paid the trademark fee of RMB 700,000 to HSTG (2003: RMB 700,000). 22 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 28 RELATED PARTY TRANSACTIONS (CONTINUED) (2) Other related party transactions 2004 2003 Rmb’000 Rmb’000 Sales of goods to HSTG 5,477 29,217 Sales of goods to subsidiaries of HSTG 144,462 14,353 Sales of goods to associates 675 1,456 Purchases of goods from subsidiaries of HSTG 37,664 8,996 Purchases of goods from associates 829 791 Payment of land use right rental to HSTG 899 678 Payments of social benefits such as pension, medical benefit, etc. and magazine fee via HSTG - 22,328 The above related party transactions were carried out based on commercial terms and conditions and market prices. (3) As of 31 December, the Group had the following material balances with related parties: 2004 2003 Rmb’000 Rmb’000 Due from related parties: - HSTG 6,604 8,455 - Subsidiaries of HSTG 42,253 8,298 - Associates - 50 48,857 16,803 Due to related parties: - Subsidiaries of HSTG 49,654 45,461 - Associates - 54 49,654 45,515 All the balances with related parties were unsecured and interest free. (4) Emoluments of the Board of Directors (a) Directors’ total remuneration approximated RMB 4,673,000 (2003: approximately RMB 2,338,000). (b) No loans have been granted to Directors. 23 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 29 SUBSIDIARIES AND ASSOCIATES As of 31 December 2004, the Company had the following subsidiaries: Percentage of equity interest held Place of Registered Name incorporation 2004 2003 capital Principal activities Zhe Jiang Steam Hangzhou, 95% 95% 31,600,000 Design, manufacture and Turbine Kit System the PRC sale of industrial equipment Technology and kit systems. Development Co., Ltd. Hangzhou Zhongneng Hangzhou, 51% - 10,000,000 Design, manufacture and Steam Turbine Power the PRC sale of steam turbines and Co., Ltd. related auxiliary equipments, spare-parts; conduct and consult on thermal power projects. Hangzhou Steam Hangzhou, 51% - 22,000,000 Manufacture and sale of Turbine Foundry and the PRC rosin cast; Installation and Forging Co., Ltd. maintenance of casting equipments; sales of products manufactured by the Company Hangzhou Steam Hangzhou, 88.38% - 20,640,000 Design, manufacture, consult Turbine Auxiliary the PRC and sale of steam turbines Equipment Co., Ltd. auxiliary products and spare-parts, thermal transmission equipments and mining equipments and spare-parts; provision of related services. As of 31 December 2004, the Company had the following associates: Percentage of equity interest held Place of Name incorporation Direct Indirect Registered capita Principal activities Hangzhou Steam Turbine Hangzhou, 45% - 20,000,000 Design, manufacture, Environmental the PRC installation and sale of Engineering Co., environmental protection Ltd. equipment and engineering Zhejiang Tianyu Hangzhou, 30% - 100,000,000 Investment, strategy Holding Co., Ltd. the PRC management consulting and other legitimate projects that do not need further approval 30 SUBSEQUENT EVENTS Pursuant to the resolution of the board of directors’ meeting dated 28 February 2005, the Company declared final dividends to all shareholders in respect of 2004 of RMB 0.7 per share (2003: RMB 0.2 per share). The total amount of cash dividends proposed was therefore RMB 154,000,000 (2003: RMB 44,000,000). The resolution is subject to approval by shareholders in the Annual General Meeting. 24 HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) IMPACT OF IFRS ADJUSTMENTS ON NET INCOME FOR THE YEARS AND NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if these standards had been applied consistently throughout the years. This basis of accounting differs from that used in the Statutory Accounts of the Group. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of 31 December 31 December 2004 2003 2004 2003 Rmb’000 Rmb’000 Rmb’000 Rmb’000 As reported in the Statutory Accounts 174,190 44,003 646,394 512,746 Impact of adjustments: - Deferred tax assets 3,051 4,840 18,131 15,080 - Deferred tax liabilities 1,932 1,932 (13,146) (15,078) - Valuation surplus/(loss) of property, plant and equipment and difference of depreciation due to revaluation and disposal of property, plant and equipment (3,688) (7,039) 17,504 21,192 - Debts exemption gains 3,458 2,140 - - - Defer income caused by government grant 605 2,750 (8,464) (9,069) - Change of minority interests caused by the deferred taxes of subsidiaries (323) - (323) - As restated in the IFRS consolidated financial statements 179,225 48,626 660,096 524,871 25