东沣B退(200160)帝贤Ｂ2004年年度报告（英文版）

CHENGDE DIXIAN TEXTILE CO., LTD. ANNUAL REPORT 2004 Apr. 13, 2005 Chengde · PRC Contents Section 1. Important Notice-------------------------------------------------------------------- Section 2. Company Profile-------------------------------------------------------------------- Section 3. Summary of Accounting Highlights and Business Highlights------------- Section 4. Changes in Share Capital and Particulars about Shareholders----------- Section 5. Particulars about Directors, Supervisors, Senior Executives and Employees------------------------------------------------------------------------------------------ Section 6. Administrative Structure ------------------------------------------------------------ Section 7. Particulars about Shareholders’ General Meeting-------------------------------- Section 8. Report of the Board of Directors------------------------------------------------- Section 9. Report of the Supervisory Committee------------------------------------------ Section 10. Significant Events------------------------------------------------------------------ Section 11. Financial Report------------------------------------------------------------------- Section 12. Documents for Reference -------------------------------------------------------- Section 1. Important Notice Important Note: The Board of Directors of Chengde Dixian Textile Co., Ltd. (hereinafter referred to as the Company) and its directors individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions or errors which would render any statement misleading. Mr. Wang Shuxian, Chairman of the Board of the Company, Mr. Zhang Jing, Chief Financial Officer, and Sun Li, Person in Charge of Accounting Organ hereby confirm that the Financial Report of the Annual Report is true and complete. Shenzhen Pengcheng Certified Public Accountants and Hong Kong CCIF Limited Certified Public Accountants respectively audited the domestic and international financial report of the Company and issued the unqualified Auditors’ Report for the Company. Section 2. Company Profile 1. Legal Name of the Company In Chinese: 承德帝贤针纺股份有限公司 In English: CHENGDE DIXIAN TEXTILE CO., LTD. 2. Legal Representative: Wang Shuxian 3. Secretary of Board of Directors: Chen Zhiguo Authorized Representative in Charge of Securities Affairs: Du Qingfeng Contact Address: Xiaban Town, Chengde County, Hebei Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3182013 E-mail: dxgs-9@heinfo.net 4. Registered Address: Xiabancheng Town, Chengde County, Hebei Office Address: Xiabancheng Town, Chengde County, Hebei Post Code: 067400 Company’s Internet Web Site: http://www.dxtex.com E-mail: dxgs-9@heinfo.net 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (domestic) and Ta Kung Pao (overseas) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Contact Tel: (86) 314-3115049, 3115048 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: DIXIAN B Stock Code: 200160 7. Other Relevant Information of the Company Initial registered date: Nov. 3, 1999 Registered date after change: Mar. 31, 2004 Registered address: Industry and Commerce Administration Bureau of Hebei Province (316#, Tiyu South Street, Shijiazhuang, Hebei Province) Registered number for business license of the Company: 1300001001372 1/1 Registered number of taxation of the Company: 130821106576876 International Accountant: CCIF Limited Certified Public Accountant Office address: 37/F, Hennessy Center, No. 500, Hennessy Road, Causeway bay, Hong Kong Chinese Accountant: Shenzhen Pengcheng Certified Public Accountant & Co. Ltd. Office address: 5/F, Baofeng Tower, No. 2006, South Road Dongmen, Luohu District, Shenzhen Custodian agent of the non-circulating shares of the Company: Shenzhen Branch of China Securities Registration and Clearing Co., Ltd. Name of lawyer firm engaged by the Company: Beijing Jin Cheng Tongda Lawyer Firm Office address: 11/F, Huaxia Bank, No. 22, Jian Guo Men Nei Ave., Beijing Section 3. Summary of Accounting Highlights and Business Highlights I. Summary of accounting highlight as of the year 2004 Unit: RMB Items Amounts Total profit 112,829,922.20 Net profit 105,127,475.36 Net profit after deducting non-recurring gains and losses 104,980,695.82 Profit form main operations 171,942,051.42 Other operating profit 2,339,022.20 Operating profit 111,796,996.03 Investment income 886,146.63 Subsidy income - Net non-operating income/expenses 146,779.54 Net cash flows arising from operating activities 77,842,558.55 Net increase/decrease in cash and cash equivalents 95,742,524.53 Items of deducting non-recurring gains and losses and the involved amounts are as following: Unit: RMB Items Amounts Income from compensation 221,458.25 Other income 337,932.36 Expenditure of penalty 59,645.00 Other expenditure 352,966.07 Total of non-recurring gains and losses 146,779.54 II. Explanation on the difference in net profit as audited by domestic and international certified public accountants respectively As audited by Shenzhen Pengcheng Certified Public Accountant & Co. Ltd. and CCIF Limited Certified Public Accountants according to Chinese Accounting Standards and International Accounting Standards respectively, the Company’s net profit as of year 2004 was RMB 105,127,475.36 and RMB 105,127,475.36. There is no difference in net profit. III. Major accounting data and financial indexes over past three years ended the end of the report period Items Unit 2004 2003 2002 Income from main operations RMB 525,685,638 463,087,869 463,087,869 Net Profit RMB 105,127,475 115,303,505 115,303,505 Total assets RMB 2.992,390,845 1,839,661,136 1,839,661,136 Shareholders’ equity （ excluding RMB 1,298,142,307 553,728,489 553,728,489 minority interests） Earnings per share RMB/share 0.18 0.33 0.32 Earnings per share after deducting RMB/share 0.18 0.32 0.32 non-recurring gains and losses Net assets per share RMB/share 2.21 1.59 1.52 Net assets per share after RMB/share 2.20 1.58 1.51 adjustment Net cash flows per share arising RMB/share 0.13 0.28 0.44 from operating activities Return on equity % 8.1 20.5 21 Weighted average earnings per RMB/share 0.21 0.36 0.35 share IV. In accordance with Reporting Regulations on the Information Disclosure of Companies Publicly Issuing Stock (No. 9) promulgated by China Securities Regulatory Commission, return on equity and earnings per share as calculated based on calculating method of fully diluted and weighted average: Return on equity Earnings per share (RMB) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 13.22% 18.77% 0.29 0.35 Operating profit 8.60% 12.21% 0.19 0.23 Net profit 8.08% 11.48% 0.18 0.22 Net profit after deducting non-recurring 8.07% 11.46% 0.18 0.21 gains and losses V. Changes in shareholders’ equity in the report period (Unit: RMB） Statutory Total Capital public Surplus public Items Share capital public welfare Retained profit shareholders’ reserve reserve fund equity Amount at the 438,600,000 45,756,833 62,955,259 20,985,087 149,462,985 696,775,076 period-begin Increase in the 150,000,000 346,239,755 16,099,121 7,152,330 105,127,475 617,466,351 report period Decrease in the 16,099,121 16,099,121 report period Amount at the 588,600,000 391,996,588 79,054,380 20,985,087 238,491,339 1,298,142,306 period-end Reason of changes Orient issue Orient issue Withdrawal in Withdrawal in Realization of Realization of this period this period profit Profit Section 4. Changes in Share Capital and Particulars about Shareholders I. Changes in Share Capital (1) Statement of changes in share Unit: Share Increase/decrease of this time (+, - ) Before the After the Items Bonus Allotment of Capitalization of Additional change Others Subtotal change shares share public reserve issuance I. Unlisted Shares 1. Sponsors’ shares 204,000,000 204,000,000 Including: State-owned share Domestic legal person’s shares 19,289,424 19,289,424 Foreign legal person’s shares Others 184,710,576 184,710,576 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others Total unlisted shares 204,000,000 204,000,000 II. Listed Shares 1. RMB ordinary shares 2.Domestically listed foreign 234,600,000 150,000,000 384,600,000 shares 3. Overseas listed foreign shares 4. Others Total listed shares 234,600,000 150,000,000 384,600,000 III. Total shares 438,600,000 150,000,000 588,600,000 (2) Issuance and Listing of shares 1. In the report period, approved by CSRC with ZJFXZ [2004] No.101 Document, the Company oriented-issued 150,000,000 shares of domestically listed foreign shares (B shares). Type of the listed share: overseas listed foreign shares (B-share) Par value of per share: RMB 1.00 Amounts of issuance: 150,000,000 shares Manner of issuance: allotted-sell to investors in overseas organization at certain price Price of issuance: HKD 3.32 per share Date of issuance: Jul. 19 to Jul. 20, 2004 Date Limit of share-holdings: having three-month term of banned sale Circulation date of listing: Oct. 22, 2004 Total amount of raising capital: HKD 498,000,000 2. In the report period, the Company oriented-issued 150,000,000 shares of domestically listed foreign shares (B shares), which made the total shares of the Company changed, for details please refer to statement of changes in share. 3. There existed no inner employees’ shares in the Company. II. About shareholders (1) Ended Dec. 31, 2004, the Company had totally 15319 shareholders, including 5 ones of sponsors’ shares and 15314 ones of domestically listed foreign shares. (2) Particulars about change of shares held by the top ten shareholders as follows: (Ended Dec. 31, 2004) No. Increase/ Holding shares Number of Nature of shareholder Type of shares Name of shareholders (full decrease at the year-end Proportion share (State-owned (circulating/non- name) during this (share) (%) pledged or shareholder / foreign circulating) year frozen shareholder) 1 WANG SHU XIAN - 173,604,000 29.49 Non-circulating No Natural person 2 CHINA SOUTHERN 90,700,000 90,700,000 15.40 Circulating Unknown B-share in circulating SECURITIES CO., LTD. 3 CHINA SOUTHERN 51,027,117 51,027,117 8.66 Circulating Unknown B-share in circulating SECURITIES (HONG KONG) CO., LTD. 4 CHENGDE NORTH - 15,431,376 2.62 Non-circulating No Domestically legal INDUSTIAL share CORPORATION 5 WANG ZHENG SONG - 11,106,576 1.88 Non-circulating No Natural person 6 RIPPERTON ASSETS - 7,084,388 1.20 Circulating Unknown B-share in circulating LIMITED 7 CSSC INTL LTD - 6,530,000 1.10 Circulating Unknown B-share in circulating 8 WANG WEN SHENG - 6,048,339 1.02 Circulating Unknown B-share in circulating 9 CHINA MIDDLING & - 5,880,000 0.99 Circulating Unknown B-share in circulating SAMLL ENTERPRISE DEVELOPMENT FUND CO., LTD 10 PERFECT SPACE - 4,542,989 0.77 Circulating Unknown B-share in circulating INVESTMENT Notes: Wang Shuxian is main sponsor and holding shareholder of the Company, who holds natural person’s shares (non-circulating shares); CSSC Co., Ltd., as recommend and guarantee representative (major consignment merchant) for additionally issuing B shares of the Company in the year 2004, became the second largest shareholder of the Company due to exclusively sell the B shares additional-issued by the Company. Chengde North Industrial Corporation is one of the sponsors of the Company, who holds domestic legal person’s shares (non-circulating shares); Wang Zhengsong is one of the sponsors of the Company, who holds natural person’s shares (non-circulating shares); other shareholders hold B shares in circulating. Wang Shuxian and Wang Zhengsong are parent child relationship so as to exist related relationship; China Southern Securities (Hong Kong) Co., Ltd and CSSC INTL LTD belong to subsidiaries of CSSC Co., Ltd. so as to exist related relationship. Among the top ten shareholders, the Company is unknown whether there exists associated relationship or belongs to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company among the other shareholders. (3) About the holding shareholder The holding shareholder of the Company is Wang Shuxian (the first largest shareholder of the Company), who is also actual controller of the Company. His information is as follows: Mr. Wang Shuxian, 51, Chinese nationality, who has not enjoy the residence power in the other country or area. He is one of the sponsors of the Company and holds 173,604,000 shares of the Company at present. Mr. Wang Shuxian is founder of the Company. In 1986, Xiaban County Knitting Factory was founded in Xiabancheng town of Chengde, Hebei. Over ten years, the Company has developed into the largest base of manufacture and exporter of textile in North China from small to large, developing the largest base of production and export in knitting products in North China. In 1994, he has established Hebei Dixian Textile Group Co., and it has been changed into joint-stock company on Nov. 3, 1999. Approved by CSRC, DIXIAN B successfully listed with Shenzhen Stock Exchange for trade on Sep. 29, 2000. The Company has become the first B-share listed company controlled by person. Now, Mr. Wang Shuxian is Chairman of the Board of the Company. (4) Property right and controlling relationship between the actual controller and the Company is as follow: WANG SHU XIAN 29.49% CHENGDE DIXIAN TEXTILE CO., LTD (5) Particulars about legal person shareholders as of holding 10% (including 10%) China South Securities Co., Ltd. was founded on Dec. 21, 1992 with registered capital of RMB 3.45 billion. Business scope of the Company includes: deputize and self-run security business; consignment of security and recommend and guarantee for listing; issuance and issuance agent for bond; guarantee agent, assignment and testimony of security; sales by proxy, mortgage and discount financing of security and investment consultation of security; finance consultant; investment related to security business; regroup, purchase and merger of enterprise and financing arrangement; deputize repay capital with interest and distribution of bonus with derived interest; capital management; promote business of fund; overseas business of security; act as sponsor of security investment fund and fund management company and other business authorized by CSRC. (4) Particulars about the top ten shareholders of circulating share as follows: Serial Holding circulating number Name of shareholders (full name) shares at the year-end Type (share) 1 CHINA SOUTHERN SECURITIES CO., LTD. 90,700,000 B-share in circulating 2 CHINA SOUTHERN SECURITIES (HONG 51,027,117 B-share in circulating KONG) CO., LTD. 3 RIPPERTON ASSETS LIMITED 7,084,388 B-share in circulating 4 CSSC INTL LTD 6,530,000 B-share in circulating 5 WANG WEN SHENG 6,048,339 B-share in circulating 6 CHINA MIDDLING & SMALL ENTERPRISE 5,880,000 B-share in circulating DEVELOPMENT FUND CO., LTD. 7 PERFECT SPACE INVESTMENTS 4,542,989 B-share in circulating 8 MAIN FORCES ASSETS LIMITED 4,046,700 B-share in circulating 9 CHINA SOUTHERN CORPORATE FINANCE 3,790,000 B-share in circulating LIMITED 10 CSS (HK) L A/C ULTRAMATIC HOLDINGS 3,690,330 B-share in circulating LIMITED Explanation on associated China Southern Securities (Hong Kong) Co., Ltd and CSSC relationship among the top ten INTL LTD belong to subsidiaries of CSSC Co., Ltd. so as to shareholders of circulating exist related relationship. Among the top ten shareholders, the share Company is unknown whether there exists associated relationship or belongs to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company among the other shareholders. Section 5. Particulars about the Directors, Supervisors and Senior Executives and Employees I. Particulars about directors, supervisors and senior executives (1) Basic information of directors, supervisor and senior executives Table 1 Holding share Holding share Reason of Name Title Gender Age Office term at the at the change year-begin year-end Chairman of the Oct. 29, 2002- Wang Shuxian Male 51 173,604,000 173,604,000 No change Board Oct. 29, 2005 Director, Oct. 29, 2002- Shi Bainian Male 33 0 0 General Manager Oct. 29, 2005 Oct. 29, 2002- Song Yushan Director Male 64 0 0 Oct. 29, 2005 Director, Deputy Oct. 29, 2002- Wang Huilai Male 50 0 0 General Manager Oct. 29, 2005 Oct. 29, 2002- Du Qingfeng Director Male 43 0 0 Oct. 29, 2005 Director, Deputy Oct. 29, 2002- Lan Wenzhi Female 46 0 0 General Manager Oct. 29, 2005 Independent Oct. 29, 2002- Wang Enyuan Male 63 0 0 director Oct. 29, 2005 Independent Oct. 29, 2002- Li Wei Male 34 0 0 director Oct. 29, 2005 Independent Oct. 29, 2002- Wang Yaguang Male 52 0 0 director Oct. 29, 2005 Wang Deputy General Oct. 29, 2002- Male 28 11,106,576 11,106,576 No change Zhengsong Manager Oct. 29, 2005 Chairman of Aug. 11, 2004- Xu Xue Supervisory Male 56 0 0 Oct. 29, 2005 committee Oct. 29, 2002- Li Xianfu Supervisor Male 59 0 0 Oct. 29, 2005 Oct. 29, 2002- Sun Zhenyu Supervisor Male 42 0 0 Oct. 29, 2005 Oct. 29, 2002- Yao Fenglan Supervisor Female 39 0 0 Oct. 29, 2005 Oct. 29, 2002- Xu Huafeng Supervisor Male 32 0 0 Oct. 29, 2005 Chief Financial Oct. 29, 2002- Zhang Jing Male 34 0 0 Supervisor Oct. 29, 2005 Secretary of Oct. 29, 2002- Chen Zhiguo Male 32 0 0 Board of Directors Oct. 29, 2005 Notes: Chairman of the Board Mr. Wang Shuxian is main sponsor of the Company, who holds 173,604,000 non-circulating shares of the Company at the year-begin as well as the shares at the year-end; deputy general manager Mr. Wang Zhengsong is one of the sponsors of the Company, who holds 11,106,576 non-circulating shares of the Company at the year-begin as well as the shares at the year-end. The other directors, supervisors and senior executives of the Company had ever not hold shares of the Company. (2) Particulars about the post held by directors, supervisors and senior executives in Shareholding Company Drawing the payment Title in Shareholding Name Name of Shareholding Company Office term from the Shareholding Company Company (Yes / No) Song Yushan Chengde North Industrial Legal Representative From 1999 till now No Corporation Chengde Dragon and Phoenix Song Yushan Legal Representative From 2002 till now No Cosmetics Co. Chengde Xiaban Town Hongxing Song Yushan Legal Representative From 1999 till now No Plastic Factory (3) Particulars about main work experience and post or part-time job of directors, supervisor and senior executives excluding in shareholder’s unit 1. About present directors of the Company Mr. Wang Shuxian, Male, Aged 51, graduated from middle school, was Chairman of the Company. Since 1986, he took the post of director of Xiaban Town Textile General Plant. In 1994, he assumed General Manager, Chairman of Dixian Group successively and was the founder of the Company. Since 1999, he took Chairman of the Company. Mr. Wang Shuxian possessed rich experience in the aspects of production, sale and enterprise management etc. of knitting and finished garments. At present he concurrently assumed the posts of Chairman of Xiaban Town Textile, Dixian Fashion, Industry Papermaking, Chengde Beirifang, Xinye Commerce and Trade and New Robot. Mr. Shi Bainian, male, aged 33, graduated from university (majored in economics management), was Director and General Manager of the Company. He successively took the post of director of tailoring branch of Dixian Group, director of dyeing manufacture and Deputy General Manager of the Company. Mr. Song Yushan, male, aged 64, graduated from university, was Director of the Company. He successively took the post of secretary of office of Chengde County People’s Government, General Manager of Xiaban Town Industrial Company, Director of Economy United Commission of Xiaban Town, Chairman of North Industrial Company and Chairman of Longfeng Cosmetic. Mr. Du Qingfeng, male, aged 42, graduated from college (majored in finance), China economist, was the director of the Company. He was successively took the post of credit staff of industry and commerce section of Chengde County, and then sub-section chief. Mr. Wang Huilai, male, aged 50, graduated from college (majored in economics management), was Director and Deputy General Manager of the Company. He was successively took the post of secretary and sub-section chief of Agricultural Recourses Company in Chengde District and Deputy General Manager of Dixian Group. Ms. Lan Wenzhi, female, aged 46, graduated from high school, was Director and Deputy General Manager of the Company. She engaged in financial work of People’s Government of Xiaban Town. Later she successively took the post of sub-section chief of financial section and sub-section chief of supply section and Deputy General Manager of Dixian Group. Mr. Li Wei, aged 34, post graduate, was the independent director of the Company. He successively took the post of business manager of China National Chemicals Import & Export Corporation, Project manager of investment banking department of China Eagle Securities Co., Ltd., and Deputy General Manager of Shijiazhuang branch office of Haitong Securities Co., Ltd.. Now he was Deputy General Manager of Shenzhen Oriental Power Investment Co., Ltd.. Mr. Wang Yaguang, aged 52, graduated from college, certified public accountant, was Independent Director of the Company. He successively took the post of accountant, deputy director of Chengde County Costume Factory and Director of Chengde County Auditing Office. Now he was Chairman and director CPA of Chengde Hongyuan Certified Public Accountants Co., Ltd.. Mr. Wang Enyuan, male, aged 63, graduated from college, High China economist, was the independent director of the Company. He successively took the post of planning staff, credit staff, office director, and associate president of Chengde City People’s Bank, president and secretary of the party commission of Chengde ICBC. He retired in 1999. (II) Basic information of the present members of the Supervisory Committee of the Company Mr. Xu Xue, male, aged 56, was born on Jul. 20, 1949 with Han nationality and graduated form secondary normal school; he is a member of CPC. He took the post of plant director of Dixian Company Zhuji Thread-making Plant from Jun. 1995 to Apr. 1997; plant director of Dixian Company Paper Cartons Plant from Apr. 1997 to Mar. 2001; committeeman of Paper mill arrangement committee from Mar. 2001 to Jul. 2003; he is deputy secretary of general Party branch of the Dixian Company from Jul. 2003 till now. Mr. Li Xianfu, male, aged 59, graduated from high school, was supervisor of the company and sub-section chief of comprehensive management office. He ever took the post of Director of Chengde County 2nd Costume Factory and Sub-section chief of comprehensive management department of Dixian Group. Mr. Sun Zhenyu, male, aged 42, graduated from university (majored in English), was the supervisor and manager of quality technology department. He ever taught in Shanggu middle school of Chengde County. Later he successively took the post of associate director of Dyeing Factory of Dixian Group and General Dispatcher and manger of Knitting Department, manager of Quality Technology Department. Mrs. Yao Fenglan, female, aged 39, graduate from high school, was supervisor and associate director of General Manager Office. She ever worked in Chengde County Insurance Company. She was office secretary of Dixian Group and associate director of office. Mr. Xu Huafeng, male, aged 32, graduated from college (majored in computer accounting), was the supervisor of the Company and sub-section chief of financial section of Heibei Xiaban Town Textile Wears Co., Ltd., the subsidiary of the Company. He ever worked as financial staff of that financial section. (III) Basic information of other senior executives Wang Zhengsong, male, aged 28, graduated from college, Deputy General Manager of the Company (in charge of overseas business). He took the executive director of gold Axe Investment. On Oct. 29, 2002, he worked for the Company. Mr. Zhang Jing, male, aged 34, graduated from university (majored in bank foreign exchange), China economist, CFO of the Company. He ever worked in Xiaban Town branch of Bank of China. He worked for the Company from December 2000. He successively worked in overseas sale department, financial department and securities department of the Company. Mr. Chen Zhiguo, male, aged 32, junior college degree, was the secretary of the Board of the Company. He ever worked as the associate director, sub-section chief of general affairs, deputy manager and manager of securities department of Spinnery of the Company. (4) Particulars about the annual remuneration received by directors, supervisors and senior executives Annual remuneration drew by directors, supervisors and senior executives in current office was determined by the Proposal on Remuneration of the Company’s Directors (Independent Directors), Supervisors and Senior Executives adopted by the 2003 shareholders’ general meeting. The total annual remuneration drew by directors, supervisors and senior executives from the Company is RMB 514,160. Total annual payment of the top three directors drawing the highest remuneration is RMB 191,040; total annual payment of the top three senior executives drawing the highest payment is RMB 138,240. Allowance and subsidy of Wang Enyuan, Li Wei and Wang Yaguang, the independent directors of the Company, amounted to RMB 20,000 per year respectively. The Company reimbursed the reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. There are 17 directors, supervisors and senior executives in office at present. Three independent directors draw allowance and subsidy of RMB 20,000 respectively per year; the other 14 draw payment from the Company. Of them, 2 persons enjoy over RMB 50,000 per year, 5 persons enjoy between RMB 40,000 to RMB 50,000 per year respectively, 10 persons enjoys between RMB 10,000 to RMB 30,000. (5) Leaving and reason of directors, supervisors and senior executives in the report period During the report period, Mr. Song Kuiwu, the primary chairman of the supervisory committee of the Company, passed away due to illness so as to the 5th meeting of the 2nd supervisory committee elected Mr. Xu Xue, supervisor representative for employee chose by workers’ congress of the Company, as chairman of the supervisory committee. The other directors, supervisors and senior executives of the Company remained unchanged. For the situation on directors, supervisors and senior executives, please refer to Table 1 of Section 5. II. Particulars about employees At the end of 2004, there were 9639 in-service employees, including 9208 production and piecework personnel, 82 sales personnel, 206 technicians, 45 financial personnel and 98 administrative personnel; of which 772 persons got the junior college and technical secondary school’s degree or above, taking 8% of the total number of employees. The Company implemented the employees labor insurance and welfare system stipulated by the relevant laws and regulations of local areas and the nation. Section 6. Administrative Structure I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies and other relevant laws and regulations, the Company continuously improved the legal person administration structure of the Company, established modern enterprise system and standardized the operation of the Company. There is no significant difference between the actual administration of the Company and the normative documents on administration of listed companies released by China Securities Regulatory Commission. The major representation is as follows: (I) Shareholders and the Shareholders’ General Meeting: The Company set up Rules of Procedure of Shareholders’ General Meeting and was able to convene and hold the Shareholders’ General Meeting strictly according to the requirement of normative opinions of the Shareholders’ General Meeting and the procedure of the meeting was legal. The Company ensures that all shareholders share the actual information of the Company equally and guarantee the legal rights of medium and small shareholders. (II) Relation of the controlling shareholder and the listed company: In order to truly safeguard the whole interest of the Company, the Company has set up Behavior Criterion of Controlling Shareholder. The Company is completely independent from the controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organization can operate independently. (III) Directors and the Board of Directors: The Company elected directors strictly according to the procedure stated in the Articles of Association and engaged independent directors according to relevant requirements. All directors can take the responsibilities in a diligent attitude on behalf of the maximum interests of the Company and the shareholders. The Board of Directors established Rules of procedure of the Board of Directors, implemented patiently the regulations of the laws, regulations and the Articles of Association of the Company, treated all shareholders fairly and concentrated on the interest of relevant beneficial parties. (IV) Supervisors and the Supervisory Committee: The Supervisory Committee established Rules of procedure of the Supervisory Committee. The supervisors can take their duties and supervise over the Company’s finance and the compliance with laws and regulations of the implementation of the, directors, managers and other senior executives’ duties in an attitude responsible for all shareholders and thus protect the legal right and interest of the Company and the shareholders. (V) Performance evaluation and encouragement and regulating mechanism: The Company improved actively a fair and transparent performance evaluation criteria and encouragement mechanism for directors, supervisors and senior executives. Engagement of senior executives is open, transparent and is in line with stipulations of laws and regulations. (VI) For relevant beneficial parties: The Company is able to fully respect and safeguard the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests. While protecting the Company’s sustainable development and realizing the maximum of the shareholders’ interests, the Company pays special attention to social welfare, environmental protection and commonweal cause in the area. (VII) Information disclosure and transparency: The Company authorized the secretary of the Board of Directors to be responsible for information disclosure, reception of the shareholders’ interviewing and consultation. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to provisions of laws, regulations and the Articles of Association so as to ensure equal chances for all shareholders to obtain information. II. Performance of Independent Directors The Company engaged 3 independent directors, taking one third of the directors of the Company according to Rules on Administration of Listed Companies and Guidance Opinions on Establishing Independent Directors System in Listed Companies. The independent directors fulfill their obligations with earnest and were able to attend to the Board of Directors in person on time. The independent directors played a full role in the Board of Directors and expressed their opinions for some significant issues of the Company and performed an active function on the scientific decision-making and normative operation of the Company and preserved the interest of the Company and all shareholders in a diligent and responsible attitude. III. Separation in businesses, personnel, assets, organization and finance of the Company and control shareholders (I) In respect of personnel: the labor, personnel and wage management of the Company is completely independent and the manager, deputy manager and other senior executives received salaries in the Company. (II) In respect of assets: The Company as an independent legal person has full property right of legal person and has independent production system, accessorial production system and auxiliary equipment. Industrial property right, trademark, non-patent technology and other intangible assets all belong to the listed company. The Company has independent purchase and sales system. (III) In respect of finance: The Company has independent financial department, whole, independent and normatively operated business accounting system and financial administration system and independent bank account. (IV) In respect of organization independence: The Company’s organizations are wholly independent and the offices of the Company are wholly separated from the controlling shareholder. (V) In respect of business: The Company is independent from the controlling shareholder in terms of businesses and has independent and whole business and operating ability. IV. Evaluation and encouragement mechanism of performance of senior executives The Company established Detailed Rules of General Manager and other specific work regulations to normalize the work of the senior executives. Meanwhile, adopting the method of testing and evaluation, the Company confirmed the performance of senior executives according to respective indexes and implementation of work and added float reward on the basis of basic annual salary to mobilize the activeness of senior executives. The above persons were evaluated through testing by the Board of Directors and supervised by the Supervisory Committee. Section 7. Particulars about Shareholders’ General Meeting I. Holding of Shareholders’ General Meeting in the report period In the report period, the Company held one Annual Shareholders’ General Meeting and one Provisional Shareholders’ General Meeting. (I) The Company published the public notice on holding 2004 the 1st provisional Shareholders’ General Meeting on Securities Times and Hong Kong Ta Kung Pao dated Dec. 25, 2003. The Annual Shareholders’ General Meeting was held in the meeting room on the 3rd floor of the Company at 9:00 am on Feb. 3, 2004(Xiabancheng Town of Chengde County). 6 shareholders and shareholders proxies attended the meeting, representing 225,527,027 shares of the Company, taking 51.40% of the total share capital (204,000,000 domestic RMB shares, taking 46.51% of the total share capital, and 21,527,027 foreign shares, taking 4.91% of the total share capital). The directors, supervisors and senior executives attended the meeting as non-voting delegates, which was presided by Mr. Wang Shuxian, the Chairman of the Board, in accordance with relevant provisions in Company Law and Articles of Association of the Company. The meeting examined and approved the following proposals by signed voting: 1. Examined and approved proposal on Amendment of Articles of Association Amounting to 225,527,027 shares approval (204,000,000 domestic RMB shares and 21,527,027 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. Lawyer Mr. Lu Xin of Beijing Jincheng Lawyer’s firm testified on the spot of the provisional shareholders’ meeting and issued law position paper, considered that the convene, holding procedure of the provisional shareholders’ meeting was legal and valid, and in accordance with Company law of PRC, Guidance Opinion on Shareholders’ General Meeting of Listed Company and the Articles of Association. The qualification of the members attended the Meeting were legal and valid as well as the voting process. The resolution public notice of the provisional shareholders’ general meeting was published in Securities Times and Hong Kong Ta Kong Pao dated Feb. 4, 2004. (II) The Company published the public notice on holding 2004 Annual Shareholders’ General Meeting on Securities Times and Hong Kong Ta Kung Pao dated May 25, 2004. The Annual Shareholders’ General Meeting was held in the meeting room on the 3rd floor of the Company at 9:00 am on Jun. 25, 2004 (Xiabancheng Town of Chengde County). 3 shareholders and shareholders proxies attended the meeting, representing 204,835,360 shares of the Company, taking 46.7% of the total share capital (204,000,000 domestic RMB shares, taking 46.51% of the total share capital, and 835,360 foreign shares, taking 0.19% of the total share capital). The directors, supervisors and senior executives attended the meeting as non-voting delegates, which Mr. Wang Shuxian authorized Mr. Bainian to preside, the Chairman of the Board, in accordance with relevant provisions in Company Law and Articles of Association of the Company. The meeting examined and approved the following proposals by signed voting: 1. Examined and approved 2003 Work Report of the Board of Directors; Amounting to 204,835,360 shares approval (204,000,000 domestic RMB shares and 835,360 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. 2. Examined and approved 2003 Work Report of the Supervisory Committee; Amounting to 204,835,360 shares approval (204,000,000 domestic RMB shares and 835,360 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. 3. Examined and approved 2003 Financial Auditor’s Report; Amounting to 204,835,360 shares approval (204,000,000 domestic RMB shares and 835,360 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. 4. Examined and approved 2003 Annual Report and Annual Report Summary; Amounting to 204,835,360 shares approval (204,000,000 domestic RMB shares and 835,360 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. 5. Examined and approved Proposal on Profit Distribution; As audited by PricewaterhouseCooper Zhongtian CPAs & Co., Ltd. according to CAS and by PricewaterhouseCooper (China) CPAs & Co., Ltd. respectively, the net profit of the Company 2003 both are RMB 143,046,587. Based on the relevant regulations of the Company Law of PRC and Articles of Association of the Company, the withdrawal 10% of statuary public reserve funds amounting to RMB 14,304,659 and 5% of statuary public welfare funds amounting to RMB 7,152,330, plus the retained profit in previous year so as to the profit available for distributing to shareholders amounting to RMB 149,462,984. Thanks to the Company inputting a large amount of capital in joint-funded paper making project, in order to make a compromise of the interests between shareholders and development of the Company, the Company would not to distribute profit to shareholders or carry out converting public reserve funds into dividends in 2003. Amounting to 204,835,360 shares approval (204,000,000 domestic RMB shares and 835,360 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. 6. Examined and approved the proposal on amendment of Articles of Association; Amounting to 204,806,680 shares approval (204,000,000 domestic RMB shares and 806,680 foreign shares); 28,680 share objection; 0 share waiver; and the approval shares take up 99.9% of total shares held by shareholders who attending the Meeting. 7. Examined and approved the proposal on the remuneration of directors (supervisors) and senior executives; Amounting to 204,835,360 shares approval (204,000,000 domestic RMB shares and 835,360 foreign shares); 0 share objection; 0 share waiver; and the approval shares take up 100% of total shares held by shareholders who attending the Meeting. Lawyer Mr. Lu Xin of Beijing Jincheng Lawyer’s firm testified on the spot of the provisional shareholders’ meeting and issued law position paper, considered that the convening, holding procedure of the annual shareholders’ meeting was legal and valid, in accordance with Company law of PRC, Guidance Opinion on Shareholders’ General Meeting of Listed Company and the Articles of Association. The qualification of the members attended the Meeting were legal and valid as well as the voting process. The resolution public notice of the annual shareholders’ general meeting was published in Securities Times and Hong Kong Ta Kong Pao dated Jun. 26, 2004. II. Election and changing of the directors and supervisors of the Company In the report period, During the report period, Mr. Song Kuiwu, the primary chairman of the supervisory committee of the Company, passed away due to illness so as to the 5th meeting of the 2nd supervisory committee elected Mr. Xu Xue, supervisor representative for employee chose by workers’ congress of the Company, as chairman of the supervisory committee. The other directors, supervisors and senior executives of the Company remained unchanged. Section 8. Report of the Board of Directors I. Discussion and analysis to the whole operation in the report period In the report period, in spite of being encountered with some difficulties, the Company’s production and operation was generally normal for the whole year. In 2004, income from core business was RMB 525,685,638.38, and the Company realized profit from core business amounting to RMB 171,942,051.42 and net profit amounting to RMB 105,127,475.36. In the report period, interest expenses increased RMB 14 mil over last year, capitalized interests decreased RMB 3 mil over last year and export tax-rebation decreased RMB 8 mil. In the report period, adverse elements including coal shortage, overfreight on road harnessed, and tight power etc., produced certain disadvantageous effect on the production of the Company. In the first half of the year, as cotton price rose up sharply and export tax rebate decreased 4%, to guarantee the profit, the Company raised selling price of knitting dressing products. After huff, customers didn’t agree on partial orders, which resulted in decrease in sales income of knitting dressing compared with that of the same period of last year and declining of gross profit ratio of knitting dressing products at some certain degree, In recent years, the Company input large quantities of capital into project construction of spinning and papermaking. Although the Company accomplished additional issuance of B-share in the second half of 2004, most of raised proceeds were paid for bank loan according to the agreement. Therefore, the tense situation of capital was not released in essence. Due to adjustment of bank policies, from the second half of 2004, partial banks didn’t increase loan and credit line for the Company and the Company faced capital turnover crisis, which resulted in vast stop production at the end of 2004. On Jan. 18, 2005, the Company issued stop production public notice, which arose high attention from governments of Chengde City and Chengde County and all bank creditors. They went to inspect conduct research and negotiate to resolve the relevant problems. Under the common efforts of the Company and all parties, on Jan. 25, 2005, the company published resuming production public notice and plans. The Company began to resume production by and by. At present, the production of the company have basically went back to normal, and the capital shortage have been mitigated at certain degree, partial banks committed to borrow new loan for returning back bad loans, or increase bank loans. The management of the Company believed, with the resumption of the production, investment project was put into operation stage by stage, and the capital pressure of the Company would be released with the increase of business revenue. The Company had two basic industries of textile and papermaking: textile product mainly included knitting wears and yarn and integrated silk achievements. From the view of development prospect, in the aspect of knitting wears: because no input in new project enlarged production volume, knitting wears scale basically kept the same; in the aspect of yarn and integrated silk: because the equipments of the Company were installed up and put into production, productivity and sales income still need improving; in the aspect of papermaking: with the papermaking equipments of the Company attaining to production capability, papermaking would become the main component of profit of the company. In the report period, as approved by China Securities Regulatory & Supervision Commission ZJFX Zi [2004] No. 101 document, the Company completed directional additional issuance of 150,000,000 domestically listed foreign shares (B-share). The accomplishment of additional issuance would improve liabilities structure of the Company and produce significant influence on the long-term development of the Company. II. The operation in the report year (I) Scope of main operations and its operating status 1. Scope of main operations The main operations of the Company are the production and sales of various knit wear, yarns, chemical fiber synthetic silks and various kinds of papers and their products. 2. Business operation (1) Classified according to industries and products Classified according to Income from Cost of main Gross Increase/decreas Increase/decreas Increase/decrease industries or products main operations operations profit e in income from e in cost of main in gross profit ratio (RMB) (RMB) ratio main operations operations over over the last year (%) over the last year the last year (%) (%) (%) Garments 210,621,457.34 125,576,393.50 40.38 -14.49 12.74 -14.4 manufacturing Cotton textile 203,730,623.38 152,899,940.67 24.95 7.26 23.17 -9.7 Papermaking 111,333,557.66 75,267,252.79 32.39 27.49 20.05 -0.41 Including: related 54,576,285.90 transactions Knit wears 210,621,457.34 125,576,393.50 40.38 -14.49 12.74 -14.4 Spinning and synthetic 203,730,623.38 152,899,940.67 24.95 7.26 23.17 -9.7 silks Paper 111,333,557.66 75,267,252.79 32.39 27.49 20.05 -0.41 Including: related 54,576,285.90 transactions Pricing rules for related Transaction price of the Company and related companies would be confirmed according to normal market transactions transaction term and relevant agreement terms. Necessity and durative Y’S Company, its main related party, is an important trade partner of the Company before becoming the of related transactions Company’s related party. (2) Main operations in various areas Areas Income from main operations Increase/decrease in income from (RMB) main operations over the last year (%) Foreign sales Asia 238,823,920.79 -13.06 Domestic sales North China 120,256,818.31 -21.22 South China 148,224,035.98 72.25 East China 6,253,910.60 -12.3 Northeast 12,126,952.70 295 (II) Business operation and achievement of the Company’s main holding subsidiaries and share-holding companies 1. Hebei Xiabancheng Knit Wears Co., Ltd. is the Company’s wholly owned subsidiary, which was a Sino-foreign joint venture set up by Knitting General Plant, the predecessor of the Company and foreign enterprises, registered on Jul. 9, 1991 with a registered capital of USD 4 million. The operating scope is: production and sale of textile. Its main products are all kinds of knitwears. Ended Dec. 31, 2004, the total assets of the company were RMB 677,341,733, and net assets RMB 443,967,895. In 2004, it realized income from core business amounting to RMB 203,307,489 and net profit RMB 20,536,901. 2. Chengde Dixian Fashion Co., Ltd. is a Sino-foreign joint venture, which was jointly invested by Japanese Y’s Corporation and the Company. It registered on May 23, 2000 with registered capital of USD 24 million. The Company holds 75% equity of this company and Y’s Corporation holds 25% respectively. The operating scope is: production and sale of yarn and synthetic silks. Its main products are yarn and synthetic silks. Ended Dec. 31, 2004, the total assets of the company were RMB 494,902,351, and net assets RMB 208,171,509. In 2004, it realized income from core business amounting to RMB 351,588,162 and net profit RMB -494,289. 3. Chengde Xingye Papermaking Co., Ltd. was a papermaking company jointly established by Hong Kong Zhanxi International Co., Ltd. and the Company, with a registered capital of USD 100 million. The Company holds 75% equity of this company and Zhanxi Group holds 25% respectively. The operating scope is: production and sale of series of high-grade copperplate plate paper and craft board. Ended Dec. 31, 2004, the total assets of the company were RMB 1,173,932,335, and net assets RMB 874,394,489. In 2004, it realized income from core business amounting to RMB 134,555,661 and net profit RMB 14,394,270. 4. Chengde Banhe Chemical Simulation Textile Co., Ltd. was shareholding company of controlling subsidiary of the Company, which was a sino-foreign operating enterprise registered and set up on Sep. 29, 2002. Dixian Fashion Co., Ltd., Japan Shanxia Trade Co., Ltd. and Hebei Xiaban Town Knitting Company respectively holds 40% and 35% and 25% equity of this company. The operating scope was: production and sale of different types of chemical simulation cloth with high quality, knitting cloth and different types of coloration finished cloth; the main products were high chemical simulation cloth, knitting cloth and different types of coloration finished cloth. Ended Dec. 31, 2004, the total assets of the company were RMB 469,692,480, and net assets RMB 391,775,057. In 2004, it realized income from core business amounting to RMB 167,462,878 and net profit RMB –5,132,024. 5. Chengde Japan Papermaking Co., Ltd. was a Sino-foreign joint venture invested and set up by the company and Japan Papermaking Co., Ltd.. The total investment was amounting to YEN 11, 000 million and the registered capital was YEN 6364 million. The Company and Japan Papermaking respectively hold 45% and 55% equity of this company. The joint venture mainly produces and sells all types of high-quality paper. The production scale is producing 150 thousand tons of paper per year. The project is still in progress. (III) Major suppliers and customers The total purchase amount from the top five suppliers amounting to RMB 185,345,263 accounts for 65% of the Company’s total purchase amount. The total sales amount to the top five customers amounting to RMB 135,952,800 accounts for 37% of the Company’s total sales amount. (IV) Problems, difficulties and solutions occurred during the Company’s operation The papermaking industry is a newly involved industry for the Company, with huge investment scale and high requirements for arts and crafts and technology, which is a capital-intensive and labor-intensive industry. The Company is still not so mature in the aspects of technology and management. There is still a shortage of skilful technicians and experienced managers, which will restrict the normal operation of the papermaking industry of the Company within a certain period and influence on the maximization of the Company’s profit to a certain extent. Therefore, the Company shall adopt many measures and try its best to enhance the productive, operating and managerial level in papermaking. The Company has employed several professionals in papermaking at home and abroad and assigned them to each production loop. At the same time, the Company shall reinforce the professional training to staffs in papermaking and enhance the whole quality of the papermaking team. In addition, the Company will also send some technical personnel to the famous domestic and foreign papermaking producers to learn their advantages and then serve the production and business management of Dixian Company to ensure the realization of papermaking industry as a new point of economic increase. In the report period, although the Company accomplished additional issuance of B-shares, most of raised proceeds were used to pay back bank loan as per the agreement. Nevertheless, the bank credit policy adjusted. Since the second half of 2004, banks didn’t increase new loan support for the Company, which resulted in the very tight capital of the Company. On Jan. 18, 2005, the Company published public notice on stop production, which arose high attention from governments of Chengde City and Chengde County and all bank creditors. They went to inspect conduct research and negotiate to resolve the relevant problems. Under the common efforts of the Company and all parties, on Jan. 25, 2005, the company published resuming production public notice and plans. The Company began to resume production by and by. At present, the production of the company have basically went back to normal, and the capital shortage have been mitigated at certain degree, partial banks committed to borrow new loan for returning back bad loans, or increase bank loans. The management of the Company believed, with the resumption of the production, investment project was put into operation stage by stage, and the capital pressure of the Company would be released with the increase of business revenue. III. Investment (I) Investment with raised proceeds As approved by China Securities Regulatory and Supervision Committee ZJFXZi [2004] No. 101 document, the Company accomplished directional additional issuance of 150,000,000 B-shares in July 2004. The net amount of raised proceeds was converted into RMB 496.24 mil. The project invested with raised proceed and the usage of raised proceeds were as follows: 1. Actual usage of raised proceeds As approved by the resolutions of 2002 Provisional Shareholders’ General Meeting held on Oct. 29, 2002 and 2002 Shareholders’ General Meeting held on Jul. 22, 2003, the company put bank loan capital into the project. After the accomplishment, the Company paid back bank loan with raised proceeds. According to the commitments of the Prospectus, after the raised proceeds of the Company was carried out, the Company and the bank agreed, the Company would pay back loan amounting to RMB 400 million right now and the rest of raised proceeds would be used to supplement current capital of the project. Ended Dec. 31, 2004, the proceeds raised through previous shares offering has been used amounting to RMB 466,240,000 accumulatively, of which, the Company returned the bank loan amounting to RMB 354.95 million and supplementary current capital amounting to RMB 111.29 million. In Jan. 2005, the Company returned the bank loan of paper-marking project amounting to RMB 30 million, thus, the raised proceeds has been used over. 2. Investment with raised proceeds The schedule of investment project with raised proceeds promised in the Prospectus Project Period of Schedule of Schedule of benefit from the project construction using of raised Trial To reach production proceeds production completely Increasing investment project of technological reforms of high-graded paper Two year Jan. 2003 Sep. 2003 Dec. 2004 used for cultural amounting to 100,000 tons Particulars about actual progress of investment project with raised proceeds Project Year Capability of Benefit from the project production Actual Proportion of output reaching production Increasing investment project of technological reforms of high-graded paper 2004 100,000 tons 28,531 tons 28.53% used for cultural amounting to 100,000 tons 3. Income from investment project with raised proceeds Particulars about benefit realized from investment project with raised proceeds in 2004 Unit: RMB’0000 Project Actual output Benefit from the project Income Cost Gross profit Increasing investment project of technological reforms of high-graded 28,531 tons 7,638 5,620 2,018 paper used for cultural amounting to 100,000 tons 4. The plan of the said project suffered the influence by a certain degree, and it did not reach estimated earnings due to the longer of additional issuance course and later of allocation of raised proceeds. (II) Investment with the proceeds not raised through shares offering: 1. In the report period, the Company newly increased investment of RMB 176,451,496 in Xingye Papermaking Company (hereinafter referred to as Papermaking Company), in 2004, Papermaking Company realized a sales income amounting to RMB 134,555,661, and realized a net profit amounting to RMB 14,394,270. 2. In the report period, the Company continued to conduct the construction of textile projects with newly increased investment amounting to RMB 200,350,876. 3. In the report period, the Company invested RMB 56,579,349.46 in Chengde-Japan Papermaking Co., Ltd.. At present, the said company is still in progress. IV. Financial position At the end of At the end of Increase/decrease in Increase/decrease 2004 2003 the amount at the ratio (%) year-end over the end of last year Total assets 2,992,390,845 2,310,992,832 681,398,013 29.49 Including: fixed assets 2,023,834,720 1,617,066,280 406,768,450 25.15 Current assets 802,102,094 466,176,869 335,925,225 72.06 Other assets 109,561,126 2,421,088 107,140,038 4425.28 Total liabilities 1,343,587,778 1,336,877,786 6,709,992 0.5 Including: long-term 605,354,800 304,904,800 300,450,000 98.54 liabilities Current liabilities 736,037,978 1,029,338,986 -293,301,008 -28.49 Shareholders’ equity 1,298,142,307 696,775,076 601,367,231 86.31 Profit from main operations 171,942,051 225,116,053 -53,174,002 -23.62 Net profit 105,127,475 143,046,587 -37,919,112 -26.53 Net increase in cash and 95,742,525 31,085,813 64,656,712 207.99 cash equivalents Main reasons for changes: Total assets: The Company conducted technological reforms and expansion of construction, thus the fixed assets and current assets have increased by a large margin; the Company completed additional issuance; the raised proceeds have been allocated. Shareholders’ equity: The Company realized profit in 2004; the Company completed additional issuance; the raised proceeds have been allocated. Profit from main operations: The prices of raw materials and fuel have risen by a big margin. Net profit: Due to decrease of income from main operations and reduction of tax rebate rate for exports. V. In the report period, the productive and operating environment, macro policies and laws and regulations did not change greatly and affected no material influence on the Company’s financial position and operating results. VI. Shenzhen Pengcheng Certified Public Accountants Ltd. and CCIF Limited Certified Public Accountant have produced unqualified domestic and oversea Auditor’s Report for the Company respectively. VII. Business plan for the next year: 1. In 2005, the Company shall continue to reinforce interior management and cost control, dig interior potential and enhance the efficiency through improving the management in order to better return to the investors. 2. The Company shall try its best to increase the product export to America and Europe while keeping and enlarging the product sales in Japan. The Company also shall actively expand the domestic market, establish sales network for products at home, increase sale in domestic market and ensure the productive and sales connection of the Company’s products. 3. The Company shall continue to speed up the construction of joint papermaking project, try its best to make papermaking equipments be under normal production and operation and enhance its output and quality in order to create more economic benefits for the Company. VIII. Routine work of the Board of Directors (I) In the report period, the meetings and resolutions of the Board of Directors: In 2004, the Board of Directors of the Company totally held 5 meetings: 1. The 13th Meeting of the 2nd Board of Directors of the Company was held on the morning of Mar. 8, 2004 and the Meeting has examined and passed the following resolutions: 1) 2003 Work Report of the Board of Directors; 2) Auditor’s Report for 2003 3) Annual Report 2003 and its Summary 4) Preplan on Profit Distribution for 2003 After being audited by PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. and PricewaterhouseCoopers Co., Ltd. according to Chinese Accounting System and International Accounting Principles respectively, the Company’s net profit in 2003 was RMB 143,046,587. According to relevant provisions in Company Law of the P.R.C. and Articles of Association of the Company, after being appropriated 10% of statutory public reserve amounting to RMB 14,304,659 and being appropriated 5% of statutory public welfare amounting to RMB 7,152,330 and adding the remained profit from last year, the profit available for distribution to shareholders is RMB 149,462,984. Since the capital input for joint-stock papermaking project is relatively large, the Board of Directors decided not to distribute profit to shareholders nor convert capital public reserve into share capital in 2003 in order to consider the interests of both the development of the Company and all shareholders. This preplan should be reported to Shareholders’ General Meeting for consideration. 5) Proposal on Revising Articles of Association; 6) Examined and approved Management System of Investor Relationship; 7) Proposal on Remuneration of Directors (Supervisors) and Senior Executives; Adopting the method of testing and evaluation at the year-end, the Company confirmed the performance of directors (supervisors) and senior executives according to respective indexes and implementation of work and added float reward on the basis of basic annual salary to mobilize the activeness of senior executives. The above persons were evaluated through testing by the Board of Directors and supervised by the Supervisory Committee. The resolutions of this Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Mar. 10, 2004. 2. The 14th Meeting of the 2nd Board of Directors of the Company was held on the morning of Apr. 15, 2004 and the Meeting has examined and passed the following resolutions: The First Quarterly Report for 2004 of the Company The first quarterly report for 2004 was published on Securities Times and Hong Kong Ta Kung Pao dated April 16, 2004. 3. The 15th Meeting of the 2nd Board of Directors of the Company was held on the morning of May 24, 2004 and the Meeting has examined and passed the following resolutions: Decision on Holding the Shareholders’ General Meeting 2003. The notification on holding the Shareholders’ General Meeting 2003 was published on Securities Times and Hong Kong Ta Kung Pao dated May 25, 2004. 4. The 16th Meeting of the 2nd Board of Directors of the Company was held on Aug. 22, 2004 and the Meeting has considered and passed the following resolutions: 1) Semi-annual Report 2004 and its Summary 2) Semi-annual Financial Report for 2004 The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Aug 25, 2004. 5. The 17th Meeting of the 2nd Board of Directors of the Company was held at the meeting room on 3/F of Dixian Building on the morning of Oct. 19, 2004 and the following resolutions have been considered and passed in the Meeting: The Third Quarterly Report for 2004 The third quarterly report for 2004 was published on Securities Times and Hong Kong Ta Kung Pao dated Oct. 20, 2004. (II) Implementation of the Board of Directors about resolutions of Shareholders’ General Meeting: In the report period, according to requirements in Company Law of the P.R.C., Securities Laws of the P.R.C., Articles of Association of the Company and other laws and regulations, the Board of Directors of the Company seriously implemented all resolutions passed by the Shareholders’ General Meeting, strictly in compliance with resolutions and authorizations of the Shareholders’ General Meeting, with details as follows: In the report period, the Board of Directors of the Company actively organized and implemented the construction of papermaking project and additional issuance of B shares directly according to authorization of Shareholders’ General Meeting. In order to catch such chance, before the raised proceeds of the Company have still not been collected, the Company has conducted the construction of projects invested with raised proceeds by using bank loans and self-owned capital according to the authorization of the Shareholders’ General Meeting. Approved by China Securities Regulatory Commission (CSRC) with ZJFXZi [2004] No. 101 Document, the Company successfully issued 150 million domestically listed foreign shares (B-share) to overseas investors at the issuance price of HKD 3.32 per share from July 19, 2004 to July 20, 2004; the total raised proceeds were converted into HKD 498 million. The said issuance was set up three-month term when the shares are not for sale. The said shares have been listed for trade on Oct. 22, 2004. IX. Profit distribution preplan or preplan on converting capital public reserve into share capital of the year After being audited by Shenzhen Pengcheng Certified Public Accountants Ltd. and CCIF Limited Certified Public Accountants in line with Chinese Accounting System and International Accounting Standards respectively, the Company’s net profit after consolidation as of the year 2004 was RMB 105,127,475.36, and the net profit of parent company was RMB 107,327,475.36. In accordance with the relevant regulations of Company Law and Articles of Association of the Company, after appropriating 10% of net profit as statutory public reserve amounting to RMB 10,732,747.54 and appropriating 5% of net profit as statutory public welfare amounting to RMB 5,366,373.77, adding the remained profit from last year after distribution, the profit available for distribution to shareholders was RMB 238,491,338.76. Since the Company invested a large amount of capital in construction of projects of textile and papermaking and the bank adjusted the policies, which not only could not conduct auxiliary support on current capital demanded in the projects, but the original scale of credit line has decreased by a large margin, resulting in the tension of the Company’s capital. The Company has taken the profit to use in the transfer and development of the Company’s operations, and the Company would conduct profit distribution after the situation of the Company’s capital straightens up. Thus, the Company shall not distribute profit to shareholders nor convert capital public reserve into share capital in 2004 temporarily. This preplan should be submitted to Shareholders’ General Meeting for examination. X. Special explanation of CPA on the capital occupied by the Company’s controlling shareholder and other related parties Special Audit Opinion on Capital Occupied by Controlling Shareholder and Related Parties of Chengde Dixian Textile Co., Ltd. and External Guarantee SPST [2005] No. 198 All Shareholders of Chengde Dixian Textile Co., Ltd. We have audited the accompanying balance sheet of Chengde Dixian Textile Co., Ltd. (the “Dixian Company”) as of 31 December 2004 and the relevant statement of profit and profit distribution and cash flow statement for the year then ended. In the course of audit, we conducted the special audit on capital occupied by the controlling shareholders and related parties of Dixian Company and the relevant external guarantee. The facticity and integrality of situations of these capital occupation and external guarantee are the responsibility of Dixian Company; our responsibility is to express a special audit opinion on situations of these capital occupation and external guarantee based on our audit. We conducted our audit in accordance with Independent Standards of Chinese CPA on Auditing and Circular on Standardizing Capital Current between Listed Company and Related Parties and External Guarantees and Other Several Problems of Listed Company (ZJF [2003] No. 56 document) released by CSRC, and in the course of auditing, we have implemented essential auditing procedures considered by us, including spot-checking accounting notes and etc. combining the actual situation of Dixian Company. (I) Particulars about capital of Dixian Company occupied by the controlling shareholder and related parties and external guarantee for 2004: Unit: RMB’0000 Name of related parties Dec. 31, Accumulated Reason for Relationship between 2004 occurrence capital related parties and (Balance) amount for occupied Dixian Company year 2004 Chengde North Japan 39.49 270.97 * Affiliated company, Textile Co., Ltd. Dixian Company takes its 50% equity Chengde-Japan 1,074.44 2,550.93 ** Share-holding company, Papermaking Co., Ltd. Dixian Company takes its 45% equity Total 1,113.93 2,821.90 *Ended Dec. 31, 2004, Chengde North Japan Textile Co., Ltd., an affiliated company of Dixian Company, owed Dixian Company funds advanced of RMB 394,994.63; the balance was RMB 236,692.34 at the period-begin, and increased by RMB 2,709,752.60 in this period, while RMB 2,551,450.31 was withdrawn in this period, which was listed in item of “other receivables” of Dixian Company. **Ended Dec. 31, 2004, Chengde Japan Papermaking Co. Ltd., a share-holding company of Dixian Company, owed Dixian Company funds advanced amounting to RMB 10,744,363.82; the balance at the period-begin was RMB 0, and increased by RMB 25,509,307.53 in this period, while RMB 14,764,943.71 was withdrawn in this period, which was listed in items of “other receivables” of Dixian Company. Repayment methods of the aforesaid funds were as follows: Chengde North Japan Textile Co., Ltd.: Ended Dec. 31, 2004, this company still had the low stretch yarn of RMB 459,240.86 left in Dixian Company’s care, and Dixian Company planned to withdraw the claims by means of paying debts with goods. Chengde Japan Papermaking Co. Ltd.: Dixian Company is a shareholder of Chengde Japan Papermaking Co. Ltd., and this sum occurred for Chengde Japan Papermaking Co. Ltd.. Once all procedures completed, this sum will be invested in this company as investment. (II) External guarantees of Dixian Company 1. Ended Dec. 31, 2004, the loan amount of Guangdong Rieys Group Company Ltd. for which Dixian Company had provided guarantee was RMB 20 million. On Dec. 29, 2004, Dixian Company signed a guarantee contract with Guangzhou Branch of CITIC Industrial Bank, to provide joint guarantee responsibility for the RMB 20 million bank loan (loan term from Dec. 29, 2004 to Jun. 29, 2005) recorded in 2004 XSYDZI No. 11783 RMB Credit Contract signed by Guangdong Rieys Group Company Ltd. and Guangzhou Branch of CITIC Industrial Bank. Guangdong Rieys Group Company Ltd. had provided Dixian Company counter-guaranty with its production equipment. 2. On Oct. 24, 2003, Dixian Company signed a ceiling guarantee contract with Shenzhen Lianhua Roal Subbranch of China Everbright Bank, to provide joint guarantee responsibility for the RMB 83 million trade acceptance recorded in S0520031015 Comprehensive Credit Line Agreement signed by Shenzhen Lingfeng Textile Industrial Co., Ltd. and Shenzhen Lianhua Road Subbranch of China Everbright Bank. The guarantee term would be two years starting from the expiration day of financial obligation performance by the debtor agreed in the detailed operational contract signed according to Comprehensive Credit Line Agreement. Dixian Company indirectly got a credit of RMB 83 million from Shenzhen Lianhua Road Subbranch of China Everbright Bank through the way of providing the aforesaid guarantee. Dixian Company had used the aforesaid RMB 83 million, and recorded it as debt in the account. Due to the aforesaid reasons, Dixian Company reckoned this guarantee event had been actually a borrowing event, therefore it did not list it in the External Guarantee Statement of Listed Company attached back. Supplementary Statement 1: Statement on the Capital of Listed Company Occupied by Related Party Supplementary Statement 2: Statement on the External Guarantees of Listed Company Shenzhen Pengcheng Certified Public Accountant Chinese CPA: Miao Qingmei Lu Jianbo Attachment 1 Capital of Listed Company Occupied by Related Party Name of the company: Chengde Dixian Textile Co., Ltd. Unit of a Name of Relationship Ledger of Balance in Debit Credit Closing Bad debt Way of R related party between related accounting the year amount amount balance provision occupancy party and listed statements beginning withdrawn and company reasons Chengde North Japan Affiliated Other 23.66 270.97 255.14 39.49 - Advance Re Textile Co., Ltd. company receivables Chengde Japan Joint stock Other - 2,550.93 1,476.49 1,074.44 - Advance Co Papermaking Co., Ltd. company receivables Total 23.66 2,821.90 1,731.63 1,113.93 - Note: For details of redemption methods, please refer to text of the report. Attachment 2 Return on the External Guarantees of Listed Company Name of the company: Chengde Dixian Textile Co., Ltd. U Guarantor Name of the Relationship Guarantee Beginning Closing day Guarantee Way of guaranteed object between the amount day of the of the responsibility guarantee guaranteed object guarantee guarantee exists at present and listed company or not Dixian Guangdong Rieys No relationship 2,000.00 06/29/2005 06/29/2007 Yes Joint Company Group Co., Ltd. responsibility warrant guarantee XI Special explanations and independent opinions of independent directors on the accumulated external guarantees and external guarantee in this period as well as implementation of regulations of the Company: According to the spirits of the Circular on Some Problems of Regulating Current Capital of Listed Companies and Related Parties and External Guarantee (ZJF [2003] No. 56) (hereinafter referred to as ‘Notification’ for short) issued by CSRC, we, as independent directors of the Company, carefully checked the external guarantees performed according to the regulations of the Circular by the Company, and now our explanations and opinions on some problems were as follows: By the end of this report period, the Company had not provided guarantees for holding shareholders, other related parties of which the Company held less than 50% equity, any non-legal person unit or individual; holding shareholders or other related parties had not forced the Company to provide guarantee for others; the accumulated external guarantee amount of the Company was RMB 220 million, including a guarantee amount of RMB 200 million for wholly-owned subsidiaries and holding subsidiaries, while a mutual guarantee amount of RMB 20 million for Guangdong Rieys Group Company Ltd. In the report period, the Company indirectly got a credit of RMB 83 million from Shenzhen Lianhua Road Subbranch of China Everbright Bank through the way of providing guarantee to Shenzhen Lingfeng Textile Industrial Co., Ltd.. The Company had used the aforesaid RMB 83 million, and had recorded it as debt in the account. The Company had not recorded it in the guarantee items, and this guarantee event had actually been a borrowing event, in compliance with the fact. The approval procedures of external guarantee of the Company were in accordance with relevant regulations. The Company had amended its articles, and there are explicit stipulations in the Articles of Association of the Company concerning external guarantee approval procedure as well as the credit standard of guaranteed object, so as to secure the further standardization of the Company’s external guarantee system, effective control external guarantee risks of the Company and safeguarding the interests of vast investors. XII Other events In the report period, the newspapers chosen by the Company for information disclosure had not been changed, and they still were Securities Times and Hong Kong Ta Kung Pao. Section 9. Report of the Supervisory Committee I Meeting of the Supervisory Committee held in the report period and decisions made In the report period, Supervisory Committee of the Company held three meetings, with details as follows: 1. The 4th meeting of the 2nd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on Mar. 8, 2004. The meeting examined and approved the following resolutions: (1) Examined and approved the Work Report of the Supervisory Committee 2003; (2) Examined and approved the Financial Audit Report 2003; (3) Examined and approved the Annual Report 2003 and Summary of the Annual Report. Notifications of the resolutions made in this meeting have been published in Securities Times and Hong Kong Ta Kung Pao dated Mar. 10, 2004. 2. The 5th meeting of the 2nd Supervisory Committee was held in the meeting room on 32 the 2nd floor of the Company on the morning of Aug. 11, 2004. The meeting examined and approved the following resolution: (1) Since the former Chairman of the Supervisory Committee of the Company Mr. Song Kuiwu died of lung cancer on Aug. 8, 2004, the staff delegate supervisor Mr. Xu Xue, who had been recommended by the Meeting of the Workers’ Representative Assembly, was elected by voting as the Chairman of the 2nd Supervisory Committee in this meeting. Notifications of the resolution made at this meeting have been published in Securities Times and Hong Kong Ta Kung Pao dated Aug. 12, 2004. 3. The 6th meeting of the 2nd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Aug. 22, 2004. The meeting examined and approved the following resolutions: (1) Examined and approved the Semi-Annual Financial Report 2004; (2) Examined and approved the Semi-Annual Report 2004 and Summary; Notifications of the resolution made at this meeting have been published in Securities Times and Hong Kong Ta Kung Pao dated Aug. 24, 2004. II Independent opinions of the Supervisory Committee 1. Operation of the Company according to law According to relevant State laws and regulations, the Supervisory Committee of the Company supervised the holding procedures and resolutions of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board, implementation of duties of the senior executives and the management system of the Company, and believed that, in 2004, the Board of the Company could normatively operate strictly according to Company Law, Securities Law, Listing Rules, Articles of Association of the Company, as well as other relevant regulations and systems in a patient and responsible way and its operation decisions were scientific and reasonable. The Board had further perfected internal management system and internal control to set up a good internal mechanism. The directors and managers of the Company had no behaviors against laws, regulations or Articles of Association of the Company, nor behaviors that had done harm to the interest of the Company in implementing their duties. 2. Inspection of the financial status of the Company The Supervisory Committee of the Company patiently and meticulously inspected the financial system and financial status of the Company, and believed that the Financial Report 2004 of the Company could truly reflect the financial status and operation achievement of the Company, and that the audit opinions on the Financial Statement of the Company furnished by Shenzhen Pengcheng Certified Public Accountant Agent Co., Ltd and Hong Kong CCRF Limited CPAs, as well as their evaluation on relevant items were objective and fair. 3. Approved by ZJFXZI [2004] No. 101 issued by China Securities Regulatory Commission, the Company had accomplished the work of directional reissue 150,000,000 B-shares. The proceeds raised by the Company was amounted to RMB 496.24 million. The raised proceeds had been used up according to the commitments stated in the Prospectus. 4. In the report period, the Company had no purchases or sales of assets. 5. Related transactions: The Supervisory Committee of the Company believed that the related transactions made by the Company were fair and reasonable, and that there were no cases that had done harm to the interest of the Company or the shareholders, or had caused outflow 33 of the Company’s assets. 6. Both the domestic and the international Accountants engaged by the Company had presented unqualified audit reports for the Financial Statement 2004 of the Company, and the Supervisory Committee had no special explanation. Section 10. Important Events I In the report period, the Company had no significant lawsuits. II In the report period, the Company had no important purchases or sales of assets, takeovers or mergers. III Related transactions 1. Related sales and purchases Related party Selling products and supplying Purchasing products and accepting labor services to related party labor services from related party Transaction Proportion in the Transaction Proportion in the amount amount of the amount amount of the same kind of same kind of transactions transactions North Japan 1,997,118.06 0.61% Textile Company Y’S Corporation 52,579,167.84 10.00% Total 54,576,285.90 10.61% The prices of the transactions between related companies and the Company were all set according to regular market transaction articles and articles of relevant agreement. 2. Current liabilities and credits Related parties Funds provided to the related Funds provided to listed parties company by related party Amount Balance Amount Balance Chengde North Japan 2,709,752.60 394,994.63 Textile Co., Ltd. Chegnde Japan 25,509,307.53 10,744,363.82 Papermaking Co., Ltd. Total 28,219,060.13 11,139,358.49 Note: In the report period, the occurred amount of funds that listed company had provided holding shareholders and its subsidiaries was RMB 0, and the balance was RMB 0. Ended Dec. 31, 2004, Chengde North Japan Textile Co., Ltd. still had low stretch yarn worthy of RMB 459,240.86 stocked in Dixian Company. Dixian Company planned to recover debt with goods. Dixian Company is shareholder of Chengde Japan Papermaking Co., Ltd.. after procedures completed, the partial expense occurred for Chengde Japan Papermaking Co., Ltd. would be invested on this company as investment. IV. Important contracts and implementation In the report period, the implementation of each business contract of the Company was normal, and no significant contract dispute ever happened. 1. In the report period, the Company had not entrusted, contracted or leased other companies’ assets, nor had other companies entrusted, contracted or leased assets of the Company. 2. In the report period, the Company provided loan guarantee for RMB 20 million Guangdong Rieys Co., Ltd. by way of counter guarantee. In the report period, the Company provided guarantee for Chengde Xingye Paper Making Co., Ltd., the holding subsidiary of the Company, getting loan amounting to 34 RMB 0.12 billion from Chengde County Subbranch of Construction Bank of China, and the guarantee term was 3 years. In the report period, the Company respectively provided guarantee for RMB 40 million loan from Dalian Branch of Guangdong Development Bank for Hebei Xiaban Town Textile Co., Ltd., the Company’s wholly-owned subsidiary, and Chengde Dixian Fashion Co., Ltd., the Company’s holding subsidiary, with a three-year-guarantee term. In the report period, the Company indirectly got a credit of RMB 83 million from Shenzhen Lianhua Road Subbranch of China Everbright Bank through the way of providing guarantee for Shenzhen Lingfeng Textile Industrial Co., Ltd.. The Company had used the aforesaid RMB 83 million, and had recorded it as debt in the account. This guarantee was actually a loan, so the Company did not list it in the guarantee items. 3. In the report period, the Company had never entrusted any other party to manage the Company’s cash assets and has no plan of entrusting any party to manage the assets in the future, either. V. In the report period or the time extending into the report period, the commitments held by the Company or shareholders holding more than 5% shares that would bear significant influence on the operation achievement or the financial status of the Company. In the report period, as authorized by shareholders’ general meeting, the Board of the Company actively organized and implemented papermaking project construction and directional additional issuance of B-shares. To grasp the challenges and chances, before the raised proceeds were not carried out, authorized by shareholders’ general meeting, the Company used bank loan and its own capital in advance to conduct project construction. As approved by China Securities Regulatory and Supervision Committee ZJFX Zi [2004] No. 101 Document, the Company directionally issued 150 mil domestically listed foreign shares (B-share) to overseas institutional investors at the issuance price HKD 3.32 per share with the total raised proceeds amounting to HKD 498 mil. The issuance arranged 3-month lock-up period. The shares of the Company issued this time were on the market for circulation on Oct. 22, 2004. VI. Since the Company and the former auditing institution PricewaterhouseCoopers Company did not reach an agreement on the auditing fee and time of arrangement in 2004, the Company didn’t engage PricewaterhouseCoopers Zhongtian Certified Public Accountants & Co. and PricewaterhouseCoopers (China) Co., Ltd. for auditing, but engaged Shenzhen Pengcheng Certified Public Accountant Agent Co., Ltd and CCRF Limited CPAs as the Company’s auditing units. The auditing fee for 2004 amounted to RMB 0.8 million. Shenzhen Pengcheng Certified Public Accountant Agent Co., Ltd and CCRF Limited had provided the Company auditing services for 1 year. The Certified Public Accountants signing the auditor’s report of the Company were Miao Qingmei and Lu Jianbo. VII. In the report year, the Company, the Board of Directors or its directors, the Supervisory Committee or its supervisors or other senior executives had never been inspected, or received administrative penalty or circulating criticism from China Securities Regulatory Commission, nor had them ever been condemned publicly by the stock exchange, either. VIII In the report period, the Company and Japan Papermaking Co., Ltd. established 35 Chengde Japan Papermaking Co., Ltd. by joint investment. The investment was totaled YEN 11 billion, and the registered capital was YEN 6.364 billion, including YEN 2.864 billion provided by Chengde Dixian Textile Co., Ltd. in the form of infrastructure, supporting facilities needed during the production and operation of the joint venture company as well as cash, taking up 45% of the registered capital, and JPY 3.5 billion provided by Nippon Paper Co., Ltd. in cash, taking up 55% of the registered capital. The joint venture company mainly engaged in production and sales of various top-grade paper, with a production scale of producing 0.15 million tons annually of various paper. IX. In the report period, the Company’s holding subsidiary, Chengde Dixian Fashion Co., Ltd. and Hebei Xiaban Town Textile Co., Ltd. along with Japan Shanxia Commerce Co., Ltd. signed an agreement on the equity change of Chengde Banhe Copy Fabric Co., Ltd.. After the change, the capital provided by Dixian Fashion Company would take up 40% of the registered capital of Banhe Company, the capital provided by Japan Shanxia Commerce Co., Ltd would take up 35% of Banhe Company’s registered capital, while that provided by Xiaban Town Company would take up 25% of Banhe Company’s registered capital. X. In the report period, approved by China Securities Regulatory Commission ZJFXZI [2004] No. 101 Document, the Company had accomplished the work of directional reissue of 0.15 billion domestic listed foreign shares (B share), of which 91.3 million shares were subscribed for in Hong Kong Dollars and 58.7 million shares were subscribed for in RMB. For the B-share subscribed for in RMB, assets verification institute believed it should get the approval from China Exchange Administration, so this part of shares weren’t get the verification from CPAs, and the Company haven’t conduct industrial and commercial change transactions so far. XI Other important events On Jan. 18, 2005, the Company issued the notification on cease production. Since the bank had tightened money, which resulted in the funds tension of the Company, from the end of 2004, the Company successively ceased production due to the lack of funds to purchase raw materials. After the issuance of cease production notification, the Company had negotiated solutions to the fund shortage with local government and banks. On Jan. 25, 2005, the Company issued production resumption notification as well as production resumption plan, and successively resumed production. Up to now, the Company has basically returned normal. After the issuance of the notification, Chairman of the Board of Dixian Company Mr. Wang Shuxian voluntarily promised to repay the debts, loan amounting to RMB 83 million from Lianhua Road Subbranch of China Everbright Bank and loan amounting to RMB 80 million from Dalian Renmin Road Subbranch of Guangdong Development Bank Co., Ltd. for Dixian Company. The aforesaid two banks have had the 173,604,000 share equity personally held by Mr. Wang Shuxian judicially frozen. 36 Section 11. Financial Report AUDITORS’ REPORT TO THE SHAREHOLDERS OF CHENGDE DIXIAN TEXTILE CO., LTD. (INCORPORATED IN PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) We have audited the accompanying consolidated balance sheet of Chengde Dixian Textile Co., Ltd. (the “Company”) and its subsidiaries (the “Group”) at 31 December 2004 and the related consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statements for the year then ended. These consolidated financial statements set out on pages 2 to 36 are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examination, 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 statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements give a true and fair view of the state of the consolidated financial position of the Group at 31 December 2004 and of the consolidated results of its operations and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards, as published by the International Accounting Board. CCIF CPA Limited Certified Public Accountants Hong Kong, 11 April 2005 Chan Wai Dune, Charles Practising Certificate Number P00712 C1238-2004con 37 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED INCOME STATEMENT YEAR ENDED 31 DECEMBER 2004 Note 2004 2003 RMB’000 RMB’000 TURNOVER 4 525,686 523,600 COST OF SALES (353,744) (298,484) GROSS PROFIT 171,942 225,116 OTHER OPERATING INCOME 5,067 28,697 DISTRIBUTION COST (9,759) (9,461) ADMINISTRATIVE EXPENSES (19,217) (19,499) OTHER OPERATING EXPENSES (413) (24,958) PROFIT FROM OPERATIONS 5 147,620 199,895 FINANCE COSTS, NET 7 (33,508) (15,855) SHARE OF RESULTS OF AN ASSOCIATE BEFORE TAX (1,283) 213 PROFIT BEFORE TAXATION 112,829 184,253 INCOME TAX EXPENSE 8 (6,027) (24,359) PROFIT BEFORE MINORITY INTEREST 106,802 159,894 MINORITY INTEREST 19 (1,675) (16,847) NET PROFIT FOR THE YEAR 105,127 143,047 DIVIDENDS 9 - - EARNINGS PER SHARE - Basic 10 RMB0.22 RMB0.34 - Diluted 10 N/A N/A The notes on pages 6 to 36 form an integral part of these financial statements. 38 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 Note 2004 2003 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 11 1,989,586 1,480,737 Prepayments for property, plant and equipment 45,993 136,329 Interests in an associate 12 56,579 225,015 Deferred tax assets 21 314 314 Other non-current assets 97,817 2,421 2,190,289 1,844,816 Current assets Inventories 13 215,911 126,361 Trade receivables 14 162,615 109,642 Other receivables and prepayments 15 191,953 91,112 Cash and bank balances 16 231,623 135,880 802,102 462,995 Total assets 2,992,391 2,307,811 EQUITY AND LIABILITIES Capital and reserves Share capital 17 588,600 438,600 Reserves 18 709,542 254,993 1,298,142 693,593 MINORITY INTEREST 19 350,661 277,340 Non-current liabilities Borrowings 20(a) 480,000 278,000 Deferred tax liabilities 21 2,195 2,634 Other non-current liabilities 22 125,355 26,905 607,550 307,539 Current liabilities Trade payables 23 282,375 304,231 Other payables and accrued charges 24 137,430 175,430 Current income tax liabilities 21,703 400 Borrowings 20(b) 294,530 549,278 736,038 1,029,339 Total equity and liabilities 2,992,391 2,307,811 Approved and authorised for issue by the board of directors on 11 April 2005. The notes on pages 6 to 36 form an integral part of these financial statements. 39 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 DECEMBER 2004 Share Share Revaluation Statutory Retained capital premium reserve reserves earnings Total (Note 17) (Note 18) (Note 18) (Note 18) (Note 18) RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1/1/2004 438,600 17,756 24,819 62,955 149,463 693,593 Net profit for the year - - - - 105,127 105,127 Appropriation from net profit (Note 19) - - - 16,099 (16,099) - Share issue 150,000 - - - - 150,000 Share premium less issuance costs - 349,422 - - - 349,422 Balance at 31/12/2004 588,600 367,178 24,819 79,054 238,491 1,298,142 Balance at 1/1/2003 365,500 20,938 24,819 41,498 100,973 553,728 Net profit for the year - - - - 143,047 143,047 Appropriation from net profit (Note 19) - - - 21,457 (21,457) - Appropriation - bonus issue (Note 18) 73,100 - - - (73,100) - Share issuance costs (Note) - (3,182) - - - (3,182) Balance at 31/12/2003 438,600 17,756 24,819 62,955 149,463 693,593 Note: Share issuance costs represent expenses incurred for the issue of shares of the company listed in securities market in 2004. The notes on pages 6 to 36 form an integral part of these financial statements. 40 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 Note 2004 2003 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 25 29,196 238,811 Interest paid (34,130) (17,506) Taxes paid (1,979) (25,221) NET CASH GENERATED FROM OPERATING ACTIVITIES (6,913) 196,084 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (342,137) (343,776) Time deposits placed, net - 60,000 Interest received 3 2,578 NET CASH USED IN INVESTING ACTIVITIES (342,134) (281,198) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings raised 517,302 189,102 Repayment of borrowings (570,050) - Issue of share capital 497,538 - NET CASH GENERATED FROM FINANCING ACTIVITIES 444,790 189,102 INCREASE IN CASH AND CASH EQUIVALENTS 95,743 103,988 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 135,880 31,892 CASH AND CASH EQUIVALENTS AT END OF YEAR 16 231,623 135,880 The notes on pages 6 to 36 form an integral part of these financial statements. 41 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2004 1. GENERAL Chengde Dixian Textile Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 3 November 1999 pursuant to a reorganisation in preparation for the listing of its shares. The initial registered capital of the company was RMB100,000,000 representing 100,000,000 shares with a par value of RMB1 each. Pursuant to the approval document No. [2000]121 issued by the China Securities Regulatory Commission (the “CSRS”) dated 29 August 2000, the company issued a total of 115,000,000 domestically listed foreign shares (“B shares”) (inclusive of the exercise of the Over-allotment Option of 15,000,000 B shares) with a par value of RMB1 each. The registered capital of the company after the issue of B shares was increased to RMB215,000,000. The company’s B shares were listed on the Shenzhen Stock Exchange on 29 September 2000. The company and its subsidiaries (hereafter collectively referred to as the “Group”) are principally engaged in the production and sale of clothes, synthetic fibers and a variety of paper products. The company is granted the rights to import and export, which has been principally utilised in the import of raw materials and export of products for its subsidiaries. The address of the registered office of the company is Xiaban Town, Chengde County, Hebei Province, the PRC. The total number of employees of the group as of 31 December 2004 was approximately 9,600 (2003: approximately 8,300). 42 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2004 2. IMPACT OF RECENTLY ISSUED INTERNATIONAL FINANCIAL REPORTING STANDARDS The following revised, amended and new standards which are generally effective for accounting periods beginning on or after 1 January 2005 may result in changes in the future as to how the Group’s financial performance and financial position are prepared and presented: - IAS 1 Presentation of Financial Statements (revised 2004); - IAS 2 Inventories (revised 2003); - IAS 8 Accounting policies, changes in accounting estimates and errors (revised 2003); - IAS 10 Events after the balance sheet date (revised 2004); - IAS 16 Property, plant and equipment (revised 2004); - IAS 17 Leases (revised 2004); - IAS 24 Related party disclosures (revised 2003); - IAS 21 The effects of changes in foreign exchange rates (revised 2003); - IAS 27 Consolidated and separated financial statements (revised 2004); - IAS 32 Financial instruments: Disclosure and presentation (revised 2004); - IAS 33 Earnings per share (revised 2004); - IAS 36 Impairment of assets (revised 2004); - IAS 38 Intangible assets (revised 2004); - IAS 39 Financial instruments: Recognition and measurement (revised 2004); and - IFRS 2 Business combination (revised 2003) The Group has not early adopted these revised, amended and new standards for the year ended 31 December 2004. The Group has commenced its assessment of the impact of these standards but it is not yet in a position to state whether these standards would have a material impact on its results of operations and financial position. 3. PRINCIPAL ACCOUNTING POLICIES a) BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. This basis of accounting differs from that used in the preparation of the company’s statutory financial statements (“PRC statutory financial statements”). The PRC statutory financial statements of the company and its subsidiaries comprising the group have been prepared in accordance with the relevant accounting principles and regulations applicable to them, as appropriate in the PRC. Appropriate adjustments have been made to the PRC statutory accounting records of the group. The consolidated financial statements have been prepared under the historical cost convention, except as disclosed in the accounting policies below. 43 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) b) CONSOLIDATED ACCOUNTING The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2004. The financial statements of the subsidiaries are prepared using consistent accounting policies. All significant intercompany balances and transactions, including intercompany profits and unrealised profits and losses, are eliminated on combination. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. i) SUBSIDIARIES Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Details of the group’s subsidiaries are set out in Note 29. In the Company’s financial statements, interests in subsidiaries are accounted for using the equity method and are stated at cost less identified impairment loss. An assessment of interests in subsidiaries is performed when there is an indication that the asset has been impaired or the impairment losses recognised in prior years no longer exist. The results of subsidiaries are accounted to the extent of dividends received and receivable. ii) ASSOCIATES Investments in associates are accounted for by the equity method of accounting. 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. Details of the group’s associate are set out in Note 12. 44 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) b) CONSOLIDATED ACCOUNTING (Continued) iii) JOINT VENTURES The group’s interest in jointly controlled entities are accounted for by proportionate consolidation. The group combines its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line by-line basis with similar items in the group’s financial statements. The group recognises the portion of gains or losses on the sale of assets by the group to the joint venture that it is attributable to the other ventures. The group does not recognise its share of profits or losses from the joint venture that result from the purchase of assets by the group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value or current assets or an impairment loss, the loss is recognised immediately. c) FOREIGN CURRENCIES i) MEASUREMENT CURRENCY Items included in the financial statements of each entity in the group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”). The consolidated financial statements are presented in RMB, which is the measurement currency of the parent. ii) TRANSACTIONS AND BALANCES Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. iii) GROUP COMPANIES Income statement and cash flows of foreign entities are translated into the group’s measurement currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. 45 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) d) FINANCIAL INSTRUMENTS Financial assets and financial liabilities carried on the balance sheet include cash and bank balances, receivables, prepayments, payables and borrowings. The accounting policies on recognition and measurement of cash and bank balances, trade receivables and borrowings are disclosed in the respective accounting policies found in Note 3. All other financial assets without a quoted market price in an active market are measured at cost subject to impairment review. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the group companies have a legally enforceable right to offset and intend to settle either on a net basis or to realise the asset and settle the liability simultaneously. e) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognised as expense in the period in which they are incurred. In situations where it is probable 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. Other properties are interests in land and buildings other than investment properties and are stated at valuation. Independent valuations are performed every year. In the intervening years, the directors review the carrying amount of the other properties and adjustment is made where there has been a material change. Increases in valuation are credited to the other properties revaluation reserve. Decreases in valuation are first set off against increases on earlier valuations in respect of the same property and are thereafter debited to operating profit. Major costs incurred in restoring property, plant and equipment to their normal working condition are charged to the income statement. Improvements are capitalised and depreciated over their expected useful lives to the company. 46 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) e) PROPERTY, PLANT AND EQUIPMENT (Continued) The gain or loss on disposal of property, plant and equipment other than investment properties is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the income statement. Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retained earnings and is shown as a movement in reserves. f) OPERATING LEASES Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals receivables/payables under such operating leases are accounted for in the income statement on a straight-line basis over the periods of the respective lease. Contingent rentals payables are written off as an expense of the accounting period in which they are incurred. g) AMORTISATION AND DEPRECIATION Depreciation is not provided for freehold land. Property, plant and equipment are depreciated at rates sufficient to write off their cost less accumulated impairment loss over their estimated useful lives on a straight-line basis, after taking into account its estimated residue value. The estimated useful lives are as follows: Land use rights 50 years Buildings 25 years Machinery and equipment - Paper making 20 years - Others 7 – 14 years Others 7 – 14 years Motor vehicles and office equipment 5 – 10 years 47 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) h) IMPAIRMENT OF ASSETS Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased: - property, plant and equipment; - interests in subsidiaries, associate company and joint venture; and - land use right. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, or are amoritsed over more than 20 years from the date when the asset is available for use or goodwill that is amortised over 20 years from initial recognition, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. i) Calculation of recoverable amount The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). ii) Reversals of impairment losses In respect of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is reversed only if the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event. A reversal of impairment losses is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the income statement in the year in which the reversals are recognised. 48 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) i) INVENTORIES Inventories are stated at the lower of cost and net realisable value, after provision for obsolete items. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. j) TRADE RECEIVABLES Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. k) CASH AND CASH EQUIVALENTS Cash represents cash on hand and deposits with banks which are repayable on demand. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less of maturity when acquired. Cash equivalents include investments and advances denominated in foreign currencies provided that they fulfil the above criteria. For the purposes of the cash flow statement, cash equivalents would also include cash, bank balances maturing within three months or less, bank overdrafts and advances from banks repayable within three months or less from the date of the advance. 49 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) l) TRADE AND OTHER PAYABLES Liabilities for trade and other payables which are normally settled on terms of about [90 to 180 days]are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Group. 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 reimbursement is virtually certain. The group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. n) BORROWINGS Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings. o) REVENUE RECOGNITION i) Revenue comprises the invoiced value for the sale of goods and services net of value-added tax, rebates and discounts, and after eliminating sales within the group. ii) Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. iii) Revenue from rendering of services is based on the stage of completion determined by reference to services performed to date as a percentage of total services to be performed. 50 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) o) REVENUE RECOGNITION (Continued) iv) 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. v) Dividends are recognised when the right to receive payment is established. p) BORROWING COSTS Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of assets that necessarily takes a substantial period of time to get ready for their intended use in which case they are capitalised as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalised at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. All other borrowing costs are charged to the income statement in the year in which they are incurred. q) EMPLOYEE BENEFITS Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Provision is made in respect of paid leave entitlement accumulated during the year, which can be carried forward into future periods for compensated absence or payment in lieu if the employee leaves employment. The employees of the group originated from urban areas have participated in the defined contribution retirement scheme organised and managed by the local government. The remaining employees, however, join the scheme based on individual preference. Apart from the above social security arrangement for employees, there is no other significant commitment in relation to employee welfare. The group’s contributions to the retirement scheme are calculated based on the relevant regulations of the local government authorities and are charged to the income statement as incurred. 51 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) r) INCOME TAX i) Income tax for the period comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in reserves, in which case they are recognised in reserves. ii) Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods. iii) The Group provide for income tax on the basis of their profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes. iv) Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases respectively. Deferred tax assets also arise from unused tax losses and unused tax credits. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets and liabilities are not discounted. The carrying amount of deferred tax assets/liabilities is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. v) Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Group and the Company has the legally enforceable right to set off current tax assets against current tax liabilities. The principle of offsetting usually applies to income tax levied by the same tax authority on same taxable entity. 52 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 3. PRINCIPAL ACCOUNTING POLICIES (Continued) s) RELATED PARTIES 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 other 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. Related parties may be individuals or corporate entities. t) SUBSEQUENT EVENTS Post-year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. u) SEGMENT REPORTING The segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risk and rewards that are different from those of other segments. 53 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 4. SEGMENT INFORMATION a) Primary reporting format – business segments Unallocated Textile Paper items Group RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2004 Sales 479,459 46,227 - 525,686 Other operating income 3,392 1,675 - 5,067 Segment result 109,883 37,737 - 147,620 Unallocated costs - - - - Profit from operations 147,620 Finance costs – net (33,508) Share of results of an associate before tax (1,283) - (1,283) Profit before tax 112,829 Income tax expense (6,027) Profit before minority interest 106,802 Minority interest (1,675) Net profit 105,127 Segment assets 1,762,880 1,174,932 - 2,935,812 Associate 56,579 - - 56,579 Unallocated assets - - - - Total assets 2,992,391 Segment liabilities 1,044,050 299,538 - 1,343,588 Unallocated liabilities - - - - Total liabilities 1,343,588 Other segment items Capital expenditure 269,972 174,284 - 444,256 Depreciation 54,662 35,288 - 89,950 Amortisation 653 421 - 1,074 Impairment provision – (reversal)/charge 3,087 1,993 - 5,080 Year ended 31 December 2003 Sales 436,272 87,328 - 523,600 Other operating income 1,314 27,383 - 28,697 Segment result 179,563 22,826 - 202,389 Unallocated costs - - (2,494) (2,494) Profit from operations 199,895 Finance costs – net (15,855) Share of results of an associate before tax 213 - - 213 Profit before tax 184,253 Income tax expense (24,359) Profit before minority interest 159,894 Minority interest (16,847) Net profit 143,047 54 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 4. SEGMENT INFORMATION (Continued) a) Primary reporting format – business segments (Continued) Unallocated Textile Paper items Group RMB’000 RMB’000 RMB’000 RMB’000 Segment assets 787,974 1,146,789 - 1,934,763 Associate 254,593 - - 254,593 Unallocated assets - - 118,455 118,455 Total assets 2,307,811 Segment liabilities 339,858 274,371 - 614,229 Unallocated liabilities - - 722,649 722,649 Total liabilities 1,336,878 Other segment items Capital expenditure 128,184 214,749 1,878 344,811 Depreciation 26,661 8,746 384 35,791 Amortisation 884 162 - 1,046 Impairment provision – charge (3,663) 502 - (3,161) There are no significant sales or other transactions between the business segments. Unallocated items mainly represent corporate expenses, assets and liabilities. Segment assets consist primarily of property, plant and equipment, land use rights, operating receivables and operating cash, and mainly exclude investments. Segment liabilities comprise operating liabilities and exclude items such as corporate taxation and borrowings. Capital expenditure comprise additions to property, plant and equipment (Note 11). b) Secondary reporting format – geographical segments As the group operates within the PRC, which is considered as one geographical segment, no segment information is presented. c) Analysis of sales and other operating income For the year ended 31 December 2004 2003 RMB’000 RMB’000 Sales of goods - Textile 414,352 436,272 - Paper 111,334 87,328 Other operating income - Rental income 1,676 - - Provision of electricity and steam 139 27,062 - Others 3,252 1,635 530,753 552,297 55 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 5. PROFIT FROM OPERATIONS The following items have been included in arriving at profit from operations: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Depreciation of property, plant and equipment 89,950 35,791 Amortisation of land use rights 1,074 991 Amortisation of other assets 55 55 Cost of inventories 383,744 265,679 Operating lease rentals in respect of property 1,000 1,000 Provision for bad and doubtful debts 927 741 (Reversal)/provision for inventory losses 4,153 (3,902) Profit on disposal of property, plant and equipment - (211) Repair and maintenance 170 700 Staff costs 52,460 49,425 6. STAFF COSTS For the year ended 31 December 2004 2003 RMB’000 RMB’000 Wages and salaries 44,946 42,244 Contributions to retirement benefits scheme 7,479 7,112 Other social security costs 35 69 52,460 49,425 7. FINANCE COSTS, NET For the year ended 31 December 2004 2003 RMB’000 RMB’000 Interest income 3,462 2,578 Interest expenses - Interest on bank borrowings (62,000) (48,222) Less: amounts capitalised in construction-in-progress 27,870 30,716 (34,130) (17,506) Net foreign exchange transaction gains/(losses) (244) 67 Bank charges (2,596) (994) Net financial expense (33,508) (15,855) 56 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 8. INCOME TAX EXPENSE For the year ended 31 December 2004 2003 RMB’000 RMB’000 Current income tax 6,466 24,073 Deferred tax relating to the origination and reversal of temporary differences (Note 21) (439) 216 Share of tax of associates (Note 12) - 70 Tax charge 6,027 24,359 The company and its major operating subsidiaries are subject to income tax at the rate of 33%, of which the enterprise income tax (“EIT”) rate is 30% and the local income tax (“LIT”) rate is 3%. In accordance with the “Income Tax Laws of the PRC for Enterprises with Foreign Investment” (FIE EIT Laws”), Hebei Xiaban City Textile Co., Ltd. (“Xiaban City Textile”) will be entitled to a 50% reduction of EIT and full exemption of LIT in the year in which its export sales exceed 70% of the total sales in that year. For the year ended 31 December 2004, export sales of Xiaban City Textile exceeded 70% of the total sales and EIT was provided at the rate of 15% (2003: 15%). Dixian Fashion and Xingye Papermaking are both foreign investment enterprises. In accordance with FIE EIT Laws, foreign investment enterprises are entitled to full exemption of EIT for two years starting from its first profit-making year, after offsetting available tax losses carried forward from prior years, and 50% reduction for the three years thereafter. 2004 is third profit-making year of Dixian Fashion, after offsetting available tax losses carried forward from prior years, but it suffered a loss in 2004. Xingye Papermaking commenced its operation in 2002 and 2004 is its third profit-making year. Consequently, the applicable tax rate is 15% (2003: nil). This is the first profit-making year of the company after becoming an enterprise with foreign investment and hence the profit is tax free. The reconciliation of the tax charge that would arise using the statutory tax rate to the effective tax charge is as follows: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Profit before tax 112,829 184,253 Tax calculated at the statutory tax rate of 33% (2003: 33%) 37,234 60,803 Effect of tax holidays (28,604) (16,209) Differential tax rate on a subsidiary due to export sales exceeding 70% of the total sales (4,297) (20,235) Tax effect of tax losses not recognised 1,694 - Tax charge 6,027 24,359 57 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 9. DIVIDENDS In accordance with relevant regulations of the PRC and the Articles of Association of Company, distributable profits of the company shall be the lower of retained earnings as reported in the statutory financial statements prepared in accordance with PRC accounting standards and the relevant accounting regulations (“PRC GAAP”) and the financial statements prepared in accordance with IFRS. The directors do not recommend any final dividend for the year ended 31 December 2004. 10. 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 105,127,000 (2003: approximately RMB143,047,000), divided by the weighted average number of shares in issue during the year ended 31 December 2004 of 488,600,000 shares (2003: 438,600,000 shares). The comparative earnings per share has been restated to reflect the increase in the average number of shares as a result of bonus issue of 73,100,000 shares. No diluted earnings per share was presented as there were no dilutive potential ordinary shares as of the respective year end. 11. PROPERTY, PLANT AND EQUIPMENT Motor Machinery vehicles and and office Construction- Land Buildings equipment equipment in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost or valuation At 1/1/2004 56,684 155,682 636,633 10,679 792,280 1,651,958 Adjustment to - - - - 312,071 312,071 consolidation Additions/ transfer 27,434 85,701 453,925 1,487 (153,449) 415,098 Disposals - (881) (108,436) - (25,000) (134,317) At 31/12/2004 84,118 240,502 982,122 12,166 925,902 2,244,810 Accumulated depreciation At 1/1/2004 4,638 20,172 141,788 4,623 - 171,221 Charge 1,074 8,348 80,659 943 - 91,024 Written back - (34) (6,987) - - (7,021) At 31/12/2004 5,712 28,486 215,460 5,566 - 255,224 Net book value At 31/12/2004 78,406 212,016 766,662 6,600 925,902 1,989,586 At 31/12/2003 52,046 135,510 494,845 6,056 792,280 1,480,737 58 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 11. PROPERTY, PLANT AND EQUIPMENT (Continued) a) The group’s property, plant and equipment were last revalued on 31 July 1999 by independent professional valuers on a replacement cost basis. The revaluation surplus net of applicable income taxes amounting to approximately RMB24,819,000 were credited to revaluation reserve. The group’s property, plant and equipment acquired subsequent to the last revaluation have not been revalued and are stated at cost less accumulated depreciation. The directors are of the opinion that the carrying amounts of property, plant and equipment do not differ materially from their fair values at the balance sheet date. b) At 31 December 2004, property, plant and equipment at cost or, as the case may be, revalued amount of approximately RMB1,496,579,086 (2003: approximately RMB630,520,000) were pledged for the group’s borrowings. The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount at 31 December 2004. 12. INTERESTS IN AN ASSOCIATE For the year ended 31 December 2004 2003 RMB’000 RMB’000 At beginning of year 225,015 11,000 Adjustment to consolidation (223,768) - Additions for the year 56,615 213,872 Share of results before tax (1,283) 213 Share of tax (Note 8) - (70) At end of year 56,579 225,015 Details of the associate are as follows: Percentage Place of Principles of equity Registered Name incorporation activity interest held capital JPY Nippon Paper Industries Hebei, PRC Production 45% 6,364 million Chengde Co., Ltd. and sales of (“Nippon”) various kinds of paper products Nippon is unlisted and incorporated in April 2004, of which 45% equity interest was held by the company. During the year, the registered capital was raised from US$5 million to JPY6,364 million. 59 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 13. INVENTORIES For the year ended 31 December 2004 2003 RMB’000 RMB’000 Raw materials, at cost 32,194 16,825 Work-in-progress, at cost 71,810 55,484 Finished goods, at cost 117,776 55,768 221,780 128,077 Less: Full provision for obsolete finished goods, net of reversal (5,869) (1,716) 215,911 126,361 During the year ended 31 December 2004, the group reversed inventory provision of approximately RMB nil (2003: RMB4,362,000) upon the sales of related finished goods. 14. TRADE RECEIVABLES For the year ended 31 December 2004 2003 RMB’000 RMB’000 Trade receivables 165,058 111,158 Less: Provision for bad and doubtful debts (2,443) (1,516) 162,615 109,642 15. OTHER RECEIVABLES AND PREPAYMENTS For the year ended 31 December 2004 2003 RMB’000 RMB’000 Other receivables 91,738 52,075 Prepayments to suppliers 100,215 39,006 Other prepayments - 31 191,953 91,112 60 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 16. CASH AND BANK BALANCES At December 2004, all time deposits, of which the maturity were within six months, were pledged for the discount of the group’s trade acceptance to banks. 17. SHARE CAPITAL At 31 December 2004, share capital included promoters’ shares and B shares, all of which ranked pari passu in all respects with each other. Details of share capital are as follows: For the year ended 31 December 2004 2003 2004 2003 Number of shares (in thousands) RMB’000 RMB’000 Registered, issued and fully paid: Unlisted - Promoters’ shares of RMB1 each 204,000 204,000 204,000 204,000 Listed - B shares of RMB1 each 384,600 234,600 384,600 234,600 588,600 438,600 588,600 438,600 Movements in share capital during the year are as follows: For the year ended 31 December 2004 2003 2004 2003 Number of shares (in thousands) RMB’000 RMB’000 Balance, beginning of year 438,600 365,500 438,600 365,000 Transfer from retained earnings and reserves - 73,100 - 73,100 Issue of B shares 150,000 - 150,000 - Balance, end of year 588,600 438,600 588,600 438,600 During the year, the company issued 150,000,000 B shares of nominal value RMB 1 at HK$ 3.32 each, of which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (“Renminbi shares”). The organisation for capital vertification considered that the issue of Renminbi shares had to be authorised by the government department which control the foreign exchange, thus the issue of Renminbi shares were not vertified by registered accountants and the procedure for the change of business registration was not carried out. 61 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 18. RESERVES a) Share premium and revaluation reserve Share premium represents the premium on the issuance of B shares. Revaluation reserve represents the revaluation surplus arising from the valuation of property, plant and equipment (see Note 11 (a)). Pursuant to the relevant PRC regulations, share premium and revaluation reserve can only be used to increase share capital. b) Statutory reserves According to the Company Law of the PRC and Articles of Association of the Company, the Company is required to provide the following statutory reserves which are appropriated from the net profit as reported in the statutory financial statements prepared in accordance with PRC GAAP: i) Statutory surplus reserve fund The group is required each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory surplus reserve fund until the balance reaches 50% of the registered share capital. This reserve can be used to make up any losses incurred or to increase share capital. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital. ii) Statutory public welfare fund The group is required each year to transfer 5%-10% of the profit after taxation as reported under the PRC statutory financial statements to the statutory public welfare fund. This reserve is restricted to capital expenditure for employees’ collective welfare facilities that are owned by the group. The statutory public welfare fund is not available for distribution to shareholders (except on liquidation). For the year ended 31 December 2004, the directors of the company proposed that 10% and 5% (2003: 10% and 5%) of the net profit as reported in the statutory accounts be appropriated to statutory reserve fund and statutory public welfare fund respectively, totalling approximately 16,099,000 (2003: approximately RMB21,457,000). The resolution is subject to approval by shareholders in the annual general meeting. 62 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 19. MINORITY INTEREST For the year ended 31 December 2004 2003 RMB’000 RMB’000 At beginning of year 277,340 260,393 Capital injection in subsidiaries 80,730 100 Share of net profit of subsidiaries 1,675 16,847 Adjustment to consolidation (9,084) - At end of year 350,661 277,340 20. BORROWINGS a) Non-current borrowings For the year ended 31 December 2004 2003 RMB’000 RMB’000 Secured bank borrowings 480,000 278,000 Borrowings of RMB360,000,000 (2003: RMB138,000,000) are secured by property, plant and equipment and land use rights of the group, borrowings of RMB120,000,000 (2003: RMB140,000,000) are cross-guaranteed by certain companies in the group. These borrowings bear interest ranging from 5.49% to 6.039% (2003: at rate from 5.49% to 6.04%) per annum. The maturity of long-term borrowings is as follows: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Within one year 120,000 - Over one year but within two years 360,000 18,000 Over two years but within three years - 260,000 480,000 278,000 63 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 20. BORROWINGS (Continued) b) Current borrowings For the year ended 31 December 2004 2003 RMB’000 RMB’000 Bank borrowings - secured bank borrowings 294,530 547,728 - unsecured bank borrowings - 1,550 294,530 549,278 Borrowings of RMB141,320,000 (2003: RMB389,150,000) are secured by property, plant and equipment and land use rights of the group, borrowings of RMB153,210,000 (2003: RMB149,840,000) are cross-guaranteed by certain companies in the group. These borrowings bear interest ranging from 5.22% to 7.24% (2003: 2.60% to 6.59%) per annum. 21. DEFERRED INCOME TAXES Deferred income taxes are calculated in full on temporary differences under the liability method using the enacted tax rates applicable to respective companies in the group. The movements in deferred tax assets and liabilities are as follows: For the year ended 31 December 2004 Credit to income 1/1/2004 statement 31/12/2004 RMB’000 RMB’000 RMB’000 Deferred tax assets Deductible temporary difference on 188 - 188 provision for inventory obsolescence Deductible temporary difference on 126 - 126 provision for doubtful debts 314 - 314 Deferred tax liabilities Assessable temporary differences on revaluation reserve of property, plant and equipments (2,634) 439 (2,195) (2,320) 439 (1,881) 64 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 21. DEFERRED INCOME TAXES (Continued) For the year ended 31 December 2003 Credit to income 1/1/2003 statement 31/12/2003 RMB’000 RMB’000 RMB’000 Deferred tax assets Deductible temporary difference on provision for inventory obsolescence 843 (655) 188 Deductible temporary difference on provision for doubtful debts 126 - 126 969 (655) 314 Deferred tax liabilities Assessable temporary differences on revaluation reserve of property, plant and equipments (3,073) 439 (2,634) (2,104) (216) (2,320) 22. OTHER NON-CURRENT LIABILITIES Other non-current liabilities mainly represented the fund over-injected for share capital by a minority shareholder and the outstanding consideration payable for the acquisition of land use rights to other parties. The balances were unsecured, interest free and repayable within two years. 23. TRADE PAYABLES For the year ended 31 December 2004 2003 RMB’000 RMB’000 Trade payables 33,375 57,444 Notes payable 249,000 246,787 282,375 304,231 Note: Payable of RMB115,000,000 are trade acceptance issued by the company to its subsidiaries, and RMB101,000,000 are trade acceptance. All of these trade acceptance have been discounted to banks, of which RMB83,000,000 are guaranteed by the group’s time deposits of RMB83,000,000. 65 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 24. OTHER PAYABLES AND ACCRUED CHARGES For the year ended 31 December 2004 2003 RMB’000 RMB’000 Advances from customers 4,915 716 Salary and welfare payables 12,414 16,402 Accrued charges 6,167 6,718 Other payables 113,934 151,594 137,430 175,430 25. CASH GENERATED FROM OPERATIONS For the year ended 31 December 2004 2003 RMB’000 RMB’000 Net profit 105,127 143,047 Adjustments for: Minority interest 1,675 16,847 Tax - 24,359 Depreciation 89,950 35,791 Amortisation of land use right (Note 12) 1,074 991 Impairment loss for assets 5,735 - Amortisation of other assets 55 55 Provision for bad and doubtful debts 927 741 Provision /(reversal) for inventory obsolescence 4,153 (3,902) Interest expenses 34,130 17,506 Interest income (3) (2,578) Share of results of associates before tax 1,283 (213) Changes in working capital: Decrease in prepayments for property, plant and equipment 90,336 - Increase in other non-current assets (95,396) - Increase in inventories (93,703) (19,915) Increase in trade receivables (53,900) (25,540) Increase in prepayments and other receivables (100,841) (73,083) (Decrease) / increase in trade payables (21,856) 131,283 Decrease in accruals and other payables (38,000) (5,596) Increase/(decrease) in other non-current liabilities 98,450 (982) Cash generated from operations 29,196 238,811 66 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 26. FINANCIAL INSTRUMENTS a) Fair values The carrying amounts of the group’s cash and bank balances, trade and other receivables, prepayments, payables and short-term borrowings approximate their fair values because of the short maturity of these instruments. The fair value of long-term borrowings is based on the current rates available for debt with the same maturity and credit-rating risk profile. At 31 December 2004, the difference between the fair values and carrying amounts of the group’s long-term borrowings was minimal since the difference between the current rates and the historical rates of such long-term borrowings was not significant. b) Credit risk The carrying amounts of cash and bank balances, trade and other receivables and prepayments represented the group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was 1.88% per annum. Majority of the group’s trade receivables relate to sales of goods. The group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. Group procedures are in force to ensure that sales are made to customers with an appropriate credit history and do not exceed an acceptable credit exposure limit. The group’s credit exposure relating to its major customer Y’S Corporation is disclosed in Note 28. The group maintains a provision for doubtful debts and actual losses have been within management’s expectation. No other financial assets carry a significant exposure to credit risk. c) Interest rate risk The directors believe that group’s exposure to interest rate risk of financial assets and liabilities as 31 December 2004 was minimal since their deviation from their respective fair values was not significant. d) Liquidity risk The group 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 use in operations. 67 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 26. FINANCIAL INSTRUMENTS (Continued) e) Foreign exchange risk The foreign exchange risks of the group occur due to the fact that the group has business activities denominated in foreign currencies. The group did not enter into any foreign exchange forward contracts to hedge against foreign currency fluctuation. However, the directors believe that the group’s exposure to foreign exchange risk was minimal since most of the group’s foreign currency transactions are denominated in USD and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD. 27. BORROWINGS a) Capital commitments At 31 December 2004, capital commitments contracted for but not required to be recognised in the financial statements are as follows: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Investment in an associate 142,425 - Investment in a subsidiary 8,439 4,150 (2003: being a jointly controlled entity) 150,864 4,150 b) Operating lease commitments At 31 December 2004, the future aggregate minimum lease payments for plant by the group under non-cancellable operating leases for each of the following period are as follows: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Within one year 1,000 1,000 Later than one year and not later than five years 4,000 4,000 Later than five years 20,000 21,000 25,000 26,000 68 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 28. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS 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 other 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. Y’S Corporation is the company’s major customer with long-term relationship. The company also entered into an equity joint venture agreement with Y’S Corporation to set up Dixian Fashion during 2000. The directors are of the opinion that Y’S Corporation is a related party of the company. Century Win International Holding Ltd. (Century Win Co.”), a company incorporated in Hong Kong, entered into an equity joint venture agreement with the company to set up Xingye Papermaking in 2001. The directors are of the opinion that CenturyWin Co. is a related party of the company. Banhe is an associate of the group, over which the group has significant influence. As a result, the directors are of the opinion that Banhe is a related party of the company. Chengde Dixian Kitanihon Knitwears and Textile Co., Ltd. (“Kitanihon”) is a jointly controlled entity of the group. As a result, the directors are of the opinion that Kitanihon is a related party of the company. a) The group had the following significant transactions with related parties: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Purchase goods from Kitanihon - 324 Sales of goods to Kitanihon 1,997 - Sales of goods to Y’S Corporation 52,579 31,709 Sales of goods/provision of services to Banhe - sales of synthetic silk - 8,844 - provision of electricity and steam - 27,062 Disposal of equipment of Banhe - 20,290 During the year, Banhe became a subsidiary of the company, thus no related party transaction was disclosed. Transactions with Y’S Corporation and Kitanihon, and sales of goods to Banhe were carried out on normal commercial terms and conditions and at market prices. Disposal of equipment to Banhe was carried out at net book value. 69 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 28. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS (Continued) b) The group had the following significant balances with related parties: At 31 December 2004, the future aggregate minimum lease payments for plant by the group under non-cancellable operating leases for each of the following period are as follows: For the year ended 31 December 2004 2003 RMB’000 RMB’000 Prepayments for purchase of machinery - Y’S Corporation - 3,735 Trade receivables - Y’S Corporation 51,073 35,876 Other receivables and prepayments - Banhe - 29,577 - Kitanihon 395 118 - Nippon 10,744 - - 日本制紙株式會社 30,792 - Trade payables - Y’S Corporation - 877 Trade advances received - Y’S Corporation - 107 Other payables and accrued charges - Century Win Co.* 95,450 128,650 * The payable to Century Win Co. represented the value of machinery contributed by Century Win Co. in excess of its required capital contribution to Xingye Papermaking. c) Directors’ remuneration The total remuneration payable to key management personnel for the year ended 31 December 2004 was approximately RMB514,000 (2003: RMB548,000). 70 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 29. SUBSIDIARIES At 31 December 2004, the company had the following subsidiaries: Percentage Place of Registered Principal of equity Name incorporation capital activities interest held Direct Indirect Xiaban City Textile Hebei, PRC USD4,000,000 Production and 75% 25% Co., Ltd. (“Xiaban sale of clothes City Textile”) Dixian Fashion Hebei, PRC USD24,000,000 Production and 75% - Co. Ltd. (“Dixian sale of clothes and Fashion”) synthetic fibers Xingye Papermaking Hebei, PRC USD100,000,000 Production and 75% - Co. Ltd. (“Xingye sale of various Papermaking”) kinds of paper products Chengde Banhe Fibre Hebei, PRC USD60,000,000 Production and - 55% Textile Co., Ltd. sale of clothes and (“Banhe”) synthetic fibers Gold Axe Investment British Virgin USD1 Investment holding 100% - Group Limited Islands and liaison of (“Gold Axe”) export business Huaxin Waste Paper Hebei, PRC RMB1,000,000 Collection and sales - 90% Collection Co., of paper Ltd. (“Huaxin”) Xingye Papermaking is a Sino-foreign equity joint venture incorporated on 9 May 2001 pursuant to an equity joint venture agreement between the company and Century Win Co. At 31 December 2004, the company and Century Win Co. had paid in capital of approximately RMB456,844,000 and RMB207,500,000 respectively. Accordingly to the joint venture agreement, the remaining registered capital would be contributed in full by the company within three years from the business license date of Xingye Papermaking (the “Investment Period”). During the year ended 31 December 2002, Century Win Co. contributed approximately RMB128,650,000 more of machinery than its required capital contribution to Xingye Papermaking (Note 29(b)). Accordingly to an agreement signed between the company and Century Win Co. on 18 March 2002, in case that the company cannot contribute the remaining registered capital during the Investment Period, the above said payable to Century Win Co. will be converted into its additional capital contribution to Xingye Papermaking. The share of equity interests in Xingye Papermaking between the company and Century Win Co. will also be re-determined according to the actual capital contributed by cash party at such time. 71 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2004 30. CONTINGENT LIABILITIES At 31 December 2004, the group provided a guarantee to Guangdong Rieys Co., Ltd., an independent third party, in respect of a short-term bank loan of RMB20,000,000. 31. POST BALANCE SHEET EVENTS On 18 January, 2005, it was publicly announced that since November 2004, the company started to cease its production due to shortage of fund released from the banks. On 25 January 2005, it was publicly announced that the company resumed its production. At present, the company’s production is basically in normal status. Pursuant to the resolution of the board of directors’ meeting dated 11 April 2005. The directors of the company do not recommend any final dividend for the year ended 31 December 2004. 32. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements were approved by the board of directors on 11 April 2005. 72 Section 12. Documents for Reference 1. Accounting statements carrying with personal signatures and seals of legal representative, person in charge of the financial affairs and person in charge of accounting institution 2. Original of Auditors’ Report carrying with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company publicly disclosed on Securities Times and Hong Kong Ta Kung Pao. The Company will provide timely the above documents for reference provided that China Securities Regulatory Commission or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Note: This report is prepared in both Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Chengde Dixian Textile Co., Ltd. Chairman of the Board: Wang Shuxian Apr. 13, 2005 73