晨鸣纸业(000488)晨鸣Ｂ2004年年度报告（英文版）

山东晨鸣纸业集团股份有限公司 SHANDONG CHENMING PAPER HOLDINGS LIMITED Annual Report 2004 March 2005 -1- Important Statement: The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. The report is prepared both in Chinese and English. When there is any diversity in interpreting, the Chinese version shall prevail. The Chairman of the Board – Mr. Chen Hongguo, Chief Accounting Supervisor – Mr. Yu Shiyong, Administrator of the Accounting Department – Mr. Liu Junwu hereby declare: the truthfulness and completeness of the report are guaranteed. Director Dong Jianwen and Director Zhou Shaohua absent the Board meeting for they are on business travel. -2- Table of Contents I. Company Profile……………………………………………………………4 II. Financial Highlight…………………………………………………………5 III. Capital Movement and Shareholders…………………………………….9 IV. Particulars about the Directors, Supervisors and Senior Executives….12 V. Management Structure…………………………………………………….18 VI. The Shareholders’ General Meeting……………………………………..20 VII. Report of the Board of Directors………………………………………..22 VIII. Report of the Supervisory Committee…………………………………31 IX. Significant Events…………………………………………………………33 X. Financial Report…………………………………………………………… 35 XI. Documents for Reference………………………………………………… 64 -3- I. Company Profile 1. Statutory Chinese Name: 山东晨鸣纸业集团股份有限公司 Statutory English Name: SHANDONG CHENMING PAPER HOLDINGS LIMITED Abbreviation: SCPH 2. Legal Representative: Chen Hongguo 3. Secretary of the Board: Hao Yun Securities Affair Liaison: Wang Wei Address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Tel: 0536－2158011、2156488 Fax: 0536－2158640 Email: cmzqb@chenming.com.cn 4. Registered address and office: No. 595 Shencheng Rd., Shouguang City, Shandong Province Post Code: 262700 Website:http://www.chenmingpaper.com 5. Newspapers Designated for Information Disclosing: Securities Times, Hong Kong Commercial Daily Website assigned by China Securities Regulatory Commission to publish the Annual Reports: http://www.cninfo.com.cn This Annual Report is available at the Capital Operation Department of the Company. 6. Stock Listed in: Shenzhen Stock Exchange Stock ID: Chenming Paper, Chenming B, Stock Code: 000488, 200488 Transferable bond: Chenming Bond, Code: 125488 7. Misc. Information Business registration changed at: September 15, 2003. Registered address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Business license No. : Qi-gu-lu-zong-zi No. 000003 Tax registration: No. 370783613588986 Certified Public Accountants invited by the Company: Tianjian Certified Public Accountant Co., Ltd. Address: 17th floor, Block A, Investment Plaza, No.27 Financial Street, Xicheng District, Beijing Deloitte Touche Tohmatsu CPA Ltd. Beijing Branch, 8/F office Tower W2, The Towers, Oriental Plaza, 1 East Chang An Avenue, Beijing 100738,PRC -4- II. Financial Highlight (I) Major accounting data (in RMB) Items 2004 Gross profit 847,436,670.72 Net profit 503,721,298.14 Net profit deducted non-recurring gain/loss 453,120,230.74 Major business profit 1,653,273,517.03 Other business profit 23,402,883.40 Operation profit 748,635,781.46 Investment revenue 6,864,868.23 Allowance income 100,905,936.59 None business income / expense (net) -8,969,915.56 Net Cash flow generated by business operation 414,042,167.71 Net increasing of cash and cash equivalents 533,406,015.73 The net profit provided by domestic CPA (consolidate) is RMB503,721,000, where the net profit provided by overseas CPA (consolidated) is RMB478,990,000 which is less than that of provided by the domestic CPA by RMB24,731,000. This is maily because according to the international accounting standard: ① Relative amortizing adjustment and trademark re-evaluation increased the net profit by RMB1.45 million. ② The government special fund regarding purchasing of fixed assets is re-classified from capital reserves into differed income, which increased the profit by RMB1.749 million. ③ The loss from foreign currency loans exchanging, which decreased the profit by RMB31.231 million. ④ Adjustment of credit of equity investment and relative amortizing, which decreased the profit by RMB4.486 million. ⑤ The government special fund regarding purchasing of properties, plants and equipment is re-classified from capital reserves into differed income, which increased the profit by RMB20.174 million. ⑥ Interests of transferable bond prediction, decreased the profit by RMB3.349 million ⑦ The opening expenses written into gain/loss, decreased the profit by RMB5.145 million. ⑧ The income from debt re-organizing transferred from capital reserves to other business income, increased the profit by RMB0.978 million. ⑨ The diversity of enterprise income tax clearance decreased the profit by RMB4.871 million. Attachment: Diversity between the domestic and overseas accounting standard Items Amount RMB0’000 The net profit provided by domestic CPA 50,372.1 Relative amortizing adjustment and trademark re-evaluation 145.0 The government special fund regarding purchasing of fixed assets is re- 174.9 classified from capital reserves into differed income The loss from foreign currency loans exchanging -3,123.1 Adjustment of credit of equity investment and relative amortizing -448.6 The government special fund regarding purchasing of properties, plants 2,017.4 and equipment is re-classified from capital reserves into differed income -5- Interests of transferable bond prediction -334.9 The opening expenses written into gain/loss -514.5 The income from debt re-organizing transferred from capital reserves to 97.8 other business income The diversity of enterprise income tax clearance -487.1 The net profit provided by overseas CPA 47,899 Note: Non-recurring gain/loss items (in RMB) Items Amount Non-business income 2,606,552.08 Non-business expenditure -6,367,697.08 Tax returned and allowance income 52,591,578.72 Short-term inventory impairment provision written back 126,426.87 Bad debt provisions written back 1,020,017.44 Gain/loss from entrusted investment 760,000.00 Income from disposal of share equity -135,810.63 Total 50,601,067.40 (II) Major accounting data and financial indices of the latest 3 years Year 2003 2002 Items 2004 Adjusted Not adjusted Adjusted Not adjusted Major business turnover (RMB) 7,064,613,089.05 5,819,073,195.58 5,819,073,195.58 4,454,775,147.87 4,454,775,147.87 Net profit (RMB) 503,721,298.14 627,141,183.07 628,111,635.21 363,767,078.67 380,660,696.72 Gross capital (RMB) 15,850,290,151.74 10,230,861,065.03 10,230,861,065.03 8,689,918,637.96 8,689,918,637.96 Shareholders’ Equity (Minority shareholders 4,839,068,873.63 4,371,048,361.78 4,375,920,134.78 3,543,330,736.52 3,535,287,468.37 excluded) Earnings per share (diluted) 0.5611 0.6986 0.6997 0.7294 0.7632 (RMB/share) Earnings per share (weighted) 0.5611 0.6986 0.6997 0.7294 0.7632 (RMB/share) Earnings per share (Diluted and less recurring 0.5047 0.6540 0.6540 0.6475 0.6793 gain/loss) -6- Earnings per share (Weighted and less recurring 0.5047 0.6540 0.6540 0.6475 0.6793 gain/loss) Net asset per share 5.3904 4.8690 4.8744 7.1046 7.0885 (RMB/share) Net asset per share , adjusted 5.3257 4.8001 4.8055 4.6256 6.9209 (RMB/share) Net Cash flow per share generated by business 0.4525 0.6869 0.6869 2.0741 2.0741 operation Net earnings / capital ratio (%), 10.41 14.35 14.35 10.27 10.77 diluted Net earnings / capital ratio (%), 10.91 15.94 15.96 10.82 11.31 Weighted Net income/capital ratio and earnings per share calculated under the formulas set out by China Securities Regulatory Commission in the “Public Company Information Disclosing Rules”. -7- 2004 Net earnings / capital ratio (%) Earnings per share (yuan/share) Profit of the report period On full On full weighted average weighted average amortizing basis amortizing basis Major business profit 34.17% 35.80% 1.8416 1.8416 Operation profit 15.47% 16.21% 0.8339 0.8339 Net profit 10.41% 10.91% 0.5611 0.5611 Net profit deducted non-recurring gain/loss 9.36% 9.81% 0.5047 0.5047 (III) Changing of capital shares Items Capital shares Capital reserves Surplus reserves Stautory public Un-distributed Total of shareholders welfare profit equity Initial 897,727,903 1,932,848,340.62 237,763,934.44 186,322,215.88 1,116,385,967.84 4,371,048,361.78 Increased 54,072,004.01 48,121,062.87 48,121,062.87 503,721,298.14 654,035,427.89 this term Decreased 186,014,916.04 186,014,916.04 this term At the end o 897,727,903 1,986,920,344.63 285,884,997.31 234,443,278.75 1,434,092,349.94 4,839,068,873.63 term Cause of Increase of allowance Draw upon net profit of Draw upon net profit of Profit of the year change the year the year -8- III. Movement of Share Capital and Shareholders A. (I) Movement of Capital Share (in Shares) Before the change Changed (+,-) After the changed I. None negotiable shares 1. Promoter’s shares 290,060,557 290,060,557 Including: State-owned shares 281,895,451 281,895,451 Domestic legal person shares 8,165,106 8,165,106 Overseas legal person shares Others 2. Legal person shares placed 3. Employees’ shares 4. Preference shares or others Total of non-negotiable shares 290,060,557 290,060,557 II. Negotiable shares 1. Common shares in RMB 236,002,356 236,002,356 2. Foreign shares in domestic market 371,664,990 371,664,990 3. Foreign shares in overseas market 4. Others Total of negotiable shares 607,667,346 607,667,346 III. Total of capital shares 897,727,903 897,727,903 B. (II) Issuing and listing of stocks As approved by China Securities Regulatory Commission by Document No. [2004]147, the Company issued 20 million transferable company bond (referred to as “the Bond”) at par value of RMB100, totaled to RMB2 billion. The term of the Bond is 5 years which started from September 15th 2004 to September 15th 2009. The Bond was listed in Shenzhen Stock Exchange on September 30th 2004 with ID of “Chenming Bond” and code of “125488”. The share transferring period commencing March 15th 2005 to September 15th 2009, and will expire on September 15th 2009. C. (III) Particulars about the Shareholders 1. Up to the end of the report term, the Company is held by 39,411 shareholders in total. 2 Top Ten Shareholders No. share Share Property Amortizing Shares held at Changing in Name of the shareholder ratio or freezing the end of term the year % Promoter’s Shandong Shouguang State- 1 281,895,451 0 31.40 national-held None owned Asset Administration shares 2 NIKKOCITI TB S/A RE:JF 9,999,871 +5,000,000 1.11 B shares N/A -9- CHINA MOTHER FD(716000) KWONG WAH INVESTMENT 3 9,415,562 0 1.05 B shares N/A (SHOUGUANG) LIMITED CHINA INTL MARINE 4 CONTAINERS (HONG 8,651,685 +8,651,685 0.96 B shares N/A KONG)LTD Fenghe Value Security 5 8,434,369 -12,355,831 0.94 Others N/A Investment Foundation China Industrial & Commercial 6 Bank – Boshi Selective Securities 8,195,055 +8,195,055 0.91 Others N/A Investment Found Taihe Security Investment 7 6,999,500 +3,225,562 0.78 Others N/A Foundation China Commercial and Industrial 8 Bank – Pufeng Securities 6,701,988 +6,701,988 0.75 Others N/A Investment Foundation Bank of China – Jiashi Service 9 Industries Securities Investment 6,701,549 +6,701,549 0.75 Others N/A Foundation China Merchant Bank Co., Ltd. – 10 Zhongxin Classic Formula 6,585,175 +6,585,175 0.73 Others N/A Securities Investment Foundation 3. The controlling shareholder (1) Shandong Shouguang State-owned Asset Administration is the controlling shareholder of the Company which is holding more than 5% of the capital shares. It is the administrative and supervisory body of state-owned properties in Shouguang City. It was holding 281,895,451 of promoter’s state- owned shares at the end of the report term, which was 31.40% of the total share capital. None of the shares was put into amortizing and freezing. (2) Property and controlling relationship between the Company and the controller Shouguang State-owned Asset Administrative Bureau ↓ 31.40％ Shandong Chenming Paper Holdings Co., 4 Top Ten Shareholders of Negotiable Shares In Shares Negotiable shares held at Share categories (A, No. Full name of shareholder the end of report B, H or others) term 1 NIKKOCITI TB S/A RE:JF CHINA MOTHER 9,999,871 B shares FD(716000) 2 KWONG WAH INVESTMENT (SHOUGUANG) 9,415,562 B shares LIMITED 3 CHINA INTL MARINE CONTAINERS (HONG 8,651,685 B shares KONG)LTD 4 Fenghe Value Security Investment Foundation 8,434,369 A shares 5 China Industrial & Commercial Bank – Boshi Selective 8,195,055 A shares Securities Investment Found 6 Taihe Security Investment Foundation 6,999,500 A shares 7 China Commercial and Industrial Bank – Pufeng 6,701,988 A shares Securities Investment Foundation 8 Bank of China – Jiashi Service Industries Securities 6,701,549 A shares Investment Foundation 9 China Merchant Bank Co., Ltd. – Zhongxin Classic 6,585,175 A shares - 10 - Formula Securities Investment Foundation 10 China Commercial and Industrial Bank – Jintai Securities 5,424,671 A shares Investment Foundation Related relationship and “Action in Concert” between the top 10 shareholders and top 10 holders of negotiable shares: Fenghe Value Security Investment Foundation, Taihe Security Investment Foundation and Bank of China – Jiashi Service Industries Securities Investment Foundation are under the same manager – Jiashi Foundation Management Co., Ltd. The Company don’t informed whether there is relationship between the above parties regarding action in concert. 5. Top 10 holders of the transferable bonds at the end of report term No. Name of the holder (full name) Bonds held at the end of year 1 China Commercial and Industrial Bank – Southern Foundation 950,000 2 China Commercial and Industrial Bank – Xingye Transferable Bond Combined 808,053 Securities Foundation 3 National Social Security Foundation 201 Combination 806,435 4 China Ping An Insurance (Group) Co., Ltd. 708,445 5 China Agriculture Bank – Jingshun Greatwall Internal Demand Open Securities 675,014 Investment Foundation 6 China Industrial & Commercial Bank – Boshi Selective Securities Investment Found 654,893 7 China Commercial and Industrial Bank – Kaiyuan Securities Investment Foundation 608,284 8 China Everbright Bank Co., Ltd. – Zhongrong Jingqi Industrial Securities Investment 409,673 Foundation 9 China Construction Bank – Huabao Xingye Multi-strategic Securities Investment 401,694 Foundation 10 China Construction Bank – Baokang Bond Investment Foundation 400,085 - 11 - IV. Particulars about the Directors, Supervisors, 1. Senior Executives, and Employees D. (I) Profile Shares held at the Shares held at Changed Name Position Sex Age Term of duty beginning of term the end of term (shares) Chen Chairman M 40 2004.9-2007.9 549,794 +497,403 52,391 Hongguo Yin Vice Chair, M 47 2004.9-2007.9 309,188 +248,940 Tongyuan 60,248 GM Guo Director M 39 2004.9-2007.9 99,500 +99,500 0 Xiucheng Dong Jianwen Director M 42 2004.9-2007.9 4,624 104,124 +99,500 Zhou Director M 43 2004.9-2007.9 66,300 +66,300 0 Shaohua Wu Bingyu Director M 35 2004.9-2007.9 0 66,300 +66,300 Hou Huancai Director M 43 2004.9-2007.9 31,433 97,733 +66,300 Hu Wenhe Director M 59 2004.9-2007.9 10,478 76,778 +66,300 Hu Director M 39 2004.9-2007.9 70,655 49,700 20,955 Changqing Liu Director M 35 2004.9-2007.9 66,300 +66,300 0 Chengzhen Zhao Jinghua Independent M 43 2004.9-2007.9 0 0 0 Director Liu Xueyan Independent M 66 2004.9-2007.9 0 0 0 Director Diao Yuntao Independent M 40 2004.9-2007.9 0 0 0 Director Independent 2004.9-2007.9 0 0 Wang Zhihua M 46 0 Director Zhou Independent F 41 2004.9-2007.9 0 0 0 Chengjuan Director Zheng Liyong Vice Chair of M 37 2004.9-2007.9 20,956 0 Supervisory 20,956 Committee Sun Supervisor M 34 2004.9-2007.9 0 0 0 Dianming Ren Guang’ai Supervisor M 37 2004.9-2007.9 0 0 0 Gao Junjie Supervisor M 34 2004.9-2007.9 20,955 20,955 0 Liu Supervisor M 33 2004.9-2007.9 0 0 0 Wenzheng Wang Vice General M 31 2004.9-2007.9 0 0 0 Baoliang Manager Huang Vice General M 40 2004.9-2007.9 0 0 0 Bendong Manager Ren Wei Vice General M 43 2004.9-2007.9 0 0 0 Manager Gen Guanglin Vice General M 31 2004.9-2007.9 49,700 +49,700 0 Manager Fang Lijun Vice General M 35 2004.9-2007.9 48,916 +33,200 15,716 Manager Li Xueqin Vice General F 42 2004.9-2007.9 38,438 +33,200 5,238 Manager Hao Yun Secretary of the M 42 2004.9-2007.9 81,133 +49,700 31,433 Board, Vice GM Wang Zaiguo Vice General M 39 2004.9-2007.9 5,238 0 5,238 Manager Yu Shiyong CFO M 42 2004.9-2007.9 0 0 0 Note: (1) Changing of shareholding status of directors and senior managements was caused by the share award implemented for year 2002. (2) None of the directors and supervisors is taking any job in the shareholding parties. - 12 - E. (II) Major career history of the directors, supervisors and senior management and their jobs taken in parties other than shareholders of the Company. Mr. Cheng Hongguo, who joined our company in 1987, once held the position of Workshop Manager, Director of Brach Factory, Deputy Manager, member of Board, and Baord Chairman of WUhan Chenming Hanyang Paper Stock Co., Ltd. Mr. Cheng has been assuming the Board Chairman of our company since 2001. Mr. Yin Tongyuan, who joined our company in 1982, once held the position of Workshop Manager, the Chief of Technology Dept., Deputy Factory Managing Director and Executive Deputy Factory Managing Director. After the reform of the enterprise in 1993, Mr. Yin assumed Deputy Board Chairman and General Manager until now. Mr. Guo Xiucheng, who joined our company in 1989, once held the position of Directorr of Operating Office, Director of Project Management Office, Manager, Assistant of General Manager and Deputy Manager of Beijing Branch, . Mr. Guo is now on the Board. Mr. Dong Jianwen, who joined our company in 1988, once held the position of Workshop Director, Manufacturing Director, Assistant of General Manager, Manager of the First Factory of Chenming, General Manager and Board Executiveof Chibi Chenming Paper Co., Ltd., General Manager and Board Chairman of WUhan Chengming Hanyang Paper Stock Co., Ltd. Mr. Dong is now on the Board and in charge of manufacturing of our company. Mr. Zhou Shaohua, who joined our company in 1997, once held the position of Executive Deputy Manager and Engineer in Chief of WUhan Chenming Hanyang Paper Stock Co., Ltd. and Borad Chairman of Jiangxi Chenmin Paper Co., Ltd. Mr. Zhou is now on the Board of our company and Jiangxi Chenming Paper Co., Ltd. Mr. Wu Bingyu, who joined our company in 1989, once held the position of Organization Section Chief, Director of Party Leadership Office, Director of Party Leadership Group, Assistant of General Manager, Deputy Secretary of Party Leadership Group of Wuhan Chenming Hanyang Paper Stoch Co., Ltd. and Board Chairman of Jilin Chenming Paper Co., Ltd. Mr. Wu is now on the Board. Mr. Hou Huancai, who joined our company in 1983, once held the position of Workshop Director, Director of Branch Factory, Deputy Director of Qihe Paperboard Factory, Board Chairman of Jilin Chenming Paper Co., Ltd. and Chairman of the 1st and the 2nd Supervisory Board. Mr. Hou is now assuming General Manager of our company and Board Chairman of Qihe Papaerboard Co., Ltd. of Shandong Chenming Paper Group. Mr. Hu Wenhe, who joined our company in 1987, once held the position of Secretary of Party Leadership Group of Shandong Chenming Xinli Thermoelectricity Co., Ltd., General Manager and Borad Chairman. Mr. Hu is now on the Board of our company and assuming Board Chairman of Shandong Chenming Thermoelectricity Stock Co., Ltd. Mr. Hu Changqing, who joined our company in 1988, once held the position of Director of Tech-reform Dept. of our company, Director of the 2nd Factory of Chenming, etc. Mr. Hu is now on the Board of our comapny and Board Chairman of Shanghai Chenming Paper Machine Co., Ltd. Mr. Liu Chengzhen, who joined our company in 1986, once help the position of Workshop Director, Deputy Director of Branch Pulp Mill, Factory Director, General Manager and Borad Chairman of Chibi Chenming Paper Co., Ltd. Deputy Manager and General Manager of Wuhan Chenming Hanyang Paper Stock Co., Ltd. Mr. Liu is now on the Board and assuming Board Chairman of Yanbian Chenming Paper Co., Ltd. - 13 - Mr. Zhao Jinghua once help the position of Deputy Director of Economic Management Dept. of Shandong University, Vice President and President of Management Institute of Shandong University. Mr. Zhao is now assuming Director of Capital Management and Enterprise Stratigy Research Center of Central Finance and Economics University. Mr. Zhao began to assume Independent Director in 6, 2002. Mr. Liu Xueyan, an Accounting professor, once held the position of teach of Accounting Dept. of Shandong Finance and Economics Institute, Accountant of Finance Dept. of Shandong Tractor Factory, Director of Accounting Dept. of Shandong Economics Institute, Director of China Accounting Professor Committee, Director of Shandong East Accouting Office. Mr. Liu is now a member of Shandong Registered Accountant Consultative Committee and Majordomo of Shandong Ruihua Management Consultant Co. Ltd. Mr. Liu began to assume Independent Director in 6, 2002. Mr. Wang Zhihua, who once held the position of teacher of Shandong Economics Institute, Director and Secretary of Shandong Electricity Academe, is now a member of Party Leadership Group and Deputy Manager of Shandong Xinyuan Stock Co. Mr. Wang began to assume Independent Director in 4, 2003. Mr. Diao Yuntao a registered accountant, once held the position of Deputy Director of Financial Office of Shandong Province, Deputy Director of Local Revenue Office of Shandong Province. Mr. Diao is now assuming Director of Shandong Qilu Accounting Office, Borad Chairman of Shandong Ruihua Management Consultant Co. and the Deputy Board Chairman and General Manager of Shandong Ruihua Investment Co. He began to assume Independent Director in 4, 2003. Ms. Zhou Chenjuan, an Econopmics Bachelor who graduated from Finance Dept. of Shanghai Finance and Economics University in 1987, was assigned to Revenue Dept. of Shandong Finance and Economics Institute in 1987. Ms. Zhou is now assuming Director of Revenue Theory Staff Office. She began to assume Independent Director in 4, 2003. Mr. Zheng Liyong, who joined our company in 1987, once held the position of Deputy Director of Power Supply Dept. He is now assuming Chairman of Supervisory Board, Assistant of General Manager and Chairman of the Labour Union. Mr. Sun Diannian, who joined our company in 1989, once held the position of Deputy Workdshop Director, Deputy Manager and General Manager of Supply Co., Assistant of General Manager and Deputy Manager of Shouguang Chenming Co. He is now assuming Supervisor of our company. Mr. Ren Guang'ai, who joined our company in 1993, once help the position of Enterprise Management Staff, Deputy Director of Enterprise Management Section, Director of Storage Dept. and Quality Dept., Deputy Director and Director of Enterprise Management Dept. He is now assuming Deputy Director of Human Resource Dept. of our company. Mr. Gao Junjie, who joined our company in 1994, once held the position of Director of Law Office and Deputy Director of Ministry of Audit of our company. He is now assuming Staff Supervisor and Director of Capital Management. Mr. Liu Wenzheng, who joined our company in 1993, once held the position of Accountant of our branch company, Director of Finance Dept. of Shandong Qihe Chenming Paperboard Co., etc. He is now assuming Staff Supervisor and Director of Ministry of Audit. Mr. Wang Baoliang, who once held the position of teacher of Yingli Middle School of Shouguang City, Secretary of Party Leadership Committee of the town, Secretary and Section Chief of Shouguang Party Leadership Committee Deputy Director of Confidential Dept., Deputy General Office and Secretary- General, etc. He joined our comapny in 10, 2003 and is now assuming Deputy Manager. - 14 - Mr. Huang Bendong once held the position of Deputy Director of Indoctrination Dept. of Shouguang Normal Institute, Secretary of Shouguang Educational Office, Vice President of Shouguang No.1 Middle School, etc. He joined our company in 12, 2003 and now is assuming Deputy Manager. Mr. Ren Wei once held the position of cashier of Bank of China, Shougaung Branch, Credit Clerk of ICBC Shouguang Branch, Deputy Manager of International Business Dept. Director of Sales Dept., Assistant of President, Vice President, President of the banck, etc. he joined our company in 7, 2004 and now is assuming Deputy Manager. Mr. geng Guanglin, who joined our company in 1992, once held the position of Workshop Director of our company, Deputy Manager of of Chibi Chenming Papaer Co. and General Manager of Shouguang Chenming Co., Ltd. He is now assuming Deputy Manager of our company. Mr. Pang Lijun, who joined our company in 1991, once held the position of Manager, Assistant of general Manager and Deputy Manager of Beijing Branch. he is now assuming Deputy Manager of our comapny. Ms. Li Xueqin, who joined our company in 1987, once held the position of Director of Ministry of Audit, Vice Chairman of Supervisory Board and Deputy Manager of our company. He was selected as the representative of the 10th People's Congress and is now assuming Deputy Manager of our company. Mr. Hao yun, who joined our company in 1984, once held the position of Secretary of the League Committee, Director of LAbour and Human Resource Dept., Director of Stock Office and Assistant of General Manager of our company. He is now assuming Deputy Manager and Secretary of the Board. Mr. Wang Zaiguo, who joined our comapny in 1987, once held the position of Secretary of transportation comapny, the Assistant of General Manager and Director of Logistics Dept., manager of hotel, Deputy Manager of Shouguang Chenming Paper Co., Ltd. and Supervisor of our company. He is now assuming Deputy Manager of our company. Mr. Yu Shiyong once held the position of Financial Majordomo of Fujian Mindong Electricity Stock Co., Ltd. He is now assuming Financial Majordomo of our company. - 15 - F. (III) Annual Reward 1. The judgment procedure for the reward of directors, supervisors and senior management: set by the Assessment and Rewarding Committee of the Company. 2. Basis of rewards to directors and senior management: upon the practical profitability, nature of duties, and individual performance, on the basic principle of motivating and stability, fixed annual reward is adopted for directors and senior management. The annual rewards of the directors and senior management vary between RMB100 thousand and RMB1.5 million. The rewards to supervisors are annually fixed. For supervisors taking managerial positions in the Company, their reward are decided by the General Manager’s Conference basing on particular position. For supervisors not taking any position in the Company, their rewards vary between RMB100 thousand to RMB200 thousand. 3. The total annual reward for the current directors, supervisors and senior management are amounted to RMB9 million. The top 3 directors are totaled to RMB3.7 million. The top 3 managements are totaled to RMB1.8 million. 4. As approved by Shareholders’ General Meeting 2002, the Company pays RMB40 thousand annually to each independent director (tax included), travel expenses and rational expenses for exercising of duties according to the Article of Association are reimbursed by the Company. 5. ?Distribution of the rewards to directors, supervisors and senior management: RMB1 million – RMB1.5 million 3 RMB0.5 million – RMB1 million 4 RMB0.2 million – RMB0.5 million 8 RMB0.05 million – RMB0.2 million 9? G. (IV) Movement of directors, supervisors and management (1) On June 22nd 2004, as approved by the Shareholder’s General Meeting 2003, Mr. Wu Binyu, Mr. Hou Huancai, and Mr. Liu Chengzhen were elected the directors of the 3rd term of Board. Their office term will expire along with the 3rd term of Board. Mr. Li Mingren, Mr. Xia Youliang, and Mr. Wang Zhijun were approved to resign from the positions of directors. (2) On September 1st 2004, as approved by the 1st Provisional Shareholders’ General Meeting 2004, Mr. Chen Hongguo, Mr. Yin Tongyuan, Mr. Guo Xiucheng, Mr. Dong Jianwen, Mr. Zhou Shaohua, Mr. Wu Binyu, Mr. Hou Huancai, Mr. Hu Wenhe, Mr. Hu Changqing, and Mr. Liu Chengzhen were elected the members of the 4th term of Board. Their office term was 3 years. Mr. Liu Xueyan, MR. Zhao Jinghua, Mr. Diao Yuntao, Mr. Wang Zhihua and Ms. Zhou Chengjuan were elected the independent directors of the 4th term of Board. Their office term was 3 years. (3) September 1st 2004, as approved by the 1st Provisional Shareholders’ General Meeting 2004, Mr. Zhen Liyong, Mr. Sun Dianming, and Mr. Ren Guang’ai were elected the supervisors of the 4th term of Supervisory Committee for office term of 3 years. As elected by the 1st Employees’ Delegation Conference, Mr. Gao Junjie and MR. Liu Wenzheng were elected the supervisors representing the employees of the Company for 3 years of office term. - 16 - (4) On September 1st 2004, as approved by the 1st meeting of the 4th term of Board, Mr. Yin Tongyuan was engaged the General Manager of the Company, Mr. Hao Yun was engaged the Secretary of the Board, Mr. Wang Baoliang, Mr. Huang Bendong, Mr. Ren Wei, Mr. Geng Guanglin, Mr. Fang Lijun, Ms. Li Xueqin, Mr. Hao Yun and Mr. Wang Zaiguo were engaged the Vice General Manager of the Company. MR. Yu Shiyong was engaged the Chief Financial Office of the Company. Their office term would be 3 years. H. (V) Employees There were totally 18270 employees in the Company, including 11649 of production employee, 631 of sales persons, 2493 technical persons, 311 of financial persons, 1463 of executive persons, and 1723 others. On education levels, 648 of undergraduate or higher, 1998 of college graduation, 5413 of intermediate technical, and 10211 high school, technical school or lower. No expenses of retired employees assumed by the Company. Employees of the controlled subsidiaries included above. - 17 - V. Managerial Structure I. (I) Company Management Under the requirement of the Company Law, Security Law and Public Company Management Regulations, the company kept optimizing the management structure and operate the company in a standardized mean to ensure its healthy development. During the report term, the “Article of Association” was revised, “The Rules of Management” was formulated, 3 independent directors was engaged which made the number of independent directors reached 1/3 of the total directors. There is not obvious different between the practical situation of the Company and the regulatory documents issued by the Regulatory Council about the management of listed companies. J. (II) Independent directors’ fulfilling of responsibility 1. Attending of Board Meetings Name of Independent Times of Board Presented Entrusted Absent Notes Director Meeting Personally others Liu Xueyan 5 5 0 0 Zhao Jinghua 5 5 0 0 Diao Yuntao 5 5 0 0 Wang Zhihua 5 5 0 0 Zhou Chengjuan 5 5 0 0 In the report term, 5 of the independent directors that engaged by the company were doing their jobs responsibly. They presented the board meetings and exercised their judgments independently on the decision-making processes of personnel changing, related transactions, devalue provisions, salaries of directors and senior managements, motivating policies, chairman motivation foundation, correcting of accounting errors, and outgoing guarantees. Thus protecting the legal benefit of the whole company and middle-small shareholders as well. 2. Objection opinion raised by the independent directors on the business of the Company None of the 5 independent directors raised any objection on the resolutions of the Board neither on resolutions adopted beyond the Board. K. (III) Particulars about the separation of businesses, personnel, assets, organizations, and accounting from the controlling shareholder Shandong Shouguang State-owned Assets Administration is the first shareholder of the company. The company is completely separated in businesses, personnel, assets, organizations, and accounting from the controlling shareholder. 1. In the aspect of business: the company has its independent and complete business operation capability. The controlling shareholder is the administrator of state-owned assets, therefore no competition exist between two of the entities by running same or similar businesses. 2. In personnel: None of the managers, vice managers, accountants and senior managements takes job in the shareholding party. The labour management, personnel and salary management are operated independently. - 18 - 3. In assets: The company owns the assets completely and runs its production, supplying and sales system independently. The trademarks, patent rights and non-patent technologies are completely separated from the controlling shareholder. 4. In organization: The company has a mature and independent organization structure, which completely separated from the controlling shareholder. Collaborated business operation or office activities never happened. 5. In accounting: The company has its own independent accounting division, accounting system, bank account, and exercise its liability of taxation independently. L. (IV) Assessment and motivating mechanism of the senior management 1. Assessment mechanism The assessment mechanism was built on both monthly basis and annual basis. Monthly assessment is formed by inter-assessment between senior managements and assessment of intermediate on the senior managements. Annual assessment is performed by the Assessment and Reward Committee of the Company basing on the job terms, positions, workloads, and individual performance. 2. Motivating mechanismThe Company adopts share equity awarding and Chairman’s awarding on motivating of senior management according to the proposal regarding share equity awarding adopted by the Shareholders’ General Meeting 2001 and the proposal regarding Chairman’s award adopted by the Shareholders’ General Meeting 2002. The awards are decided by the Assessment and Reward Committee of the Company basing on the job terms, positions, workloads, and Company’s business scale and individual performance. - 19 - VI. The Shareholders’ General Meeting M. (I) The Shareholders’ General Meeting 2003 and the 1st Provisional Shareholders’ General Meeting were held in the report term. 1. The Shareholders’ General Meeting 2003 of Shandong Chenming Paper Holdings Co., Ltd. was held on June 22nd 2004 in the Company. The calling announcement of the meeting was published on March 16th, 2004 issues of China Securities Journal and Hong Kong Commercial Daily. There were totally 14 shareholders’ and proxies presented the meeting, which including 12 domestic shareholders or proxies and 2 overseas shareholders or proxies. They were representing in total 312,740,855 shares, which takes 34.84% of the total entitled share capital of the Company. Among them, 287,260,987 are domestic shares, take 91.85% of the total share presented the meeting, whereas 25,479,868 are overseas shares, take 8.15% of the total shares. The holding of the meeting was regarded as compliance with the Company Law, the Article of Association and “Suggestions on Standardizing of Shareholders’ General Meetings of Listed Companies”. Haotian Law Firm sent Mr. Wang Xiaoming, the lawyer, to present the meeting and issued the lawyer’s opinion. The following proposals were examined one after another and passed in way of registered ballots. I. The 2003 Annual Work Report of the Board of Directors II. The 2003 Annual Work Report of the Supervisory Committee III. The Financial Settlement of Year 2003 IV. The Profit Distribution Proposal for Year 2003 V. The Proposal to revise Articles of Association VI. Proposal to Alter Directors VII. The Proposal on Employment of Domestic and Overseas CPAs VIII.Discussed and passed the proposal to extend the expiration IX. The proposal of statements on the utilizing of fund raised previously X. Discussed and passed proposal that shareholder meeting authorizes to sign important project The above resolutions were published on June 23rd 2004 by China Securities Journal and Hong Kong Commercial Daily. 2. The 1st shareholders’ special meeting of 2004 of Shandong Chenming Paper Holdings Ltd. was held on September 1, 2004 in the meeting room of the sales department of the Company located on the 26th floor, Block A, Beijing Digital Building, Zhongguanchun Rd. South, Haidian, Beijing. The notification of calling for the meeting was published on July 29th 2004 issues of China Securities Journal and Hong Kong Commercial Daily. Totally 18 shareholders or attorneys presented the meeting. Which including 17 of domestic shareholders and 1 foreign shareholder. The people presented the meeting were representing totally 309,871,622 shares of the Company, took 34.52% of the total shares entitled for voting rights. Among which, 292,631,164 were local shares which takes 94.44% of the total shares presented the meeting; while 17,240,458 were foreign shares which takes 5.56% of the total shares presented the meeting. The holding of the meeting was complying with the provisions of the Company Law, The Article of Association and The Opinions on Standardizing of Shareholders’ General Meeting. Mr. Wang Xiaoming, the lawyer sent by Haotian Law Firm presented the meeting and issued the lawyer’s statement thereof. The following proposals were examined one after another and passed in way of registered ballots.I. The proposal of alternating the Board of Directors.II. The proposal of alternating the Supervisory Committee.III. The proposal of amending partial of the provisions of the rewarding system of directors and senior executives.The above resolutions were published on September 2nd 2004 by China Securities Journal and Hong Kong Commercial Daily. N. (II) Electing and changing of directors and supervisors (1) On June 22nd 2004, as approved by the Shareholder’s General Meeting 2003, Mr. Wu Binyu, Mr. Hou Huancai, and Mr. Liu Chengzhen were elected the directors of the 3rd term of Board. Their - 20 - office term will expire along with the 3rd term of Board. Mr. Li Mingren, Mr. Xia Youliang, and Mr. Wang Zhijun were approved to resign from the positions of directors. (2) On September 1st 2004, as approved by the 1st Provisional Shareholders’ General Meeting 2004, Mr. Chen Hongguo, Mr. Yin Tongyuan, Mr. Guo Xiucheng, Mr. Dong Jianwen, Mr. Zhou Shaohua, Mr. Wu Binyu, Mr. Hou Huancai, Mr. Hu Wenhe, Mr. Hu Changqing, and Mr. Liu Chengzhen were elected the members of the 4th term of Board. Their office term was 3 years. Mr. Liu Xueyan, MR. Zhao Jinghua, Mr. Diao Yuntao, Mr. Wang Zhihua and Ms. Zhou Chengjuan were elected the independent directors of the 4th term of Board. Their office term was 3 years. (3) September 1st 2004, as approved by the 1st Provisional Shareholders’ General Meeting 2004, Mr. Zhen Liyong, Mr. Sun Dianming, and Mr. Ren Guang’ai were elected the supervisors of the 4th term of Supervisory Committee for office term of 3 years. - 21 - VII. Report of the Board of Directors O. (I) Statement on significant events in the report term For the year of 2004, the competition of the industry was severe all over the world. The Company was doing its best to develop its potential and enhance its management, to overcome negative effect brought by high rising of prices of energy and raw materials. The output and sales income increased successively during the year and enforced the Company’s leading position in the whole industry of the country for the past 10 years. Issuing of RMB2 billion transferable bonds was a strong support to the Company’s construction projects. The 300KT coated white board project was completed in early 2005 and put into test operation; The 250KT hot mill pulp project was in test operation; Jiangxi Chenming was established together with SAPPI LIMITED from South Africa, Xin Maolin Co. from Korea, and international financing companies, which will introduce advanced management system to the Company and opened an international financing channel. The 200KT low-ration coated paper and accessory projects was in testing stage. All of the above will bring new growth point to the Company in the year of 2005. P. (II) Business Situation of the Report Term The company is in the paper manufacturing industry, which is a light-industry. The Company is mainly engaged in production and sales of machine-make paper and paperboard, papermaking raw materials, papermaking machinery, power and heat supply. For the report term, the output of machine-made paper was 1.58 million ton, which was 14.2% over the corresponding period of previous year. The sales volume was RMB7,064,610,000, which increased by 21.4%. The net profit was RMB847,440,000 which decreased by 0.18%. 1. Major business turnover and profit structure （1） Distribution on industries Major business turnover Major business profit Industry (RMB0,000) (RMB0’000) Machine-made paper 661,115.52 154,815.79 Power and heating 5,238.01 623.49 Construction materials 27,028.83 7,423.62 Paper chemical material 6,813.61 2,497.91 Paper machines 4,415.19 1,820.20 Others 1,850.15 319.44 Total 706,461.31 167,500.45 （2） Distribution on products Major business turnover Major business profit Major products (RMB0,000) (RMB0’000) Lightweight coated paper 56,207.47 13,928.21 Duplex press paper 97,095.57 23,290.78 Writing paper 41,511.26 9,241.25 Art paper 181,155.27 49,350.22 News press paper 69,726.26 20,373.53 - 22 - Paperboard 75,878.67 11,886.39 Total 521,574.50 127,944.15 （3） Distribution on territories Major business turnover Major business profit Areas (RMB0,000) (RMB0’000) East 292,779.09 69,418.55 North 135,350.99 32,091.72 South 94,686.57 22,450.19 Mid-south 77,048.40 18,268.18 North-east 49,967.42 11,847.28 South-west 23,397.01 5,548.09 North-west 13,421.58 3,181.41 Overseas 19,810.25 4,695.03 Total 706,461.31 167,500.45 2. Particulars about the turnover, sales costs and gross profit ratio of the major products (RMB0’000) Category Sales Income Sales cost Gross profit ratio % Lightweight coated paper 56,207.47 42,279.26 24.78 Duplex press paper 97,095.57 73,804.79 23.99 Writing paper 41,511.26 32,270.01 22.26 Art paper 181,155.27 131,805.04 27.24 News press paper 69,726.26 49,352.73 29.22 Paperboard 75,878.67 63,992.29 15.66 3. In the report term, the output and sales volume increased and the major business has increased significantly, but the gross profit ratio decreased due to increasing of prices of energy and raw materials. Though the major business profit has break even with the previous year. Following with the launching of aforesaid large projects, the Company will be enforced in business scale and competition. Q. (III) Business performance of major controlled subsidiaries 1. Controlled subsidiary – Wuhan Chenming Hanyang Paper Holdings Co., Ltd. Registered capital RMB211,367,000 Shareholding portion: 50.93% Major products: ordinary paper, press paper Gross asset at the end of report term: RMB2,387,271,600 Output of machine made paper in 2004: 329K ton Sales income: RMB1,586,717,100 Net profit: RMB106,748,400 2. Controlled subsidiary – Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. Registered capital RMB376,200,000 Shareholding portion: 99.9468% Major products: paperboard Gross asset at the end of report term: RMB1,243,384,000 Output of paperboard and corrugated paperboard in 2004: 399.8K ton Sales income: RMB1,083,177,700 Net profit: RMB78,284,700 3. Controlled subsidiary –Shandong Chenming Power Supply Holdings Co., Ltd. Registered capital RMB99,553,100 - 23 - Shareholding portion: 51% Major products: electricity and heat power supply Gross asset at the end of report term: RMB664,094,700 Sales income: RMB406,348,200 Net profit: RMB14,770,500 4. Controlled subsidiary –Chibi Chenming Paper Co., Ltd. Registered capital RMB177,419,400 Shareholding portion: 35.7883% Major products: Double plastic coated paper Gross asset at the end of report term: RMB464,830,500 Output volume: 78.4K ton Sales income: RMB370,442,600 Net profit: RMB62,288,900 5. Controlled subsidiary – Hailaer Chenming Paper Co., Ltd. Registered capital RMB16,000,000 Shareholding portion: 75% Major products: Bleached reed board Gross asset at the end of report term: RMB122,785,700 Output volume: 26.6K ton Sales income: RMB88,219,500 Net profit: RMB3,724,600 6. Controlled subsidiary – Jilin Chenming Paper Co., Ltd. Registered capital RMB81,633,000 Shareholding portion: 51% Major products: Wood pulp, machine-made paper Gross asset at the end of report term: RMB37,172,500 Output volume: 101.8K ton Sales income: RMB359,264,400 Net profit: RMB39,427,900 7. Controlled subsidiary – Shanghai Chenming Paper Machinery Co., Ltd. Registered capital RMB70,000,000 Shareholding portion: 61% Major products: pulp machine, paper make machinery Gross asset at the end of report term: RMB273,879,500 Output volume: 101.8K ton Sales income: RMB122,088,000 Net profit: RMB13,713,300 R. (IV) Particulars about the major vendors and buyers in the report term (1) The purchases of the company from the top 5 vendors took 10.11% of the total purchases of the year. (2) The sales of the company to the top 5 buyers took 6.78% of the total sales of the year. S. (V) Problems and difficulties encountered and solutions Due to rising of raw materials and energy prices, and the invasion of international manufacturers the market competition became more severe. It increased the costs and lowered the Company’s competitive capacity. The Company adopted the following measurements to facing the situation: (1) Perform direct administration on the purchasing process of subsidiaries. Invite bidding for large amount purchasing of materials to lower the price. - 24 - (2) Fully develop the potential of current equipments. Increase the operational quality through reconstruction of equipments and fine turning of production techniques. This has increased the output by 14.2%. (3) Enlarge pulp production capacity, enforce researching and controlling of major material market, rational control on the material stock, to override the influence of price vibration. (4) Speed up international co-operation, enlarge the co-operation with world-known manufacturers and international financing bodies. Introduce advanced management concept; bring the Company into the international marketplace. (5) Keep targeting on the marketplace construction, management standardizing at one hand, market developing at the other, keep the marketing practice progress stably. T. (VI) Investment in the Report Term 1. Utilizing of fund raised The Company issued RMB2 billion of transferable corporation bond in September 2004, and practically received RMB1,956.22 million. The fund was utilized right as set out by the prospectus. No changing of investment project was made. Ended the report term, RMB1,754.65 million was put into investment. The balance of RMB201.57 million is in the special bank account for future use. The details of investment are as the followings: In RMB10 thousand Proposed Prospected Total of Practical Accumulated Project set by the prospectus investment profit after Progress investment investment expenditure tax Almost 83,760 83,760 83,760.00 118,667.83 17,354 300KT coated white board finished Pollution treatment and recycling Under 17,300 17,300 7,800.00 7,800.00 962 engineering construction IT and logistics management Under 17,800 17,800 1,361.00 1,419.57 - project construction Jiangxi Chenming 200KT low- Almost 168,555 51,699 51,699.00 246,043.30 23,237 ration coated paper project finished 150T/D chemical-mechanical pulp system and accessories 8,708 8,708 8,708.00 13,906.94 - Finished Supplementary of working capital 25,000 25,000 22,137.00 - - Total 175,465.00 387,837.64 - - Notes: (1) 150T/D chemical-mechanical pulp system and accessories have been put into operation at the end of 2003, and produced profit after tax of RMB38.20 million. (2) When the investment from the raised fund is not enough, the short part is funded by banks or the Company itself. 2. Investment from non-financing resources The 25KT BCTMP (Bleach Chemical Temperature Milled Pulp) project and its accessories were proposed for investment of RMB520 million. RMB279 million was invested in the report term. The fund was raised by the Company itself. The project will be put into test operation in the first quarter of 2005 and expected to produce profit after tax of RMB100 million. 3. In the report term, the investment partners of Jiangxi Chenming Paper Co., Ltd. – SAPPILIMITED (South Africa), International Financial Co., Xinmaolin Paper Co., (Korea) and the Company enlarged their investment. The registered capital of Jiangxi Chenming Paper Co., Ltd. was enlarged to USD172,000,000. The Company invested with cash and physical property amounted to USD81.1049 - 25 - million, which takes 47.154% of the registered capital. The details about this event have been published on October 28th 2004 by China Securities Journal and Hong Kong Commercial Daily. The company was established on December 24th 2004 as a sino-foreign joint venture. U. (VII) Financial status and business performance 1. Movement of accounting indices in RMB Items 2004 2003 +/- (%) Gross asset 15,850,290,151.74 10,230,861,065.03 54.93 Shareholders’ equity 4,839,068,873.63 4,371,048,361.78 10.71 Major business profit 1,653,273,517.03 1,624,729,186.82 1.76 Net profit 503,721,298.14 627,141,183.07 -19.68 Net increase of cash and cash 533,406,015.73 244,375,893.43 118.27 equivalents (1) Increasing of total asset was caused by increasing of loans raised for new projects, issuing of bonds and increasing of net profit. (2) Increasing of shareholders’ equity was caused by increasing of net profit in the report term. (3) Decreasing of net profit was due to the decreasing of tax reimbursement and increasing of raw materials prices, which caused the increasing of costs and decreasing of gross profit. (4) Increasing of cash and cash equivalent was due to the collecting of sales income and the part of the fund raised from bond issuing in 2004 has not been utilized yet, and the increasing of current capital due from the investment of Jiangxi Chenming Paper Co., Ltd. 2. Influence of alteration of accounting policies, accounting estimations, and correcting of accounting errors (1) None of alteration of accounting policies or changing of accounting estimation been undertaken in the report term (2) Correcting of accounting errors for previous fiscal years: The Company paid enterprise income tax of RMB2,698,976.43 when clearing the taxations for year 2003 (including: RMB3,901,320.86 for the income tax of year 2002, and offsetted RMB1,202,344.43 of income tax for year 2003). This event has been retrospectively written into the relative subjects of Financial Report 2003. The subsidiaries of the Company paid income tax retrospectively for the previous years when clearing the taxation for year 2003. Relative subjects were rewritten in the Financial Report 2003 of the subsidiaries and the Company’s as well. - 26 - The influence of the above correcting of accounting errors are as the followings: Influence on the total profit of Name of companies Amount corrected the Company Year 2002 Shandong Chenming Paper Holdings Co. Ltd. 3,901,320.86 -3,901,320.86 Yer 2003 Shandong Chenming Paper Holdings Co. Ltd. -1,202,344.43 1,202,344.43 Wuhan Chenming Paper Holding Ltd. 1,383,556.97 -704,645.56 Shandong Chenming Paper Group Qihe Paper Board Ltd. 1,468,932.48 -1,468,151.01 Total 5,551,465.88 -4,871,773.00 3. Particulars about the liabilities, credit, and arrangement for returning of debts, including principal and interests At the end of report term, the Company is responsible for RMB5,583.5965 million of current liabilities, and RMB3,664.1138 million of long-term liabilities, totaled to RMB9,247.7102 million. At the end of the report term, the credit status of the Company has not been changed. Relative details and debt returning plan can be find in the Prospectus of Issuing Corporation Transferable Bonds published on September 25th 2004 by China Securities Journal, Securities Times, Shanghai Securities Daily and http://www.cninfo.com.cn. V. (VIII) Changing of business environment, macro policies, laws and regulations impact on the business operation of the company The significant increasing of raw materials and energy prices has impacted the business operation of the Company at certain level. W. (IX) Business plan for the coming year For the year 2005, the Company will keep focusing on the market construction and emphasis on self- development and creativity. Investment will be enlarged on construction of net projects and marketplace as well as technical development. International development will also be the main strategic direction in viewing of create an international enterprise with global competition. Major works and measurements: 1. Enforce the market developing of new products with target of building up international reputation. Further enhance the construction of marketing force and network. Keep balance of production and sales volume of new products. 2. Building a network of production bases and purchasing process. Establish wood supplying base by means of joint venture, to establish a integrated wood, pulp and paper production chain. 3. Enforce employee training programme to increase employee skill and backup the speedy development of the enterprise. - 27 - 4. Speed up international co-operation process, improve capital operation, perform multi-layer and full range international cooperation, seek for more powerful partners. 5. Explore for new projects in viewing of international market to ensure the consistence of delelopment. X. (X) Daily works of the Board 1. The Company held 5 Board meetings during the report term. 1) The 3rd term of Board of Shandong Chenming Paper Holdings Limited (the Company) held its 16th meeting on March 14th, 2004 on the 2nd floor of Chenming Hotel. All of the 15 directors presented the meeting. All of the supervisors and relative executives presented the meeting as none voting delegations. The meeting was complying with relative laws and acts and provisions of the Article of Association of the Company. The Directors examined and passed the proposals raised in the meeting and the followings are the resolutions: 1) The Annual Report 2003 and its summary version; 2) The Board’s Report 2003; 3) The Financial Settlement Report 2003; 4) Profit allocation plan for year 2003 and profit allocation policy for year 2004 5) The proposal on revising the Article of Association of the Company; 6) The proposal of investment on chemical-mechanical pulp projects; 7) The proposal on distribution of share equity motivation foundation; 8) The proposal on distribution of Chairman’s rewarding foundation; 9) The proposal on extending of transferable bond plan of the Company; 10) The statement on utilizing of fund raised from previous financing; 11) The proposal on engaging of domestic and overseas accountants; 12) The proposal on engaging of conventional legal advisor. 13) The proposal on providing securities to the controlled subsidiaries for integrated credits; 14) The proposal of applying for the authorization from the Shareholders’ General Meeting about entering of significant contracts; 15) The proposal of holding the Shareholders’ General Meeting 2003. The above resolutions were published by the March 16th 2004 issues of China Securities Times and Hong Kong Commercial Daily. 2) The 3rd term of Board of Shandong Chenming Paper Holdings Limited (the Company) held its 17th meeting on April 16th, 2004 on the 2nd floor of Chenming Hotel. All of the 15 directors presented the meeting. All of the supervisors and relative executives presented the meeting as none voting delegations. The meeting was complying with relative laws and acts and provisions of the Article of Association of the Company. The 1st Quarterly Report 2004 was examined and passed on the meeting. 3) The 3rd term of Board of Shandong Chenming Paper Holdings Limited (the Company) held its 18th meeting on July 27th, 2004 in the Headquarter of Sales Division located on the 26th floor of Block A, Beijing Digital Building. All of the 15 directors presented the meeting. All of the supervisors and relative executives presented the meeting as none voting delegations. The meeting was complying with relative laws and acts and provisions of the Article of Association of the Company. The Directors examined and passed the proposals raised in the meeting and the followings are the resolutions: I. The Semi-Annual Report 2004 and its summary version. II. Semi-annual profit distribution plan of 2004. III. The proposal of alternating the Board of Directors. IV. The proposal of management regulations about the proceeds raised from financial activities. - 28 - V. The proposal of apply for integrated credit of RMB0.3 billion from Bank of China Shouguang Branch for one year. VI. The proposal of amending partial of the provisions of the rewarding system of directors and senior executives. VII. The proposal on holding of the 1st Provisional Shareholders’ General Meeting 2004. The above resolutions were published by the July 29th, 2004 issues of China Securities Times and Hong Kong Commercial Daily. 4) The 4th term of Board of Shandong Chenming Paper Holdings Limited (the Company) held its 1st meeting on September 1, 2004 in the meeting room on the 2nd floor of Yibin House of Beijing Friendship Hotel. All of the 15 directors presented the meeting. The meeting was complying with relative laws and acts and provisions of the Article of Association of the Company. The following proposals were adopted as resolutions through examination and voting. I. Mr. Chen Hongguo was elected the Chairman of Board, and Mr. Yin Tongyuan was elected the Vice Chairman of Board for the office term of 3 years. II. As nominated by Chairman Chen Hongguo, Mr. Yin Tongyuan was engaged as the General Manager of the Company; Mr. Hao Yun was engaged as the Secretary of the Board; and Mr. Wang Wei was engaged the Representative of Securities Affairs. They will hold the office for 3 years. III. As nominated by General Manager Yin Tongyuan, Mr. Wang Baoliang, Mr. Huang Bendong, Mr. Ren Wei, Mr. Gen Guanglin, Mr. Fang Lijun, Ms. Li Xueqin, Mr. Hao Yun, and Mr. Wang Zaiguo were engaged the Vice General Managers of the Company. Mr. Yu Shiyong was engaged the Chief Financial Officer of the Company. They will hold their office for 3 years. IV. Mr. Chen Yongxing was engaged as the senior advisor of the Board of Directors for office term of 3 years. The above resolutions were published by the September 2nd 2004 issues of China Securities Times and Hong Kong Commercial Daily. 5) The 4th term of Board of Shandong Chenming Paper Holdings Limited (the Company) held its 2nd meeting on October 28th, 2004 on the 2nd floor of Chenming Hotel. All of the 15 directors presented the meeting. The meeting was complying with relative laws and acts and provisions of the Article of Association of the Company. The 3rd Quarterly Report of year 2004 was examined and passed by the meeting. 2. Execution of the resolutions adopted by the shareholder’s general meeting. As adopted by the Shareholders’ General Meeting held on June 22nd 2004, the profit distribution plan was as: basing on the total capital share amounted to 897,727,903 and the distributable profit of RMB1,120,283,386.24, RMB1.00 will be distributed to each 10 shares (tax included). Totally RMB89,772,790.30 would be distributed, and the balance of RMB1,030,510,595.94 would be carried over to the next year. The above distribution plan has been implemented in August 2004. Y. (XI) Current profit distribution plan or capitalization of public reserves plan 1. As audited by Tianjian Public Accountant Co., Ltd., the net profit realized in year 2004 was RMB503,721,298.14. According to the regulations of the Article of Association, 10% of it will be drawn as legal reserves amounted to RMB48,121,062.87, 10% of it will be drawn as legal public welfare amounted to RMB48,121,062.87, the distributable profit for year 2004 was RMB407,479,172.40. Plus - 29 - the retained profit at the beginning of year amounted to RMB1,116,385,967.84 and minus the amount distributed for year 2003, the distributable profit for year 2004 is RMB1,434,092,349.94. 2. Profit distribution preplan for year 2004 On the basis of total capital share of 897,727,903 at the end of year 2004, and the distributable profit of RMB407,479,172.40, 2 bonus shares and RMB1.00 of cash dividend will be dilivered to each 10 shares (tax included). The total profit distributed is amounted to RMB269,318,370.90, the retained profit of RMB138,160,801.50 will be carried over to the next year. By the meantime, basing on the total capital share of 897,727,903 shares at the end of year 2004, 3 new shares will be increased over each 10 shares by the capital reserves. Z. (XII) Misc. Information 1. Capital transaction with related parties In accordance with “Notification on the regulations of capital transactions and external guarantees between listed companies and related parties” (Document No. Zheng-jian-fa [2003]56, referred to as “the Notification” hereinafter) issued by China Securities Regulatory Commission, Tianjian Public Accountant issued the special statement about the capital transaction and guarantee provided between the Company and its related parties. (Document Tian-jian-(2005)-Te-Shen-Zi 025). To the Shareholders of SHANDONG CHENMING PAPER HOLDINGS LIMITED: (1) Capital occupation of the controlling shareholder and related parties ① The controlling shareholder There was no capital occupied by controlling shareholder till the end of December 31st 2004. ② Other related parties Ended December 31st 2004, the balance of account receivables due to Shouguang Liben Paper Co., Ltd. (in which the Company is holding 26.40% of capital shares) was amounted to RMB1,002,375.90. These are rents, water and electricity charges. (2) We didn’t find any evidence that the Company provided any capital to the controlling shareholder and other related parties directly or indirectly as set out in the 1st and 2nd term of the Notification. The independent directors acknowledge: ended at December 31st 2004, the Company provided no external guarantee. As required by the document Zheng-Jian-Fa [2003] 56, the Company has revised the Article of Association. The procedures of external guarantee and qualifications for the receivers has been amended into the Article of Association. The Company is performing its duty of information disclosing right according to the Rules of Stock Listing and the Article of Association, and provided relative information to the CPA. 2. The official information disclosing medias are China Securities Journal and Hong Kong Commercial Daily. - 30 - VIII. The Report of the Supervisory Committee In the report term, the Supervisory Committee was exercising its duty with respecting of the shareholders’ benefit. The committee presented the Board meetings and performed inspection on the legality of the financial activities and performing of duties of the directors, managers and other senior managements. AA. (I) The Committee has held 3 meetings during the report term. 1. The 8th meeting of the 3rd term of Supervisory Committee was held on March 14th 2004 on the 2nd floor of Chenming Hotel. All of the 5 supervisors presented the meeting. The following resolutions were examined and passed in the meeting. I. The Annual Report 2003 and its summary version. II. The Report of the Supervisory Committee 2003; III. The Financial Settlement Report 2003; The above resolutions were published by the March 16th, 2004 issues of China Securities Times and Hong Kong Commercial Daily. 2. The 3rd term of Supervisory Committee of Shandong Chenming Paper Holdings Limited (the Company) held its 10th meeting on July 27th, 2004 in the Headquarter of Sales Division located on the 26th floor of Block A, Beijing Digital Building. All of the 5 supervisors presented the meeting. The proposals raised in the meeting were examined and passed by the supervisors. The followings are the resolutions of the meeting: I. The Semi-Annual Report 2004 and its summary version. II. The proposal of alternating the Supervisory Committee. The above resolutions were published by the July 29th 2004 issues of China Securities Journal and Hong Kong Commercial Daily. 3. The 4th term of Supervisory Committee of Shandong Chenming Paper Holdings Limited (theCompany) held its 1st meeting on September 1, 2004 in the meeting room on the 2nd floor of Yibin House of Beijing Friendship Hotel. All of the 5 supervisors presented the meeting. The proposals raised in the meeting were examined and passed by the supervisors. The followings are the resolutions of the meeting: Mr. Zhen Liyong was elected the Chairman of the 4th Term of Supervisory Committee for the office term of 3 years. The above resolutions were published by the September 2nd 2004 issues of China Securities Journal and Hong Kong Commercial Daily. BB. (II) Independent statements issued by the supervisory committee 1. The decision-making procedures of the company are valid. The internal controlling system is mature and properly operated. No behaviors that violate the laws or the Article of Association or harming the benefit of the company were found. 2. The committee undertook inspections on the financial status of the company. The committee takes for the auditors’ reports issued by both of Tianjian Certified Public Accountants and Deloitte Touche Tohmatsu CPA Ltd.as reflecting the financial status and business results of the company frankly, objectively, and justly. 3. The company issued RMB2 billion of transferable bonds, which was according with that described in the Stock Inviting Prospectus. No investment has been made to projects other than that of set by the prospectus. - 31 - 4. Property acquisitions occurred during the report term was on reasonable price and neither harmed the interests of the shareholders nor causing losing of company assets. 5. Related transactions occurred during the report term was on a fair and reasonable base, harmed no benefit of the company. - 32 - IX. Significant Events CC. (I) Significant lawsuit or arbitration events occurred in the report term The Company was involved in a lawsuit event regarding payment for engineering projects. After the completion of the workshop, the contractor sued to the court that the Company didn’t make the payment. The court issued judgment of executing in advance to the Company according to the request of the contractor. The bank saving of the Company amounted to RMB7.804 million was frozen and executed the Company by RMB10 million in advance. Ended December 31st 2004, the court didn’t make any formal judgment yet. The Company is preparing for responding the lawsuit. Because of the uncertainty of the result, the Company has predicted relative liabilities in accordance with the lawsuit, and adjusted the cost and gain/loss account of the relative project. This event will not make any impact on the normal operation and production of the whole company and shall bring no loss to the Company. DD. (II) Acquisition or selling of assets, taking over events occurred in the report term. The Company increased its investment and shareholding in Jiangxi Chenming Paper Co., Ltd. during the report term. Details about this can be found in the report of the Board of Directors. EE. (III) Material Related Transactions No material related transactions occurred during the report term. FF. (IV) Material Contracts and Implementation 1. There was no external guarantee or illegal guarantee occurred in the report term. Ended December 31st 2004, the Company has provided loan securities to the controlling subsidiaries amounted to RMB1,812,520,00. Name of the subsidiaries Amount guaranteed Wuhan Chenming Paper Holding Ltd. 672,511,909.47 Shandong Chenming Paper Group Qihe Paper Board Ltd. 80,000,000.00 Hailaer Chenming Paper Ltd. 14,850,000.00 Shandong Chenming Board Ltd. 35,000,000.00 Jiangxi Chenming Paper Ltd. 815,160,945.00 Heze Chenming Board Ltd. 60,000,000.00 Shanghai Chenming Paper-making Machine Ltd. 135,000,000.00 Total 1,812,522,854.47 2. The provider of security for the issuing of transferable bonds is China Industrial and Commercial Bank Shandong Branch. The profitability, assets, and credit positions have not changed during the report term. GG. (V) Changing of CPAs The 3rd meeting of the 4th term of Board has examined and adopted the proposal of changing the overseas auditor. PriceWaterHouseCoopers Ltd. will no longer be the overseas auditor of the Company for year 2004, and Deloitte Touche Tohmatsu CPA Ltd. was engaged the overseas auditor of the Company for year 2004. This proposal is subject to the approval of the Shareholders’ General Meeting 2004. Tianjian Public Accountant will be the domestic auditor of the Company for another one year. - 33 - CPA Auditing Charge for year 2004 Tianjian Public Accountants RMB1 million Deloitte Touche Tohmatsu CPA Ltd. HKD1.15 million The traveling expenses of the two CPAs were taken by the Company. HH. (VI) Statement on the company, the Board or the Director received any penalty form China Securities Supervisory Committee or any condemn from the Stock Exchange. In May 2004, China Securities Regulatory Commission performed inspection on the Company and issued “The notification of rectification”. The notification requires the Company to rectify the information disclosing about the adjustment of income tax for year 2002. The total impact of the adjustment was amounted to RMB3.9753 million. The Company has repaid the tax and performed adjustment in 2004 on the financial statement of year 2002. Relative losses have been written into the net gain/loss account of 2004. The Company will pay great attention on the information disclosing of relative affairs. Details about this can be found in the June 10th 2004 issues of China Securities Journal and Hong Kong Commercial Daily. - 34 - X. Financial Report Notes to the Financial Statements R 05-066 AUDITORS' REPORT TO THE SHAREHOLDERS OF SHANDONG CHENMING PAPER HOLDINGS LIMITED (established as a joint stock limited company in the People's Republic of China) We have audited the accompanying consolidated balance sheet of Shandong Chenming Paper Holdings Limited and its subsidiaries (the "Group") as of 31 December 2004 and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These consolidated financial statements are the responsibility of the Group'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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2004 and the consolidated results of its operations and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards. Deloitte Touche Tohmatsu CPA Ltd. Beijing, 25 March 2005 - 35 - CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 NOTES 2004 2003 RMB'000 RMB'000 Turnover 4 7,042,882 5,797,836 Cost of sales (5,366,187) _________ (4,152,181) _________ Gross profit 1,676,695 1,645,655 Other operating income 6 153,680 86,781 Distribution costs (396,042) (345,354) Administrative expenses (358,084) _________ (327,895) _________ Profit from operations 7 1,076,249 1,059,187 Finance costs 8 (249,863) (167,268) Gain on disposal of a subsidiary 9 - 4,769 Share of results of associates 411 _________ (572) _________ Profit before taxation 826,797 896,116 Taxation 10 (212,692) _________ (171,008) _________ Profit after taxation 614,105 725,108 Minority interests (135,115) _________ (72,047) _________ Net profit for the year 478,990 _________ 653,061 _________ Proposed dividend 11 89,773 _________ 89,773 _________ Earnings per share 12 - Basic RMB0.53 _________ RMB0.73 _________ - Diluted RMB0.52 _________ N/A _________ - 36 - CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 NOTES 2004 2003 RMB'000 RMB'000 Non-current assets Property, plant and equipment 13 10,287,124 6,126,413 Land use rights 14 170,709 173,066 Interests in associates 15 20,058 19,647 Available-for-sale investments 16 6,052 6,052 Prepayments 17 12,000 _________ 18,000 _________ 10,495,943 _________ 6,343,178 _________ Current assets Inventories 18 1,611,938 1,045,831 Trade and other receivables 19 2,025,503 1,785,596 Restricted bank deposits 19 7,804 - Bank balances and cash 19 1,586,340 _________ 1,052,935 _________ 5,231,585 _________ 3,884,362 _________ Current liabilities Trade and other payables 20 1,866,673 1,209,697 Borrowings - amount due within one year 21 3,619,705 2,963,757 Taxation payable 99,277 71,438 Dividend payable 775 _________ 128 _________ 5,586,430 _________ 4,245,020 _________ Net current liabilities (354,845) _________ (360,658) _________ 10,141,098 _________ 5,982,520 _________ Capital and reserves Share capital 24 897,728 897,728 Reserves 25 3,730,258 _________ 3,117,183 _________ 4,627,986 _________ 4,014,911 _________ Minority interests 1,694,660 _________ 866,042 _________ Non-current liabilities Convertible loan notes 23 1,767,050 - Borrowings - amount due after one year 21 1,642,910 687,386 Deferred income 22 408,492 _________ 414,181 _________ 3,818,452 _________ 1,101,567 _________ 10,141,098 _________ 5,982,520 _________ The consolidated financial statements on page 2 to 29 were approved and authorised for issue by the Board of Directors on 25 March 2005 and are signed on its behalf by: DIRECTOR DIRECTOR - 37 - CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2004 Statutory Statutory public Discretionary Share Capital Equity surplus welfare surplus Dividend Accumulated capital reserve reserve reserve reserve reserve reserve profits Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 2003 498,738 1,853,261 - 146,596 126,610 - 24,937 736,645 3,386,787 Bonus issue 398,990 (299,242) - - - - - (99,748) - Dividend paid - - - - - - (24,937) - (24,937) Net profit for the year - - - - - - - 653,061 653,061 Appropriations to reserves - 17,561 - 58,502 58,502 - - (134,565) - Dividend proposed - - - - - - 89,773 (89,773) - Reclassifications _____ - ______ - - ____ _____ - (117) _____ 117 ___ _____ - ______ - ______ - At 31 December 2003 897,728 1,571,580 - 205,098 184,995 117 89,773 1,065,620 4,014,911 Recognition of equity component of convertible loan notes, net of direct issue cost incurred - - 223,858 - - - - - 223,858 Dividend paid - - - - - - (89,773) - (89,773) Net profit for the year - - - - - - - 478,990 478,990 Dividend proposed - - - - - - 89,773 (89,773) - Appropriations to reserves - _____ 19,141 ______ - ____ 47,491 _____ 47,491 _____ ___- _____ - (114,123) ______ ______ - At 31 December 2004 897,728 1,590,721 223,858 252,589 232,486 117 89,773 1,340,714 4,627,986 _____ ______ ____ _____ _____ ___ _____ ______ ______ - 38 - CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003 RMB'000 RMB'000 Operating activities Profit before taxation 826,797 896,116 Adjustments for: Interest income (19,549) (16,652) Interest expense 210,912 163,622 Share of result of an associate (411) 572 Depreciation of property, plant and equipment 549,008 486,756 Amortisation of land use rights 5,078 4,987 Amortisation of government grants received (21,769) (19,177) Loss on disposal of property, plant and equipment 10,213 2,527 Allowances for bad and doubtful debts (496) 19,948 Allowances for inventories (223) (970) Investment income - (10,300) Gain on disposal of equity interest in a subsidiary - ________ (4,769) ________ Operating cash flows before movements in working capital 1,559,560 1,522,660 Increase in inventories (565,884) (517,266) Increase in trade and other receivables (239,411) (113,084) Decrease (increase) in non-current prepayments 6,000 (18,000) Increase in trade and other payables (56,431) ________ (118,914) ________ Cash generated by operations 703,834 755,396 Tax paid (184,853) ________ (150,853) ________ Net cash from operating activities 518,981 ________ 604,543 ________ Investing activities Payment for construction costs (3,713,642) (915,821) Purchase of property, plant and equipment (286,199) (205,814) Payment of land use rights (2,721) (20,919) Government grants received 16,080 252,000 Proceeds on disposal of property, plant and equipment 22,164 1,235 Interest received 19,549 16,652 Acquisition of subsidiaries - 22,500 Proceeds on disposal of trading investments - 10,300 Proceeds on disposal of equity interest in a subsidiary - 10,140 Dividend received - ________ 732 ________ Net cash used in investing activities (3,944,769) ________ (828,995) ________ - 39 - 2004 2003 RMB'000 RMB'000 Financing activities New borrowings raised 6,527,981 593,053 Issue of convertible loan notes 2,000,000 - Capital contribution by minority shareholders of subsidiaries 709,798 58,420 Borrowings repaid (4,916,509) - Interest paid (208,862) (166,926) Dividends paid by the Company (89,126) (24,809) Direct issue costs incurred in connection with the issue of convertible loan notes (39,990) - Dividends paid by subsidiaries to minority shareholders of subsidiaries (16,295) (32,595) Increase in restricted bank deposits (7,804) - Decrease in pledged bank deposits - ________ 106,900 ________ Net cash from financing activities 3,959,193 ________ 534,043 ________ Net increase in cash and cash equivalents 533,405 309,591 Cash and cash equivalents at beginning of the year 1,052,935 ________ 743,344 ________ Cash and cash equivalents at end of the year, representing bank balances and cash 1,586,340 ________ 1,052,935 ________ - 40 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 1. GENERAL Shandong Chenming Paper Holdings Limited (the "Company") was incorporated in the People's Republic of China (the "PRC") in May 1993. The Company's B shares and A shares were listed on the Shenzhen Stock Exchange in 1997 and 2000, respectively. The Company and its subsidiaries (the "Group") are principally engaged in manufacture of paper. The number of employees of the Group at 31 December 2004 is 18,270 (2003: 16,292). 2. PRESENTATION OF FINANCIAL STATEMENTS The Company and its subsidiaries maintain their accounting records and prepare their statutory financial statements in accordance with the accounting standards and regulations applicable to joint stock companies limited by shares of the People's Republic of China ("PRC GAAP"). These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The accounting policies and bases adopted in the preparation of the statutory financial statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in the consolidated financial statements but are not taken up in the accounting records of the Company and its subsidiaries. These financial statements are presented in Renminbi ("RMB") since that is the currency in which majority of the Group's transactions are dominated. Potential impact arising from the recently issued accounting standards IFRS 3 "Business combination" became effective in 2004 and applies to the accounting for business combinations for which the agreement date is on or after 31 March 2004. As the Group has no business combinations or acquisition of subsidiaries during the year, so the Group does not expect that their issuance will have a material effect on how the results of operations and financial position of the Group are prepared and presented. Moreover, in 2004, the International Accounting Standards Committee Foundation issued a number of new or revised IFRSs which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new IFRSs in the consolidated financial statements for the year ended 31 December 2004. - 41 - 3. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments which are carried at fair values. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries), made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. When necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All significant intercompany transactions and balances between group enterprises are eliminated on consolidation. Interests in associates An associate is an enterprise over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Interests in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate less any impairment in the value of individual investments. Any excess of the cost of acquisition over the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. Where a group enterprise transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group's interest in the relevant associate, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred. - 42 - 3. SIGNIFICANT ACCOUNTING POLICIES - continued Revenue recognition Sales of goods are recognised when goods are delivered and title has passed. Sales of electricity are recognised when electricity are generated and transmitted to the power grid operated by the local electric power company. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Dividend income from investments is recognised when the Group's right to receive payment have been established. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to the consolidated income statement on a straight-line basis over the term of the relevant lease. Foreign currencies Transactions in currencies other than RMB are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in currencies other than RMB are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in currencies other than RMB are translated at the rate prevailing at the date when the fair value was determined. Gains and losses arising on exchange are included in net profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the exchange in fair value is recognised directly to equity. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the costs of those assets. All other borrowing costs are recognised in net profit or loss for the period in which they are incurred. - 43 - 3. SIGNIFICANT ACCOUNTING POLICIES - continued Government grants Government grants relating to property, plant and equipment are treated as deferred income and released to consolidated income statement over the expected useful lives of the assets concerned. Other government grants, including value-added tax refunds are recognised as income when the Group is entitled to receive. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and 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. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. - 44 - 3. SIGNIFICANT ACCOUNTING POLICIES - continued Property, plant and equipment Assets in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group's accounting policy. Depreciation of these assets, on the same basis as other assets, commences when the assets are ready for their intended use. Other items of property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost of assets, other than construction in progress, over their estimated useful lives, after taking into account of their estimated useful lives using the straight-line method, on the following bases: Buildings 20 - 40 years Plant and machinery 5 - 10 years Cost of upgrade of leased plant and machinery Over the unexpired terms of the lease The gain or loss arising on disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Land use rights Land use rights are measured initially at purchase cost less impairment loss identified, and amortised on a straight-line basis over their estimated useful lives. Impairment At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of 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 the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. - 45 - 3. SIGNIFICANT ACCOUNTING POLICIES - continued Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables Trade and other receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Investments Investments are recognised on a trade-date basis and are initially measured at cost including transaction costs. At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost, less any impairment loss recognised to reflect irrecoverable amounts. The annual amortisation of any discount or premium on the acquisition of a held-to-maturity security is aggregated with other investment income receivable over the term of the instrument so that the revenue recognised in each period represents a constant yield on the investment. Investments other than held-to-maturity debt securities are classified as either held-for-trading or available-for-sale, and are measured at subsequent reporting dates at fair value except for any financial assets that do not have a quoted market price in an active market and for which fair value cannot be reliably measured. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period. Borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade and other payables Trade and other payables are stated at their nominal value. - 46 - 3. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Convertible loan notes Convertible loan notes are regarded as compound instruments, consisting of a liability component and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible loan notes and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity. Issue costs are apportioned between the liability and equity components of the convertible loan notes based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity. The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible loan notes. Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group's obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plan. 4. TURNOVER Turnover represents the amount received or receivable from the sales of paper products, construction materials, chemical products, paper manufacturing machinery, electricity and other products, net of sales returns and sales tax during the year. 2004 2003 RMB'000 RMB'000 Sale of paper products 6,591,626 5,464,283 Sale of construction materials 268,918 205,560 Sale of chemical products 67,715 33,616 Sale of electricity 52,102 37,910 Sale of paper manufacturing machinery 43,901 43,813 Others 18,620 _________ 12,654 _________ 7,042,882 _________ 5,797,836 _________ - 47 - 5. BUSINESS AND GEOGRAPHICAL SEGMENT The Group's operations and sales are in the PRC only. The sales of paper products accounted for over 90% (2003: over 90%) of the consolidated turnover and result of the Group in the business segment. 6. OTHER OPERATING INCOME 2004 2003 RMB'000 RMB'000 Government grants Expansion grants (a) 79,999 37,429 Value-added tax and other taxes refund (b) 24,685 10,695 Others 22 _________ 3,478 _________ 104,706 51,602 Interest income 19,549 16,652 Others 29,425 _________ 18,527 _________ 153,680 _________ 86,781 _________ (a) The Company and its subsidiaries received government grants from the local municipal governments in relation to the encouragement of the development and advancement of the business of the Group. The total amount granted and received during the year is RMB79,999,000 (2003: RMB37,429,000). According to the relevant government grant documents, the grants are used for the expansion and development of the business operations and production of the Group. 2004 2003 RMB'000 RMB'000 The Company 19,907 - Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited 32,866 19,603 Chibi Chenming Paper Company Limited 12,591 10,550 Wuhan Chenming Hanyang Paper Company Limited 11,660 3,500 Hailaer Chenming Paper Company Limited 2,040 3,776 Yanbian Chenming Paper Company Limited 935 _________ - _________ 79,999 _________ 37,429 _________ (b) Pursuant to various circulars issued by the State Administration of Taxation and local government authorities, the Group received various types of refund on value-added tax and other local taxes. - 48 - 7. PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging (crediting): 2004 2003 RMB'000 RMB'000 Wages and salaries 275,418 245,613 Staff welfare 39,569 21,171 Defined retirement benefit schemes contributions 31,455 28,226 Performance bonus fund - ________ 22,435 _______ Total staff costs 346,442 ________ 317,445 _______ (Reversal of) allowance for bad and doubtful debts (496) 19,948 Reversal of allowance of inventory (223) (970) Amortisation of land use rights 5,078 4,987 Depreciation of property, plant and equipment 549,008 486,756 Loss on disposal of property, plant and equipment 10,213 2,527 Minimum operating lease payment in respect of buildings, plant and equipment 40,351 37,730 Repairs and maintenance expenditure on property, plant and equipment 126,669 102,286 Research and development costs 8,656 ________ 9,525 _______ 8. FINANCE COSTS 2004 2003 RMB'000 RMB'000 Interest expenses on: Bank borrowings 201,283 158,633 Convertible loan notes 30,898 - Other borrowings 7,579 4,989 Less: Interest capitalised in construction in progress (28,848) ________ - _______ Net interest expense 210,912 163,622 Net exchange loss (gain) 32,479 (188) Other finance charges 6,472 ________ 3,834 _______ 249,863 ________ 167,268 _______ Borrowing costs capitalised during the year are calculated by applying a capitalisation rate of approximately 5% (2003: nil) to expenditure on qualifying assets. 9. GAIN ON DISPOSAL OF A SUBSIDIARY During 2003, the Group disposed of its 49% equity interest in a subsidiary, namely, Shandong Chenming Panels Company Limited, to a PRC third party for a consideration of RMB10,140,000 and resulting in a gain of RMB4,769,000. - 49 - 10. TAXATION 2004 2003 RMB'000 RMB'000 The income tax charge represents Charge for the year 207,328 140,477 Underprovision in prior years 5,551 30,531 Income tax refunded (187) _______ - _______ 212,692 _______ 171,008 _______ Pursuant to the relevant laws and regulations in the PRC, the statutory enterprise income tax rate of 33% is applied to the Group except for the following companies which entitle to different concessionary tax rates below. Since the Company is a foreign investment enterprise established and operated in the Technology Economic Zone in Shandong, the applicable income tax rate of the Company is 24%. Pursuant to the approval of the Shouguang State Tax Bureau, Shandong Chenming Xinli Co- generation Company Limited, a subsidiary of the Company, being a foreign investment enterprise, is exempted from paying PRC income tax for two years starting from the first year with assessable income followed by a 50% reduction in income tax rate in the following three years. 2004 is the fifth profit-making year of the subsidiary and accordingly, income tax has been provided at 7.5%. Pursuant to the approval of the Hailaer government and according to the related regulations issued by PRC Ministry of Foreign Trade and Economic Cooperation, Hailaer Chenming Paper Company Limited, a subsidiary of the Company, is exempted from paying PRC Enterprise Income Tax for three years starting from the first year with assessable income followed by a 50% reduction in income tax rate in the following two years. 2004 is the fifth profit-making year of the subsidiary and accordingly, income tax has been provided at 16.5%. Pursuant to the approval of the local government and according to regulations issued by State of Council, the applicable income tax rate of Yanbian Chenming Paper Company Limited, a subsidiary of the Company, is 15%. PRC Enterprise Income Tax of the Group for the year mainly comprises income tax of the Company and certain of its subsidiaries which are calculated at rates applicable to the relevant companies ranging from 15% to 33% (2003: 15% to 33%). As the effect of deferred taxation arising on the temporary differences as at the balance sheet date is insignificant, no deferred taxation has been provided. - 50 - 10. TAXATION - continued The charge for the year can be reconciled to the profit per the consolidated income statement as follows: 2004 2003 RMB'000 RMB'000 Profit before taxation 826,797 _______ 896,116 _______ Tax calculated at domestic tax rates applicable to individual companies (average rate: 24%) 198,431 216,534 Effect of tax incentives (note) (20,378) (119,484) Income not taxable (11,201) (16,570) Expenses not deductible 40,476 59,997 Underprovision in prior year 5,551 30,531 Income tax refunded (187) _______ - _______ Tax charge for the year 212,692 _______ 171,008 _______ Note: Included in the amounts above, according to regulations issued by the State Administration of Taxation, the Company and a subsidiary, Wuhan Chenming Hanyang Paper Company Limited, obtained incentives for purchase of equipment manufactured domestically with an amount of RMB5,074,000 (2003: RMB91,921,000) and RMB15,304,000 (2003: RMB21,504,000) respectively from local tax authorities during the year. 11. PROPOSED DIVIDEND 2004 2003 RMB'000 RMB'000 Proposed dividend for the year ended 31 December 2004 of 10 cents (2003: RMB10 cents) per share 89,773 ______ 89,773 ______ The proposed dividend for the year ended 31 December 2004 is subject to approval by shareholders at the forthcoming Annual General Meeting and has not been included as a liability in these financial statements (see note 31). - 51 - 12. EARNINGS PER SHARE The calculation of the basic and diluted earnings per share is based on the following data: Earnings 2004 2003 RMB'000 RMB'000 Earnings for the purpose of basic earnings per share 478,990 653,061 Effect of dilutive potential shares: Interest on convertible loan notes (net of tax) 19,803 _______ - _______ Earnings for the purposes of diluted earnings per share 498,793 _______ 653,061 _______ Number of shares 2004 2003 '000 '000 Number of shares for the purposes of basic earnings per share 897,728 897,728 Effect of dilutive potential shares: Convertible loan notes 58,689 _______ - _______ Weighted average number of shares for the purposes of diluted earnings per share 956,417 _______ 897,728 _______ 13. PROPERTY, PLANT AND EQUIPMENT Plant and Construction Buildings machinery in progress Total RMB'000 RMB'000 RMB'000 RMB'000 COST At 1 January 2004 1,191,598 5,442,662 706,392 7,340,652 Additions 101,025 185,174 4,455,897 4,742,096 Transfers 163,727 431,979 (595,706) - Disposals (5,336) _________ (36,426) _________ - ________ (41,762) _________ At 31 December 2004 1,451,014 _________ 6,023,389 _________ 4,566,583 ________ 12,040,986 _________ DEPRECIATION At 1 January 2004 162,966 1,051,273 - 1,214,239 Provided for the year 68,179 480,829 - 549,008 Eliminated on disposals (1,287) _________ (8,098) _________ - ________ (9,385) _________ At 31 December 2004 229,858 _________ 1,524,004 _________ - ________ 1,753,862 _________ CARRYING AMOUNT At 31 December 2004 1,221,156 _________ 4,499,385 _________ 4,566,583 ________ 10,287,124 _________ At 31 December 2003 1,028,632 _________ 4,391,389 _________ 706,392 ________ 6,126,413 _________ - 52 - 14. LAND USE RIGHTS RMB'000 COST At 1 January 2004 198,308 Additions 2,721 ________ At 31 December 2004 201,029 ________ AMORTISATION At 1 January 2004 25,242 Provided for the year 5,078 ________ At 31 December 2004 30,320 ________ CARRYING VALUES At 31 December 2004 170,709 ________ At 31 December 2003 173,066 ________ The lease terms of the land use rights held by the Group are ranged from 40 to 50 years. 15. INTERESTS IN ASSOCIATES 2004 2003 RMB'000 RMB'000 Share of net assets 20,058 ______ 19,647 ______ Particulars of associates of the Group at 31 December 2004, which are established in the PRC, are as follows: Place of Percentage of equity Name of company operation interest held by the Group Principal activities Shouguang Liben Paper PRC 26.4% Manufacture Making Company Limited of paper Qingzhou Chenming PRC 30.0% Production of Denaturation Amylum denaturated Co., Ltd. amylum - 53 - 16. AVAILABLE-FOR-SALE INVESTMENTS 2004 2003 RMB'000 RMB'000 Unlisted investments, at cost 7,252 7,2,52 Less: Impairment (1,200) ______ (1,200) ______ Carrying value at the balance sheet date 6,052 ______ 6,052 ______ Available-for-sale investments comprise unlisted investments in the companies established in the PRC in which the Group holds not less than 20% of their paid-up capital or the Group cannot exercise significant influence or control. The directors of the Company are of the opinion that the carrying value of the available-for-sale investment approximated the recoverable amount of the available-for-sale investments as of the balance sheet date. 17. PREPAYMENTS Non-current prepayments represented prepaid rental for production facilities leased from Hanyang Paper Making Factory, a minority shareholder of Wuhan Chenming Hanyang Paper Company Limited. These prepayments are due within 5 years from the balance sheet date. The current portion of prepayments is included in the trade and other receivables in note 19. The directors consider that the carrying amount of prepayments approximates their fair value. 18. INVENTORIES 2004 2003 RMB'000 RMB'000 Raw materials 905,390 496,948 Work in progress 48,706 52,284 Finished goods 586,371 426,699 Property under construction 71,471 ________ 70,123 ________ 1,611,938 1,046,054 Less: Allowances for obsolescence - ________ (223) ________ 1,611,938 ________ 1,045,831 ________ Finished goods of RMB12,216,000 at 31 December 2003 were stated at net realisable value. Other inventories at 31 December 2003 and inventories at 31 December 2004 were stated at cost at the balance sheet date. - 54 - 19. OTHER FINANCIAL ASSETS Trade and other receivables at the balance sheet date comprise amounts trade and bills receivables of RMB1,411,432,000 (2003: RMB1,371,340,000), other receivables of 188,678,000 (2003: RMB204,644,000) and deposits and prepayments of 425,393,000 (2003: RMB209,612,000). The average credit period taken on sales of goods is 60 days. An allowance has been made for estimated irrecoverable amounts of goods sold of RMB122,833,000 (2003: RMB123,329,000) at the balance sheet date. The allowance has been determined by reference to past default experience. The directors consider that the carrying amount of trade and other receivables approximates to their fair value. Bank balances and cash comprise cash held by the Group and short-term deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value. Restricted bank deposits of RMB7,804,000 (2003: nil) at the balance sheet date was the cash balance at bank frozen by a court order in connection with the court case mentioned in note 27. The carrying amount of this asset approximates to its fair value. Credit risk The Group's principal financial assets are bank balances and cash, trade and other receivables and investments, which represent the Group's maximum exposure to credit risk in relation to financial assets. The Group's credit risk is primarily attributable to its trade and other receivables. A substantial amount of trade and other receivables arise from the operation of sales of papers. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and the current economic environment. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. The credit risk on liquid funds is limited because the counterparties are approved banks in the PRC. The credit risk on the restricted bank balance is limited because the court has released a court order to unfreeze that bank account subsequent to the balance sheet date. 20. OTHER FINANCIAL LIABILITIES Trade and other payable principally comprise amounts outstanding for trade purchase and ongoing costs accrued and expense accruals. The directors consider that the carrying amount of trade and other payables approximates their fair value. - 55 - 21. BORROWINGS 2004 2003 RMB'000 RMB'000 Unsecured bank borrowings 5,064,642 2,676,612 Unsecured bank borrowings guaranteed by third parties 155,000 920,000 Other borrowings 42,973 _________ 54,531 _________ 5,262,615 _________ 3,651,143 _________ The borrowings are repayable as follows: Within one year 3,619,705 2,963,757 In the second year 158,440 49,900 In the third to fifth year inclusive 548,470 513,105 After five years 936,000 _________ 124,381 _________ 5,262,615 3,651,143 Less: Amount due for settlement within one year shown under current liabilities (3,619,705) _________ (2,963,757) _________ Amount due after one year 1,642,910 _________ 687,386 _________ 2004 2003 RMB'000 RMB'000 Total borrowings - at fixed rates 4,161,237 3,612,670 - at floating rates 1,101,378 _________ 38,473 _________ 5,262,615 _________ 3,651,143 _________ Analysis of borrowings by currency: - denominated in RMB 3,449,161 3,057,392 - denominated in United States dollars 1,527,015 583,094 - denominated in Euro 286,439 - - denominated in Hong Kong dollars - _________ 10,657 _________ 5,262,615 _________ 3,651,143 _________ Fixed interest rate borrowings are charged at the prevailing market rates up to 6.03% (2003: 6.9%) per annum. The effective weighted average annual rate for the year ended 31 December 2004 was 4.54% (2003: 4.93%) per annum. Interest on borrowings at floating rates are calculated based on the borrowing rates announced by the People's Bank of China. The directors consider that the carrying amounts of borrowings approximate their fair values. - 56 - 22. DEFERRED INCOME 2004 2003 RMB'000 RMB'000 At beginning of the year 414,181 181,358 Grants obtained 16,080 252,000 Released to income statement (21,769) _______ (19,177) _______ At end of the year 408,492 _______ 414,181 _______ During the year, certain government grants obtained are in relation to the construction of property, plant and equipment amounting to RMB16,080,000 (2003: RMB252,000,000) from the local municipal governments. The grants were recorded as deferred income in the balance sheet and to be credited to the income statement on a straight-line basis over the expected useful lives of the related assets. In accordance with the terms of the grants, the amount attributable to the Group of RMB19,141,000 (2003: RMB17,561,000) was transferred from accumulated profits to capital reserve as the relevant amount is restricted in distribution. 23. CONVERTIBLE LOAN NOTES The convertible loan notes were issued on 15 September 2004. The loan notes are convertible into shares of the Company at the discretion of the holders, at any time between 15 March 2005 and 15 September 2009. The initial conversion price is RMB9.99 per share of the Company. The conversion price will be adjusted during the period if the capital structure of the Company is changed as a result of bonus issues, rights issue, issue of new shares or dividends distribution occurred after the issue of convertible loan notes. If the loan notes have not been converted, they will be redeemed within 5 trading days before 15 September 2009 at the price of RMB106.05 per loan note of RMB100. Interest ranged from 1.5% to 3.17% per annum will be paid to the holders of the loan notes during 2004 to 2009 until that settlement date. The net proceeds received from the issue of the convertible loan notes have been splitted between the liability element and equity component, representing the fair value of the embedded option to convert the liability into equity of the Group, as follows: RMB'000 Nominal value of convertible loan notes issued 2,000,000 Equity component, net of direct issue cost incurred (223,858) Direct issue cost incurred (39,990) ________ Liability component at date of issue 1,736,152 Interest charged 30,898 ________ Liability component at 31 December 2004 1,767,050 ________ - 57 - 23. CONVERTIBLE LOAN NOTES - continued The directors are of the opinion that the carrying amount of the liability component of estimated the fair value of the liability component of the convertible loan notes at 31 December 2004 is approximately the carrying amount of the convertible loan notes at the balance sheet date. 24. SHARE CAPITAL State- PRC legal Number of owned person Employees shares shares shares shares B shares A shares Total '000 '000 '000 '000 '000 '000 At 1 January 2003 498,737,724 156,609 4,536 54,112 206,481 77,000 498,738 Bonus issue (note (c)) 398,990,179 125,287 3,629 43,290 165,184 61,600 398,990 Transfer to A shares (note (d)) - _________ - ______ - ____ (97,402) _____ - ______ 97,402 ______ - ______ At 31 December 2003 and at 31 December 2004 _________ 897,727,903 281,896 ______ 8,165 ____ - _____ 371,665 ______ 236,002 ______ 897,728 ______ _________ (a) All issued shares are authorised, issued and fully paid with a par value of RMB1 each. The state-owned shares, the PRC legal person shares, employees shares, A and B shares carry equal voting rights. (b) State-owned shares and PRC legal person shares are not allowed to be traded unless approvals are obtained from the relevant authorities. (c) During 2003, with the approval by the shareholders of the Company in the 2003 annual general meeting, a bonus issue of 398,990,179 shares in the proportion of 2 shares for every 10 shares from accumulated profits and 6 shares for every 10 shares from capital reserves be distributed to the shareholders of the Company. Consequently, as at 31 December 2003, the total number of authorised and issued shares of the Company was increased to 897,727,903 shares. (d) With the approval from the relevant authorities, employees shares were allowed to be traded as A shares from November 2003 onwards. (e) There were no changes in the authorised, issued and fully paid share capital during 2004. - 58 - 25. RESERVES (a) Reserves of the Group other than accumulated profits and dividend reserve include capital reserves, equity reserve, statutory surplus reserve, discretionary surplus reserve and statutory public welfare reserve, which form part of shareholders' equity. Capital reserve comprises: (a) Surplus between the appraised value of the net assets and the value of shares issued when the Company was converted from a state-owned enterprise to a joint stock limited company; (b) The placing of 115,000,000 B shares at a premium of RMB3.75 per share; (c) The placing of 70,000,000 A shares at a premium of RMB19.80 per share; (d) Contributed surplus arising from injection of capital from minority shareholders. Contributed surplus represents the Group's share of the excess amount of the fair value of assets over the amount of capital required to be injected by the minority shareholders in the establishment of subsidiaries; (e) Transfers from accumulated profits for those government grants recognised in the income under IFRS but are not distributable in accordance with the legal requirement in the PRC (note 22); and (f) Transfer of capital reserve of RMB299,242,000 to share capital in connection with the bonus issues in 2003. Equity reserve Equity reserve represents the equity component of the convertible loan notes issued during the year. Statutory surplus reserve/Discretionary surplus reserve In accordance with relevant PRC Company laws and regulations and the Company's Articles of Association, the Company is required to appropriate 10% of its profit after taxation reported in its statutory financial statements prepared under the PRC GAAP to the statutory surplus reserve. Allocation to the discretionary surplus reserve shall be approved by the shareholders in general meeting. The appropriation of statutory surplus reserve may cease to apply if the balance of the statutory surplus reserve has reached 50% of the Company's registered capital. Surplus reserves may be used to make up losses or for conversion into share capital. The Company may, upon the approval by a resolution of shareholders' general meeting, convert its surplus reserves into share capital by issuing new shares to existing shareholders in proportion to their then existing shareholdings or by increasing the nominal value of each share. However, when converting the Company's statutory surplus reserve into share capital, the amount of such reserve remaining unconverted must not be less than 25% of the registered capital. - 59 - 25. RESERVES - continued Statutory public welfare reserve In accordance with relevant PRC Company laws and regulations and the Company's Articles of Association, the Company is required to appropriate 5% to 10% of the profit after taxation as reported in its statutory financial statements prepared under the PRC GAAP to the statutory public welfare reserve. The statutory public welfare reserve shall only apply to collective welfare of staff and workers and welfare facilities remain as properties of the Group. The statutory public welfare reserve is non-distributable. When the statutory public welfare reserve is utilised, an amount equal to the cost of the assets acquired is transferred to discretionary surplus reserve. On disposal of the relevant asset, the original transfers from the reserve are reversed. There is no utilisation during the year (2003: Nil). (b) Basis for profit distribution In accordance with the Company's Articles of Association, profit available for distribution to shareholders should be based on the lower of the amount determined in accordance with the PRC accounting standards and regulations and that determined under IFRS after deduction of the current year's appropriation to the statutory reserves. 26. COMMITMENTS Capital commitments The capital commitments in relation to the expenditure authorised but not contracted for in the financial statements in respect of acquisition of property, plant and equipment at 31 December 2003 were RMB1,446,585,000. There was no significant capital commitment at 31 December 2004. Operating lease commitments At the balance sheet date, the Group was future minimum lease payments under non-cancelable operation leases in respect of property, plant and equipment are as follows: 2004 2003 RMB'000 RMB'000 Within one year 31,133 26,703 In the second to fifth year inclusive 65,644 84,862 After five years 8,259 _______ 60,268 _______ 105,036 _______ 171,833 _______ Leases are negotiated for an average term of 10 years and rentals are fixed at the date of signing the agreements. - 60 - 27. LITIGATION At 31 December 2004, the Company has an outstanding lawsuit claimed by one of its contractors in connection to the dispute in payment of the construction work performed for a production plant of the Company. The contractor sued the Company for an aggregate sum of approximately RMB17 million for the contract work and corresponding interest and compensation for loss due to the work suspension. Upon the application filed by the plaintiff, the court has issued a court order during the year to freeze a Company's bank account with bank deposit of RMB7,804,000 and also an amount of cash of RMB10,000,000 is in the court's custody. The judgement from the court regarding this case has not yet been finalised as at 31 December 2004. Due to the uncertainty of the result of the court case, the Company has fully accrued the claim amount of RMB17 million and capitalised the corresponding amount of contract work in the construction in progress at the balance sheet date. Subsequent to the balance sheet date, by the application filed by the Company, the court has issued an order of release to unfreeze the above bank account. 28. RELATED PARTY TRANSACTIONS (a) The Group has entered into the following significant transactions with its associates during the year: 2004 2003 RMB'000 RMB'000 Purchase of raw materials 26,019 17,125 Electricity charges received 7,392 6,089 Utility charges received 4,562 ______ 3,791 ______ The terms of the above transactions are mutually agreed between the Group and its associates. (b) Directors' remuneration In 2004, the total remuneration of the directors amounted to approximately RMB9,000,000 (2003: RMB6,790,000). 29. RETIREMENT BENEFIT SCHEME CONTRIBUTIONS The Company and its subsidiaries have participated in certain defined contribution retirement schemes managed by the respective municipal governments where the Group operates, covering all permanent staff of the Group. The Group has no obligation beyond the contributions which are calculated based on 20% to 25% (2003: 20% to 25%) of permanent staff basic salaries. - 61 - 30. PRINCIPAL SUBSIDIARIES The particulars of the principal subsidiaries of the Company at 31 December 2004, that all are established in the PRC, are as follows: Attributable equity interest Place of held by Principal Name of company operation the Company activities Directly held by the Company Shandong Chenming Electric Power PRC 51.00% Investment holding Generation Holdings Company Limited Wuhan Chenming Hanyang Paper PRC 50.93% Manufacture of paper Company Limited Hailaer Chenming Paper Company Limited PRC 75.00% Manufacture of paper Shandong Chenming Paper Group Qihe PRC 99.95% Manufacture of paper Linerboard Paper Company Limited Yanbian Chenming Paper Company Limited PRC 51.00% Manufacture of paper pulp (formerly known as Yasong Chenming Paper Company Limited) Shouguang Chenming Tianyuan PRC 68.00% Arboriculture of tree Arboriculture Company Limited Jiangxi Chenming Paper Company Limited* PRC 47.15% Manufacture of paper Beijing Tianbaojialin Real Estate PRC 45.00% Property developer Company Limited* Shanghai Chenming Paper Machinery PRC 61.00% Manufacture of Company Limited paper machinery Indirectly held by the Company Xiangfan Chenming Copperplate Paper PRC 35.79% Manufacture of paper Company Limited* Chibi Chenming Paper Company Limited* PRC 35.79% Manufacture of paper Shandong Chenming Xinli Co-generation PRC 26.01% Generation of electricity Company Limited* Wuhan Chenming Qianneng Electric Power PRC 25.97% Generation of electricity Generation Company Limited* - 62 - 30. PRINCIPAL SUBSIDIARIES - continued Attributable equity interest Place of held by Principal Name of company operation the Company activities Shandong Chenming Panels PRC 26.01% Manufacture of Company Limited* decorating materials Shouguan Chenming Cements PRC 45.90% Manufacture of cements Company Limited* Shouguang Xinyuan Coal Company Limited PRC 50.49% Sale of coal Wuhan Chenjian New-style Wall PRC 25.97% Manufacture of Materials Company Limited* construction materials * The Group controls over 50% of the voting rights of these companies and therefore, they have been consolidated accordingly. 31. POST BALANCE SHEET EVENT On 25 March 2005, the directors proposed a bonus issue of 448,863,951 shares in the proportion of 2 shares for every 10 shares from retained earnings and 3 shares for every 10 shares from capital reserve, based on the number of shares issued as at 31 December 2004. Moreover, the directors also proposed a dividend of RMB1 for every 10 shares from retained earnings, based on the number of shares issued as at 31 December 2004. The above proposed distribution is subject to approval by shareholders at the forthcoming Annual General Meeting. - 63 - XI. Documents for Reference (I) Financial statements carrying the signatures of the legal representative, chief accountant and principal of the accounting department. (II) Auditors’ Report carrying the stamps of the accountant firm and signature of the certified accountants (III) All the originals of the Company’s documents and public notices disclosed in the newspapers designated by China Securities Regulatory Commission in the report period; The Board of Directors of Shandong Chenming Paper Holdings Co., Ltd. March 2005 - 64 -