苏常柴Ａ(000570)苏常柴Ｂ2004年年度报告（英文版）

CHANGCHAI COMPANY, LIMITED ANNUAL REPORT 2004 Important Notes: Board of Directors of the Changchai Company, Limited (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Due to certain reasons, Director Mr. Xuo guojun and Xu zhenpin was absent from the Board meeting, and entrusted Director Mr. Shi Jianchun to attend and vote on his behalf. Director Mr. Yue lian was absent from the Board meeting without entrusting the other directors to vote on his behalf. Horwath Hong Kong CPA Limited produced Auditors’ Report with qualified opinion for the Company; the investors are suggested to read the Financial Report enclosed in the full text of Annual Report to understand more details. Person in charge of the Company Mr. Zhang Junyuan, person in charge of the accounting Mr. Xue Guojun and person in charge of handling accounting affairs Mr. Tang Jianzhong hereby confirm that the Financial Report enclosed in the Annual Report is accurate and complete. Page 1 Content I. Company Profile-------------------------------------------------------------------------------3 II. Abstract of Financial Highlights and Business Highlights------------------------------4 III. Changes in Share Capital and Particulars about Shareholders------------------------6 IV. Particulars about Directors, Supervisors, Senior Executives and Employees-------8 V.Administrative Structure--------------------------------------------------------------------11 VI. Brief Introduction of Shareholders’ General Meeting--------------------------------12 VII. Report of the Board of Directors--------------------------------------------------------13 VIII. Report of the Supervisory Committee-------------------------------------------------18 IX. Significant Events--------------------------------------------------------------------------19 X. Financial Report-----------------------------------------------------------------------------22 XI. Documents Available for Reference-----------------------------------------------------45 Page 2 I. COMPANY PROFILE 1. Legal Name of the Company In Chinese: 常柴股份有限公司 In English: CHANGCHAI COMPANY, LIMITED Abbr.: CHANGCHAI CO., LTD. 2. Legal Representative: Mr. Zhang Junyuan 3. Secretary of the Board of Directors: Mr. Shi Jianchun Securities affairs representative: Mr. He Jianjiang Contact Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Tel: (86) 519-6610041, 6600448 (86) 519-6603656-3155 Fax: (86) 519-6630954 E-mail: sjc000570@changchai.com, hjj000570@changchai.com 4. Registered Address and Office Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Post Code: 213002 Internet Website: http://www.changchai.com.cn E-mail: cctqm@public.cz.js.cn 5. Newspapers Chosen for Disclosing Information of the Company: Securities Times and Ta Kung Pao The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board Internet Website Designated by CSRC for Publishing the Annual Report of the Company: http://www.cninfo.com.cn 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Suchangchai A Stock Code: 000570 Suchangchai B 200570 7. Other Relevant Information of the Company (1) Initial registration date: May 5, 1994; The authority registered with: Changzhou Municipal Administration Bureau for Industry and Commence (2) The changed registration date: July 3, 2002 The authority registered with: Jiangsu Provincial Administration Bureau for Industry and Commence (3) Registered number of the corporate business license for enterprise legal person: 3200001103367 (1/2) (4) Registered number of tax: 320401137155863 (5) Name of the Certified Public Accountants engaged by the Company: Domestic: Jiangsu Gongzheng Certified Public Accountants Office address: 5/F, Tower A of Henry Bldg., No. 1, Hualong Lane, Changzhou, Jiangsu International: Horwath Hong Kong CPA Limited Address: Room 2001, Central Plaza, 18 Harbour Road, Wan Chai, Hong Kong Page 3 II. ABSTRACT OF FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS (I) Total profit and its composing as of the year 2004 (In RMB’000) Total profit 48,267.44 Net profit 46,034.18 Net profit after deducting non-recurring gains and losses (Note) 29,261.97 Profit from main operations 191,609.20 Other operating profit 9,140.10 Operating profit 35,301.60 Investment income 1,527.16 Subsidy income 814.44 Net non-operating income / expense -3,120.20 Net cash flow arising from operating activities 151,065.78 Net increase in cash and cash equivalent 43,770.58 Note: Items of non-recurring gains and losses: Subsidy income 814.44 Add: Profit of current assets -527.34 Add: Various non-operating income 7,037.29 Add: Switching back various reserve for impairment losses allotted in the previous years 9,187.14 Add: Disposal of investee’s equity income 10,958.07 Less: Disposal of expenditure of fixed assets 1,168.48 Less: Non-operating expense 9,528.90 Total 16,772.21 Difference in net profit as audited by PRC Accounting Regulations and International Accounting Standards (IAS) Net profit as of the year Net assets as at Dec. 31, 2004 2004 (RMB’000) (RMB’000) As calculated pursuant to PRC 46,034 852,253 Accounting Regulations Net income due to sale of subsidiaries 35,983 10,000 Switching back losses occupied by 1,623 -10,596 minority shareholders Switching back unrecognized 2,435 investment losses Others 86,075 852,253 As calculated pursuant to 46,024 852,253 International Accounting Standards (II) Major accounting data and financial index over past three years ended the report year (In RMB’000) Items 2004 2003 2002 Income from main operations 1,664,723.42 1,542,799.89 1,579,968.45 Net profit 46,034.18 54,347.09 -477,475.86 Page 4 Total assets 1,854,577.04 1,944,525.31 2,184,414.07 Shareholders’ equity (excluding minority 852,849.48 784,584.99 738,664.38 interests) Earnings per share (diluted) (RMB) 0.12 0.15 -1.28 Earnings per share (weighted) (RMB) 0.12 0.15 -1.28 Earnings per share after deducting non-recurring 0.08 0.06 -1.24 gains and losses (RMB) (diluted) Net assets per share (RMB) 2.28 2.10 1.97 Net assets per share after adjustment (RMB) 1.85 1.67 1.82 Net cash flows per share arising from operating 0.40 0.50 0.30 activities (RMB) Return on equity (%) (diluted) 5.40 6.93 -64.64 (III) The profit are calculated according to Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC Supplementary statement of profit Earnings per share Profit as of the report period Return on equity (%) (RMB) Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 22.47 23.73 0.51 0.51 Operating profit 4.14 4.37 0.09 0.09 Net profit 5.40 5.70 0.12 0.12 Net profit after deducting non-recurring gains and losses 3.43 3.62 0.08 0.08 (ＩＶ) Changes in shareholders’ equity in the report period (Unit: in RMB’000) Total Share capital Capital Surplus public Statutory public Retained Items shareholders’ (share) reserve reserve welfare fund profit equity Amount at 374,249,551 167,978.92 185,479.84 92,855.11 97,093.77 784,584.99 period-begin Increase in the 7,114.71 3,557.35 46,034.18 53,148.89 report period Decrease in the 4,623.16 1,482.25 7,114.71 11,737.87 report period Amount at 374,249,551 167,978.92 187,971.39 94,930.21 138,544.51 852,849.48 period -end Reason for the changes: Increase of retained profit was due to payoff amounting to RMB 46,034.18 in the report period. III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS (I) Changes in share capital 1. Changes in shares Type of shares Amount at Change in Amount at period-begin this period period-end I. Unlisted Shares 1. Sponsor’s shares 153,160,000 0 153,160,000 Including: State-owned shares 153,160,000 0 153,160,000 Shares held by domestic legal person Shares held by foreign legal person Page 5 Others 2. Raised legal person’s shares 10,064,000 0 10,064,000 3. Inner employee’s shares 4. Preference shares and others Total unlisted shares 163,224,000 0 163,224,000 II. Listed Shares 1. RMB ordinary shares 111,025,551 0 111,025,551 2. Domestically listed foreign shares 100,000,000 0 100,000,000 3. Overseas listed foreign shares 4. Others Total listed shares 211,025,551 0 211,025,551 III. Total shares 374,249,551 0 374,249,551 2. Issuance and listing of shares (1) The Company did not issue shares over the past three years ended the report period. (2) In the report period, the share capital of the Company remained unchanged. (3) There exist no inner employee’s shares in the Company. (II) About Shareholders 1. Ended Dec. 31, 2004, the Company had totally 68,975 shareholders, of them, 53,040 shareholders of domestic shares with holding 274,249,551 shares in total and 15,935 shareholders of foreign shares with holding 100,000,000 shares in total. 2. Particulars about shares held by the top ten shareholders at the end of the report period Increase / Holding Number Proportion decrease in shares at the of share Nature of Name of Shareholder in total Type of shares the report year-end pledged shareholders shares (%) year (share) or frozen 1. CHANGZHOU STATE State-owned ASSETS ADMINISTRATIVE 0 153,160,000 40.92 Non-circulating 0 shareholder BUREAU 2. WUJIN DIESEL ENGINEER Legal person 0 5,330,000 1.42 Non-circulating 0 BLOCK FACTORY shareholder 3. BENNIU AGRICULTURAL Legal person 0 1,760,000 0.47 Non-circulating 0 MACHINERY FACTORY shareholder Foreign 4. HE YONG HANG +357,100 1,283,698 0.34 Circulating Unknown shareholder 5. DONGHAI SECURITIES CO., Circulating +1,074,200 1,074,200 0.29 Circulating Unknown LTD. shareholder Foreign 6. XU BIN SHENG 0 722,550 0.19 Circulating Unknown shareholder Foreign 7. CHEN YONG QUAN 663,695 0.18 Circulating Unknown shareholder Foreign 8. LIU DE DI 0 645,210 0.17 Circulating Unknown shareholder Foreign 9. LIU ZILI -50,229 587,071 0.16 Circulating Unknown shareholder 10. TOYO SECURITIES ASIA Foreign +10,000 565,900 0.15 Circulating Unknown LIMITED-A/C CLIENT shareholder Page 6 Notes: (1) Changzhou State-owned Assets Administrative Bureau (“the Bureau”) is the first largest shareholder of the Company, holding 153,160,000 shares on behalf of the state without pledged or frozen. The first largest shareholder, Changzhou State Assets Administrative Bureau was changed as Changzhou State-owned Assets Investment Management Corporation due to reform of government organ, and the relevant procedure of change was still in process. The No. 2 and No. 3 are shareholders of the domestic legal person’s share; the No. 5 is shareholder of the domestic circulating shares; No. 4, 6, 7, 8, 9 and 10 are shareholders of foreign shares. (2) Among the top ten shareholders, the Company is unknown whether there exists associated relationship and the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies among shareholders of domestic circulating shares and shareholders of foreign shares. 3. Changzhou State-owned Assets Administrative Bureau is the holding shareholder of the Company as non-legal person organ. 4. At the end of the report period, particulars about shares held by the top ten shareholders of circulating shares Type of shares Holding shares at the Shareholders’ name (A-share, B-share, year-end (share) H-share and other) 1. HE YONG HANG 1,283,698 B-share 2. DONGHAI SECURITIES CO., LTD. 1,074,200 A-share 3. XU BIN SHENG 722,550 B-share 4. CHEN YONG QUAN 663,695 B-share 5. LIU DE DI 645,210 B-share 6. LIU ZILI 587,071 B-share 7. TOYO SECURITIES ASIA B-share 565,900 LIMITED-A/C CLIENT 8. SHEN YUAN QIN 537,800 B-share 9. LIV LY 487,600 B-share 10. YE HAI QIANG 430,000 B-share Explanation on associated The Company was unknown whether there exists associated relationship among the top ten relationship and the consistent actionist regulated by the shareholders of circulating Management Measure of Information Disclosure on Change of share Shareholding for Listed Companies among the top ten shareholders of circulating share. Property right and controlling relationship between the actual controller of the Company and the Company is as follows: Changzhou State-owned Assets Administrative Bureau 40.92% Changchai Company, Limited IV. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES Page 7 (I) Basic information 1. Directors, supervisors and senior executives Holding Holding Reason of Name Title Sex Age Office term shares at the shares at the change year-begin year-end Zhang Junyuan Chairman of the Board Male 50 Jun. 2003- 0 0 Jun. 2006 Xue Guojun Director, General Manager Male 41 Jun. 2003- 0 0 Jun. 2006 Yue Lian Director Male 43 May 2004- 0 0 Jun. 2006 Shi Jianchun Director, Deputy General Male 42 Jun. 2003- 0 0 Manager, Secretary of the Jun. 2006 Board Zhu Xinmin Director, Deputy General Male 57 Jun. 2003- 0 0 Manager Jun. 2006 Xu Zhenping Director, Assistant General Male 48 Jun. 2003- 0 0 Manager Jun. 2006 Qian Shufa Independent Director Male 48 Jun. 2003- 0 0 Jun. 2006 He Yihua Independent Director Male 42 Jun. 2003- 0 0 Jun. 2006 Lu Gang Independent Director Male 40 Jun. 2003- 0 0 Jun. 2006 Lu Weimin Chairman of the Supervisory Male 50 May 2004- 0 0 Committee Jun. 2006 Ni Mingliang Supervisor Male 38 Jun. 2003- 0 0 Jun. 2006 Lu Zhonggui Supervisor Male 37 Jun. 2003- 0 0 Jun. 2006 Wu Keyun Supervisor Male 41 Jun. 2003- 200 200 Jun. 2006 Yan Gang Supervisor Male 47 Jun. 2003- 0 0 Jun. 2006 He Jianguang Chief Engineer Male 40 Jun. 2003- 0 0 Jun. 2006 The aforesaid Directors, supervisors and senior executives of the Company didn’t hold the position in Shareholding Company. (II) Major work experience of directors, supervisors and senior executives and particulars about holding the post in Shareholding Company Zhang Junyuan, successfully took the posts of Deputy Minister and Minister of Publicity Department and of Industry and Agriculture Youth Department of Changzhou Municipal Committee of the Youth Communist League, Deputy Secretary of Party Committee and Secretary of Party Committee of Changzhou Passenger Car Manufactory, Deputy Director of Changzhou Municipal Economic Committee, Deputy Secretary-general of Changzhou Municipal Committee of the CPC, and General Page 8 Manager and Secretary of Party Committee of Changzhou Jiye Holding (Group) Co., Ltd.. Now he acts as Chairman of the Board of Changzhou Mechanical-Electronic State-owned Assets Operation Co., Ltd., Chairman of the Board of Changchai Group Co., Ltd. and Chairman of the Board of the Company. Xue Guojun, successfully took the posts of Deputy Factory Director and Factory Director of Foundry Branch Factory of Changchai Company, Limited, and Deputy General Manager of Changchai Company, Limited. Now he acts as Director and General Manager of the Company. Yue Lian, successfully took the posts of Assistant of Director and Director of Micro-electrical Institute of Changzhou Baoma Group Company, Deput y Factory Director of Precision Electrical Factory of Changzhou Baoma Group Company, Deputy General Manager and General Manager of Changzhou Baoma Group Company, Deputy Director of Changzhou Municipal Bureau of Electronics Industry, and Deputy General Mana ger of Changzhou Mechanical-Electronic State-owned Assets Operation Co., Ltd.. Now he acts as Deputy Secretary of Party Committee and Deputy General Manager of Changzhou Mechanical- Electronic State-owned Assets Operation Co., Ltd., Deputy General Manager of Changzhou Industry Investment Co., Ltd. and Director of the Company. Shi Jianchun, successfully took the posts of Teacher of Xi’an Polytechnic University, Deputy Director of Technology Reformation Office of Changzhou Diesel Engine Factory, Deputy Director of Changzhou Industry Promotion Planning Office, Deputy Director of Technology Reformation Office of Changzhou Municipal Economic Committee, Deputy Chief Engineer of Changchai Company, Limited, and General Manager of Changzhou Vehicle Co., Ltd.. Now he acts as Director, Deputy General Manager and Secretary of the Board of the Company. Zhu Xinmin, successfully took the posts of Deputy Secretary and Director of Box-body Factory and Section Chief of Sales Section of Wujin Diesel Engine Block Factory, Deput y Manager of Wujin Tractor Industry Company, Deputy Manager of Machinery Industry Company, Deputy Factory Director of Wujin Diesel Engine Block Factory, Assistant General Manager of Changchai Company, Limited, General Manager of Changchai Yinchuan Diesel Engine Co., Ltd., Chairman of the Board of Changchai Yinchuan Diesel Engine Co., Ltd., Chairman of the Board of Changchai Group Import & Export Co., Ltd.. Now he acts as Director and Deputy General Manager of the Company. Xu Zhenping, successfully the posts of Deputy Factory Director of Jintan Diesel Engine General Factory, Director and Deputy General Manager of Changchai Jintan Diesel Engine Co., Ltd.. Now he acts as Director and Assistant General Manager of the Company and Manager Sales Company of the Company. Qian Shufa, successfully took the posts of Deputy Secretary of Youth League Committee of Jiangsu College of Chemistry, Deputy Head of Publicity Department in the College’s Party Committee, Director and Associate Professor of Social Science Department in Jiangsu Petroleum Chemical University, Director and Professor of Business Administration Department in Jiangsu Petroleum Chemical University. Now he acts as Vice Dean of College of Economics in Nanjing University of Economy and Independent Director of the Company. He Yihua, successfully took the posts of Clerk of Publicity & Education Section Changzhou Municipal Finance and Tax Bureau, Officer of Education Section of Changzhou Municipal Bureau of Finance, Section Chief of Training Section of Changzhou Municipal Finance & Accounting Training Center, and Page 9 Deputy Director of Changzhou Assets Appraisal Firm. Now he acts as Chairman of the Board and General Manager of Jiangsu Zhongtian Assets Appraisal Firm and Independent Director of the Company. Lu Gang, successfully took the posts of Clerk of Changzhou Municipal Bureau of Justice, Lawyer of Changzhou No. 1 Law Firm, and Lawyer of Changzhou Union Law Firm. Now he acts as Director of Jiangsu Changzhou Changlian Law Firm and Independent Director of the Company. Lu Weimin, successfully took the posts of Deputy Secretary of Youth League Committee, Vice Chairman of Labor Union and Chairman of Labor Union in Changzhou Diesel Engine Factory, Deputy Secretary of Party Committee, Secretary of Discipline Inspection Committee and Chairman of Federation of Trade Unions in Changchai Group Co., Ltd., and Secretary of Party Committee in Changchai Company, Limited. Now he acts as Secretary of Party Committee of Changchai Company, Limited and Chairman of the Supervisory Committee of the Company. Yan Gang, successfully took the posts of Teacher of Zhaoming Middle School in Jianhu County, Jiangsu, Financial Teacher in Jiangsu Yancheng School of Business, Clerk, Deputy Section Chief and Section Chief of Financial & Trade Auditing Section in Changzhou Bureau of Auditing, Assistant Researcher of Changzhou Bureau of Auditing and Division of Trade Auditing Division. Now he acts as Standing President in Changzhou Institute of Auditing and Supervisor of the Company. Wu Keyu, successfully took the posts of Technician of Shanghai Water Pump Plant, Clerk of Preparing General Office of New Foundry Factory in Changzhou Diesel Engine, Clerk and Assistant of Division Chief of Supervision and Auditing Division in Changchai Company, Limited. Now he acts as Deputy Director of Enterprise Management Department of Changchai Company, Limited and Supervisor of the Company. Ni Mingliang, successfully took the posts of Technician of Foundry Branch Factory in Changzhou Diesel Engine Factory, Cadre of Labor Union in Changchai Company, Limited. Now he acts as Vice Chairman of Labor Union of Changchai Company, Limited and Supervisor of the Company. Lu Zhonggui, successfully took the posts of worker in the No. 1 Factory of Changzhou Diesel Engine Factory, Cadre of Organization and Personnel Section in Changchai Company, Limited, special Discipline Inspector of Supervision and Auditing Department Changchai Company, Limited. Now he acts as special Discipline Inspector of Discipline Inspection Committee and Secretary of Organ Party General Branch in Changchai Company, Limited and Supervisor of the Company. He Jianguang, successfully took the posts of Technician and Deputy Section Chief of Design Section in Changzhou Diesel Engine Factory, Engineer of Products Development Division in Changzhou Diesel Engine Factory, Deputy Director of Joint Venture Office in Changchan Company, Limited, Director of the 2nd Board of Directors of Changchai Company, Limited, Deputy Director of Technology Center in Changchai Company, Limited. Now he acts as Chief Engineer of the Company. (III) Particulars about the annual payment 1. In 2004, the annual remuneration received by directors, supervisors and senior executives from the Company were paid on monthly according to the relevant provisions of Standard for Wage Management and Rank established by the Company, and paid bonus at the end of the year based on the Company’s Page 10 benefit situation and checking results. Director Mr. Yue Lian and Supervisor Mr. Yan Gang received no pay from the Company. 2. The total annual payment of directors, supervisors and senior executives received from the Company was RMB 1,645,300. The total annual payment of the top three directors drawing the highest payment was RMB 656,300. The total annual payment of the top three senior executives drawing the highest payment was RMB 653,900; the annual allowance of independent directors was RMB 20,000 respectively without other treatment. 3. In 2004, among directors, supervisors and senior executives, 6 enjoyed their annual payment over RMB 200,000 respectively; 1 enjoyed their annual payment between RMB 100,000 to RMB 200,000 respectively, and 3 enjoyed their annual payment under RMB 100,000 respectively. (III) Directors, supervisors and senior executives leaving the post and the reason in the report year In the report period, as examined by the Shareholders’ General Meeting 2003, the Shareholders’ General Meeting agreed Mr. Zhu Zhihong to resign from the post of Director, and elected Mr. Yue Lian as Director of the Company; agreed Mr. Lu Jin to resign from the post of Supervisor and Chairman of the Supervisory Committee, and elected Mr. Lu Weimin as Supervisor of the Company. The 7th Meeting of the 4th Supervisory Committee elected Mr. Lu Weimin as Chairman of the Supervisory Committee of the Company. Whereas Mr. Zhang Jianhe resigned from the post of Secretary of the Board, as examined by the 7th Meeting of the 4th Board of Directors, the Company engaged Mr. Shi Jianchun as Secretary of the Board. The aforesaid resolutions were published in Securities Times and Ta Kung Pao dated May 21, 2004 and Aug. 11, 2004 respectively. (IV) About employees By the end of 2004, the Company had totally 3606 employees registered in book, including 2989 production personnel; 227 salespersons; 257 technicians; 58 financial personnel, 75 administration personnel. Education Background: 6 postgraduate; 164 graduated from bachelor degree; 276 persons graduated from 3-years regular college; 95 persons graduated from polytechnic school; 1254 persons graduated from senior high school and 1811 persons graduated from junior high school or lower. The Company need not bear the costs of retirees. V. ADMINISTRATIVE STRUCTURE (I) Particulars about Company Administration In the report period, according to the requirements of standardized documents on listed companies’ administration promulgated by CSRC, the Company perfected consistently legal person administrative structure and operated strictly, which accorded with the requirements of the standardized documents as a whole. (II) Performance of Independent Directors The independent directors of the Company are specialists in management, finance and law respectively. They played an important role in the scientific decision- making of the Board and sound development of the Company. They participated patiently in the meetings of the Board of Directors, and expressed the independent opinion on the examined issues. 1. Particulars about the independent directors attending the Board Page 11 Name of Times that should Times of Times of Times of Remark Independent be attend the personal commission absence Directors Board meeting presence presence Qian Shufa 5 4 1 0 Absent due to business He Yihua 5 4 1 0 Absent due to business Lu Gang 5 5 0 0 2. Three independent directors didn’t propose different opinions about the relevant proposals of the Board and other matters out of proposals of the Board this year. (III) Separation from the holding shareholders in personal, business, assets, organization and financing 1. In respect of personal: the Company established special HR department, drew independent labor personal and remuneration system, checked, trained, encouraged and punished the employees through strict regulations and systems. Engagement and dismission of the directors, supervisors and senior executives were performed in conformity with legal procedure. Directors, supervisors, senior executives and employees in all departments of the Company have taken no position in the Shareholding Company. 2. In respect of business: the Company’s the production and operation, R&D and administration were independent completely with the holding shareholders. There existed no competition in the same industry from the holding shareholder in term of products. 3. In respect of assets: the Company has independent production, auxiliary production system, auxiliary facilities, land use right, industrial property right and non-patent technology, established independent system of purchase and sale service. The assets are independent and integral and the property right is clear. 4. In respect of organization: the establishment of the Company’s organizations is independent and integral and the office address and the sites of production and operation of the Company is separated from the holding shareholder. There existed neither affiliation relationship between the function departments of the Company and the holding shareholders nor mixed operation and offices. 5. In respect of business: the Company set up independent financing department, ha s independent accounting personals and bank account, paid taxes according to laws and has independent accounting settlement system and perfect financing management system. (IV) Assessment and encouragement mechanism of senior executives of the Company At the end of 2003, the Company determined the annual salary assessment plan of senior executives according to the operating objectives 2004 proposed by the Board. At the end of the year, the Board and Employee Representative Committee of the Company evaluated the achievements on senior executives based on audited financial statements etc. according to assessment plan and conducted encouragement and punishment in line with the evaluation result. VI. BRIEF INTRODUCTION OF SHAREHOLDERS’ GENERAL MEETING (I) Particulars about the Shareholders’ General Meetings in the report period In the report year, the Company held one Shareholders’ General Meeting. Shareholder General Meeting 2003 was held at the meeting room of the labor union of the Company on the morning of May 20, 2004 The Company published the notice on holding Shareholders’ General Meeting 2003 in Securities Times and Ta Kung Pao dated Apr. 16, 2004 and Apr. 30, 2004. Total 19 shareholders and shareholders’ proxies attended the meeting, representing 161,111,639 shares, taking 43.03% of the Company’s total shares, including 160,970,210A shares, which took 43.02% of the Page 12 Company’s total shares and 41,429 B shares which took 0.01% of the Company’s total shares. The Company’s directors, supervisors, senior executives and lawyer engaged by the Company attended the meeting as nonvoting delegates. The meeting examined and approved the following issues by vote: 1. Work Report 2003 of the Board of Directors; 2. Work Report 2003 of the Supervisory Committee; 3. Annual Report 2003 and its Summary; 4. Proposal on Profit Distribution 2003; 5. Draft of Amendment of Articles of Association of the Company; 6. Proposal on Reengaging the Domestic and Overseas Audit Organization in 2004 for the Company and the Auditing Remuneration; 7. Proposal on Supplementing Current Capital with the Balance of Last Raised Proceeds; 8. Proposal on Changing Partial Directors; 9. Proposal on Changing Partial Supervisors. (II) Particulars about the disclosure of the resolutions of the Shareholder’s General Meeting The resolutions of this Shareholders’ General Meeting were published in Securities Times and Ta Kung Pao dated May 21, 2004. (III) Particulars about the election and changing of the directors and supervisors of the Company In the report period, as examined and approved by 2003 Shareholders’ General Meeting, the Company agreed Mr. Zhu Zhihong to resign the post of Director and elected Mr. Yue Lian as Director of the Company; agreed Mr. Lu Jin to resign the post of Supervisor and Chairman of the Supervisory Committee and elected Mr. Lv Weimin as Supervisor of the Company. The 7th meeting of the Supervisory Committee elected Mr. Lv Weimin as Chairman of the Supervisory Committee. VII. Report of the Board of Directors (I) Analysis and discussion of the operation in the report period In the report period, guided by “Structure adjustment and Benefit sales”, overcoming the adverse element that the market price of raw materials consistent ly increased by a big margin and the big influence caused by implementation of new Law on Road Traffic Safety on auxiliary agro-vehicle auxiliaries, through series of measures grasping new products development, increasing input of technology innovation, strengthening quality control, reinforcing market constructio n, implementing benefit sale, decreasing costs and increasing income, shrinking foreign investment in order etc., the Company consistently promoted economic operating quality of the Company, helped enterprise operation enter into benign track. Especially in the report period, shares of the Company were cancelled special treatment, and the company rewon the trust of vast shareholders and market. 1. Scope of main operations and its operation (1) The Company belongs to the industry of machinery manufacturing, which is mainly engaged in manufacturing and sales of single-cylinder diesel, multi-cylinder diesel and fittings of diesels. In the report period, the formation of income from main operations of the Company classified according to product is as follows: Index Income from main operations Profit from main operations Product Amount (RMB) Percentage (%) Amount (RMB) Percentage (%) Diesels and 1,664,723,424.12 100 191,609,195.58 100 Fittings of diesels Total 1,664,723,424.12 100 191,609,195.58 100 In the report period, the formation of income from main operations of the Company classified according to area is as follows: Page 13 Area Income from main operations (RMB) Increase/decrease of income from main East China 1,095,300,422.44 122,345,057.19 Northeast 125,046,412.36 13,967,684.26 Southwest 126,157,652.80 14,091,809.82 Central China 140,002,164.80 15,638,241.81 North China 98,862,548.58 11,042,946.68 Northwest 35,973,913.56 4,018,286.14 South China 127,649,355.76 14,258,433.04 (2) Particulars about diesel products taking the largest proportion in the income from main operations Sales income: RMB 1,664,723,424.12 cost of sales: RMB 1,472,859,558.01 gross profit ratio: 11.53% 2. Operation of main subsidiaries and controlling subsidiaries of the Company (Unit: RMB ’0000) Name of company Main products Registered Total Net capital assets profit Changchai Wanxian Diesel Diesels 3500.00 6580.29 405.85 Engine Co., Ltd. Changchai Benniu Diesel Accessories of diesels 3378.64 9468.18 -790.10 Engine Parts Co., Ltd. 3. Major suppliers and customers In 2004,the purchase amount of the top five suppliers of the Company took 18.84% of the total annual amount of purchase and the sales amount of the top five customers took 31.47 % of the total amount of sales of the Company. 4. Problems and difficulties arising from the operation and the solutions In the report period, the problems and difficulties arising from the operation of the Company were as follows: (1) The market price of main raw materials and auxiliary materials, pig iron and steel etc., consistently increased by a big margin, which brought great cost pressure on the operation of the Company. (2) Implementation of Law on Road Traffic Safety and new Automobile Industry Development Policy, resulted in the big increase in using costs and productive costs of agricultural transportation vehicles, decrease of sales of agro-vehicles and decrease the auxiliary quantity of diesels of the Company. Confronted with the difficulties, the Company took kinds of measures: (1) Strengthen internal management, continue to develop work of cutting down costs, decreased management expenses and operating expenses, controlled purchasing price of parts effectively, and digested cost pressure from increase in the market price of raw materials and auxiliary materials in certain. (2) Adjusted market structure timely, enlarged circulating sales share, actively exploited new auxiliary fields such as project machinery, untied reaping machine, and vessel engine, and made up big decrease of auxiliaries of mainframe manufactory this year. (II) Investment in the report period 1. There was no financing of the Company in the first three years 2.There was no project invested with proceeds not raised through share offering in the report period. (III) Financial position of the Company 1. Financial indexes (Unit: RMB’000) Name of index Dec. 31, 2004 Dec. 31, 2003 Increase/decrease (%) Total assets 1,854,577.04 1,944,525.31 -4.63 Shareholders’ equity 852,849.48 784,584.99 8.70 2004 2003 Page 14 Profit from main operations 191,609.20 221,739.64 -13.59 Net profit 46,034.18 54,347.09 -15.30 Cash and cash equivalents Net increase 43,770.58 6,802.39 543.46 2. Explanation on reasons of changes in financial position (1) The net profit changed, which was mainly because that in the report period the purchasing prices of raw materials and auxiliary materials rose up sharply, resulted in the gross profit ratio of products decreased. (IV) Influence on the Company by the changes of production and operating environment and macro policies and regulations etc. 1. Affected by macro-economic environment of the State, price of raw materials and recourses rose up sharply, which caused relative big influence on the operating achievements; 2. New Law on Road Traffic Safety implemented from May 1, 2004, directly influenced business of agro- vehicles manufactories, which indirectly caused big influence on the auxiliary quantities of agro-vehicles of the Company. (V) Routine Work of the Board of Directors The meetings and resolutions of the Board of Directors in the report period: 1. The 5th Meeting of the 4th Board of Directors was held on Mar. 15, 2004 and the following resolutions were examined and approved in the Meeting: (1) Annual Report 2003 of the Company and its Summary; (2) Work Report of the Board of Directors 2003; (3) Profit Distribution Plan 2003 and Proposal on Making up Losses; (4) Application on Canceling Delisted Risk Suggestive Notice and Special Traetment; (5) Proposal on Re-providing Loan Guarantee amounting to RMB 50 mil for Changzhou Geer Factory. 2. The Board of Directors held provisional meeting by communication on Mar. 25, 2004, which examined Issue on Transacting Pledge Loan. 3. The Board of Directors held provisional meeting by communication on Mar. 31, 2004, which examined Public Notice on Correction of 2003 Annual Report by the Board. 4. The 6th meeting of the 4th Board was held on Apr. 14, 2004, which examined and approved the following matters: (1) 1st Quarterly Report of 2004; (2) Proposal on Revising the Draft of the Articles of the Association; (3) Proposal on Reengaging Auditing Institutions 2004 and Auditing Remuneration; (4) Proposal on Supplementing Current Capital with the Balance of Latest Raised Proceeds; (5) Proposal on Changing Partial Directors; (6) Proposal on Engaging Lawyer of the Company; (7) Proposal on Entitling Chairman of the Board Full rights to Handle Reloaning at the expiration of original loan and Newly Increasing Short-term borrowing within RMB 30 mil (including RMB 30 mil) of single amount; (8) Proposal on Holding 2003 Shareholder’s General Meeting. 5. The 7th meeting of the 4th Board of Directors was held on Oct. 15, 2004 and the meeting examined and approved the following events, (1) Semi-annual Report 2004 and its Summary; (2) Proposal on Engaging Mr. Shi Jianchun as Secretary of the Board of the Company. 6. The 8th meeting of the 4th Board was held on Oct. 15, 2004, examining and approving 3rd Quarterly Report of 2004. 7. The 9th meeting of the 4th Board was held on Dec. 29, 2004 and the meeting examined and approved Page 15 the following matters: (1) 2005 Operating Objective; (2) 2005 Salary Assessment Plan of Senior Executives; (3) Proposal on Canceling Partial Accounts Receivable after Verification; (4) Supplementary Regualtion on the Realted Parties Withdrawing Bad Debts Reserve; (5) Proposal on Implementing Assessment on Senior Executives of the Company in 2004. (VI) Preplan on profit distribution and converting of capital public reserve into share capital Audited by domestic and oversea auditors as per Chinese Accounting Standards and International Accounting Standards respectively, the net profit of the Company in 2004 was RMB 46,034,180.58 and RMB 86,075,000 respectively. The total profit available for distribution in the consolidated statement as of the year was RMB 138,544,514.60 and the profit available for distribution of the parent company was RMB 97,093,765.01. In 2001 and 2002, a huge amount of deficit occurred in the Company, by two year’s adjustment, the company canceled the special treatment “ST”, the condition of the capital got worse. The Board of Directors, with the consideration of long way development, accumulated capital to enlarge the investment of technology reform, quicken new product development, and cultivate new growing point of the profit. The Board of Directors decided neither to distribute profit nor convert capital public reserve into share capital in 2004. The aforesaid distribution preplan should be submitted to 2004 Shareholders’ General Meeting for examination. (VII) Other reporting issues The newspapers of information disclosure designated by the Company in 2004 were Securities Times and Ta Kung Pao. (VIII) Special explanations of CPA on the capital occupied by the Company’s holding Shareholders and other related parities: 1. Current of operating funds between the Company and its stockholding subsidiaries, holding shareholders and other related parties (1) Changzhou Municipal State Assets Administrative Bureau is the first largest shareholder of the Company. In the year 2004, there exists no current fund between Changzhou State Assets Administrative Bureau and the Company. (2) Changchai Group Co., Ltd. is the actual controlling company of The Company. In 2004, The Company provided provisional loan amounting to RMB 1,215,000.00 to Changchai Group Co., Ltd.; Changchai Group Co., Ltd. cancelled out 22180214 legal person’s shares of Huayuan Kaima Co., Ltd. (originally Zhongtai Kaima Co., Ltd.), which was executed into account, translated into RMB 15,747,952.00 to The Company. The Company paid accepting and hearing expenses, saving expenses, executing expenses, lawyer expenses and other expenses amounting to RMB 1,783,801.20 for the case, which would be undertaken by Changchai Group Co., Ltd.; Changchai Group Co., Ltd. was controlling shareholder of original Changchai Qifu Diesel Co., Ltd.. After original Changchai Qifu Diesel Co., Ltd. wrote off registered procedures of industry and commerce on Jan. 17, 2000, Changchai Group Co., Ltd. carried all creditor’s rights of original Changchai Qifu Diesel Co., Ltd.. According to relevant agreements, the arrearage of The Company amounting to RMB 12,081,628.20 owed to original Changchai Qifu Diesel Co., Ltd. should return to Changchai Group Co., Ltd., used for offsetting the arrearage of Changchai Group Co., Ltd. owed to The Company; At the announcement of bankruptcy of the product dealer, Zhejiang Tongye Agricultural Machinery & Materials Co., Ltd., The Company declared creditors’ rights amounting to RMB 3,428,461.61. The company had share equity amount of Page 16 RMB 0.3 mil in finance settling center of Changchai Group. After bankruptcy-clearing team confirmed it, Zhejiang Huzhou Outskirt People’s Court confirmed the amount of creditor’s rights RMB 3,128,461.61. According to the agreement signed by The Company and Changchai Group Co., Ltd. on Nov. 8, 2004, Changchai Group should pay back RMB 0.3 mil to The Company; original Changzhou Tractor Factory and original Changzhou Geer Factory has implemented transform. According to Four Parties Adjusting Account Agreement signed by The Company, Changchai Group Co., Ltd., The Company amounting to Changchai Tractor Factory and Changzhou Geer Factory (appraised by Changzhou Economic and Trade Commission), the difference between the accounts receivable of The Company amounting to RMB 15,471,392.32 from original Changzhou Tractor Factory and the accounts payable of The Company amounting to RMB 9,086,928.32 Changzhou Geer Factory, was totaled RMB 6,384,464.00, which would be returned by Changchai Group Co., Ltd.. Therefore, the accounts receivable of The Company from Changchai Group Co., Ltd. was increased RMB 6,384,464.00. Ended Dec. 31, 2004, the balance of item “othe r receivable - Changchai Group Co., Ltd.” in the book of The Company was RMB 65,085,805.39; the accumulative annual debit amount was RMB 18,770,193.52 and the accumulative annual credit amount was RMB 36,916,508.52, while the annual average balance was RMB 74,158,962.89. (3) Changchai Wanzhou Diesel Engineer Co., Ltd. is the holding subsidiary of the Company. In 2004, the Company offered the diesel engine and fittings worth of RMB 457,947.13, and paid RMB 346,989.87 for the personnel dispatched in the subsidiary of the Company. The Company accumulatively received RMB 2,805,000.00. Ended Dec. 31, 2004, the balance of item “accounts receivable- Changchai Wanzhou Diesel Engineer Co., Ltd.” in the book of the Company was RMB 53,035,902.30, which was the same with that in the book of Changchai Wanzhou Diesel Engineer Co., Ltd.. The accumulative annual debit amount was RMB 804,937.00, while the annual average balance was RMB 54,035,933.80. The annual purchase and sale and the current balance in the period-end between the Company and Changchai Wanzhou Diesel Engineer Co., Ltd. were offset in the process of consolidating the statements. (4) Changzhou Vehicle Co., Ltd. is the associate company of the Company. In 2004, the Company offered diesel engines and fittings worth of RMB 1,179,327.54. Ended Dec. 31, 2004, the balance of item “accounts receivable- Changzhou Vehicle Co., Ltd.” in the book of the Company was RMB 6,686,834.76; the balance of item “other receivables- Changzhou Vehicle Co., Ltd.” was RMB 19,251,570.47, which were the same with those in the book of Changzhou Vehicle Co., Ltd.. The accumulative annual debit amount in item accounts receivable was RMB 1,179,327.54 and the accumulative annual credit amount in item accounts receivable was RMB 1,798,127.80, while the annual average balance was RMB 6,996,234.89; There was no accumulative annual debit amount in item other receivables and the accumulative annual credit amount in item other receivables was RMB 1,300,943.53, while the annual average balance was RMB 19,902,042.24. (5) Changchai Group Import & Export Company is the related party of the Company. In 2004, the Company offered the diesel engine and fittings worth of RMB 56,916,409.80. Ended Dec. 31, 2004, the balance of item “accounts receivable- Changcha i Group Import & Export Company” in the book of the Company was RMB 82,321,729.86. The accumulative annual debit amount was RMB 59,916,409.80 and the accumulative annual credit amount was RMB 50,240,000.00, while the annual average balance was RMB 78,983,524.96. (6) Changchai Industrial Corporation is the associated company of The Company. Ended Dec. 31, 2004, the balance of item “other receivable – Changchai Industrial Corporation” in the book of The Company was RMB 12,492,890.57; there was no the accumulative annual credit amount and the accumulative annual credit amount was RMB 395,853.45, while the annual average balance was RMB 12,690,817.30. 2. Current of non-operating funds between The Company and its stockholding subsidiaries, holding Page 17 shareholders and other related parties (1) In 2004, The Company provided the provisional loan of RMB 1,215,000.00 for Changchai Group Co., Ltd.. (2) Changchai Group Co., Ltd. cancelled out 22180214 legal person’s shares of Huayuan Kaima Co., Ltd. (originally Zhongtai Kaima Co., Ltd.), which was executed into account, translated into RMB 15,747,952.00 to The Company. The Company paid accepting and hearing expenses, saving expenses, executing expenses, lawyer expenses and other expenses amounting to RMB 1,783,801.20 for the case, which would be undertaken by Changchai Group Co., Ltd.. (3) Except for the above cases, The Company did not provided the commission loan for the related parties through finance institution such as the bank or others except for the bank, did not entrusted holding shareholders and other related parties to do investing activities, did not wrote trade acceptance draft without actual dealing for the holding shareholders and other related parties, and did not repaid the debt instead of the holding shareholders and other related parties. (IX) Special explanations and independent opinions of independent directors on the Company’s external guarantee: 1. There existed no guarantee provided by the Company for controlling shareholders or other related parties holding less than 50% shares, any non-legal person’s unit or individuals. 2. Ended Dec. 31, 2004, the total amount of external guarantee of the Company was RMB 167.45 mil, taking 19.63% of the net assets in the end of 2004, with a decrease of RMB 70.24 mil over the end of the previous year. 3. The Articles of Association of the Company have been modified according to the correlated regulations in ZJF No. [2003] No. 56 Document; (examined and approved by the 6th meeting of the 4th Board meeting) 4. The Company neither directly nor indirectly provide guarantee for the objects, of which the capital debt ratio is over 70%. 5. The external guarantee of the Company requires the opposite party provides the counter-guarantee with the assets or the mortgage of payment for goods, which our company should pay, and the Company should control guarantee risk strictly. 6.In terms of the relevant regulations such as Regulations of Share Listing on Market of Shenzhen Stock Exchange and the Articles of Association of the Company, the Company performed the responsibility of information disclosure of external guarantee condition and provided the whole external guarantee items of the Company according to the facts. VIII. Report of the supervisory Committee In the report year, according to relevant laws and regulations such as Company Law of the P.R.C. and the Articles of Association of the Company etc., the Supervisory Committee seriously performed its duties, strictly supervised over the significant decisions made by the Board of Directors as well as the Company’s management team according to law, production and operation and financial management in an all-round way, boosted the Company’s standardized operation, and ensured veracity and legitimacy of its economic operation. (I) Meetings of the Supervisory Committee The meetings of the Supervisory Committee of the Company and its resolutions in the report period: 1. The 5th meeting of the 4th Supervisory Committee was held on Mar. 15, 2004, in which the following proposals were examined and approved: (1) Annual Report 2003 and its Summary; (2) 2003 Work Report of the Supervisory Committee. 2. The 6th meeting of the 4th Supervisory Committee was held on Apr. 14, 2004, in which the following proposals were examined and approved: Page 18 (1) The 1st Quarterly Report of 2004 of the cCmpany; (2) The Proposal on Change of the Partial Supervisors; (3) The Proposal on Changing the Use of Raised Proceeds. 3. The 7th meeting of the 4th Supervisory Committee was held on May 20, 2004 that elected Lv Weimin as the Chairman of the Supervisory Committee. 4. The 8th meeting of the 4th Supervisory Committee was held on Aug. 8, 2004 that examined and approved Semi-Annual Report 2004 and its Summary; 5. The 9th meeting of the 4th Supervisory Committee was held on Oct. 18, 2004 that examined and approved the 3rd Quarterly Report of 2004. (II) Independent Opinions from the Supervisory Committee 1. Operation According to Laws: In an opinion of the Supervisory Committee, the Board of Directors and the managers of the Company run in a patient and responsible way, normatively operated strictly according to Company Law of the P.R.C., Securities Law of the P.R.C. and the Articles of Association of the Company and basically established good internal control system and the procedures of decision-making were legal. 2. Inspection of Finance of the Company: The Supervisory Committee seriously and carefully inspected the Company’s financial systems and financial position, believed that the financial report of 2004 factually reflected the Company’s financial status and operation results, and the auditor’s opinion and assessment on relevant events issued by the domestic and overseas Certified Public Accountants were objective and impartial. 3. Purchase and sales of assets. On Jan. 15, 2004, the Company transferred 15% equity of Changzhou Vehicle Co., Ltd. that it held at the transfer price of RMB 900,000. The Supervisory Committee believed that the transactions of assets were conducted based on the negotiated price, and the procedures of transfer were legitimate, avoiding the further loss of the shareholders’ interests and rights. 4. The related transaction occurred due to purchase and sales between the Company and Changchai Group Import and Export Company was fair and reasonable and not harmful for the interests and rights of the shareholders and the Company. IX. Significant Events (I) In the report period, the accumulative amount of the lawsuits and arbitrations involved by the Company was RMB 51,536,500, taking 6.04 % the total amount of net assets at the end of the report period. The involved lawsuits and arbitrations were prosecuted by the Company because the opposing party could not repay funds timely that they should pay the Company. The detailed matters are as follows: Name of defendants Date of accepting & Name of lawsuit & arbitration Involved sum hearing organ (RMB’ 0000) 1. Tongshan County Tengyu Farm Trade Jun. 27, 2001 Changzhou Intermediate 493.06 Centre People’s Court 2. Nanjing Jinwa Share-holding Co., Ltd. Jul. 9, 2002 Changzhou Intermediate 1,419.00 People’s Court 3. Shandong Hongli Group Co., Ltd. Jun. 27, 2001 Changzhou Intermediate 1,436.00 People’s Court 4. Anhui Tangshan Hongda Farm Jan. 5, 2001 Changzhou Intermediate 202.17 Company People’s Court Page 19 5. Heihongjiang Fujin Tractor Plant Apr. 19, 2004 Changzhou Intermediate 1603.42 People’s Court Total 5153.65 1. Explanation of the case: (1) Items 1-4 had been explained with detail by the Company in the 2003 Annual Report; (2) Heihongjiang Fujin Tractor Plant owed Changchai Group Co., Ltd. with the loan amounting to RMB 16,034,173.82. The Changchai Group Co., Ltd. entrusted the Company to withdrawal the arrearage which be used to commute the arrearage Changchai Group Co., Ltd. should pay the related parties of the Company. On Mar. 8, 2004, the Company sued to Changzhou Intermediate People’s Court (hereinafter referred to as the Court), the Court heard this case publicly on Apr. 19, 2004 and judged the defendant Heihongjiang Fujin Tractor Plant to pay RMB 16,034,173.82 for the Company. On May 18, 2004 Changzhou Intermediate People’s Court sent the enforcement circular to Heihongjiang Fujin Tractor Plant, afterward, the Court auctioned 22,180,214 state-owned legal person’s shares of Huayuan Kaima Co., Ltd. after evaluation held by Heihongjiang Fujin Tractor Plant, due to no transaction occurred after three-time auction, the Court took RMB 15,747,952 after discount of the said equity to commute to the Company. The Company has fulfilled the transfer procedure of the said equity and deducted the fund amounting to RMB 15,747,952 which Changchai Group Co., Ltd. should pay for the related parties of the Company. 2. Particulars about the progress of lawsuits: (1). Anhui Tangshan Hongda Farm Plant has entered into the procedure of bankruptcy, the Company has applied on the credit right. (II) Purchase and sales of assets (1) On Jan. 15, 2004, the Company signed Equity Transfer Agreement with Changzhou Roller Plant Co., Ltd. (hereinafter referred to as Roller Plant) and agreed to transfer 15% equity of Changzhou Vehicle Co., Ltd. (hereinafter referred to as Vehicle Company) to Roller Plant. Taking the assessment of the assets of Vehicle Company by agency, which has the legal qualification, as reference of the deal price, the final equity transfer price was determined as RMB 900,000. (III) In the report year, the Company had never kept as custodian, contracted or leased any other company’s assets, and vice versa. (IV) Significant related transaction events (1) Changcha i Group Import and Export Co., Ltd. is a subsidiary of Changchai Group Co., Ltd. which is the related company of the Company, and mainly deals with import and export business. The Company sells its diesel products overseas mostly through this company. In the report period, the Company sold it diesel products with total sum RMB 56,916,409.80 and the pricing rule of the transaction was market fair price. The deal belonged to normal goods sales. Ended the report period, the accounts payable, which the Changcha i Group Import and Export Co., Ltd. owed the Company was RMB 82,321,729.86, most of which were historic problems. In the report period, the Company has already established Overseas Business Dept. to deal with import and export of its diesel products on its own, while its business contact with Changchai Group Import and Export Co., Ltd. remains normal. (2) In the report period, the funds which Changchai Group owed the related parties of the Company has decreased to RMB 5,085,805.39 as at the end of the year from RMB 83,232,120.39 as at the beginning Page 20 of the year, which mainly because that Changchai Group Co., Ltd. took RMB 15,747,952 after discount of 22,180,214 state-owned legal person’s shares of Huayuan Kaima Co., Ltd. to commute to the Company in 2004 in order to write off the related funds that should pay for the Company. (V) Significant Guarantee Events In the report year, the accumulative amount of the guarantee the Company provided for others is RMB 167,450,000, taking 19.63% of its net assets. Of which, the Company provided the guarantee of RMB 950 million for the controlling subsidiaries. (1) In the report period, the Company provided RMB 50 million loan extension guarantee for Changzhou Gear Plant (For details, refer to the Notice of the Resolutions of the 5th meeting of the 4th Board of Directors published on Securities Times and Ta Kung Pao dated Mar. 18, 2004). (2) The balance of loan guarantee provided by Changzhou Tractor Plant at the year-begin was RMB 77 million, while RMB 55 million still remained at the end of the report period. Changzhou Tractor Plant has established detailed repayment plan, and the guarantee term will be up to Nov. 30, 2006. The counter-guarantee provided by Changzhou Tractor Plant for the Company was RMB121,212,800. At present Changzhou Tractor Plant has finished its reformation and reorganization and got out of the control of Changchai Group, and the guarantee provided for this company was also provided counter-guarantee by the continuous enterprise. (3) As examined and approved by the 11th meeting of the 3rd Board of Directors, the Company agreed to provide loan guarantee of RMB 30million for Shandong Shuangli Group Co., Ltd., and the guarantee term was from Mar. 6, 2002 to Mar. 5, 2009. This company agreed to provide counter-guarantee with land use right of 93454.43 sq.m. (assessed value of RMB 43,879,600) for the Company. (4) As examined and approved by the 1st meeting of the 4th Board of Directors, the Company agreed to provide loan guarantee of RMB 13.6 million for Changzhou Weite Electric Machine Factory, and the guarantee term was to 12. 7, 2004. The said company is affiliated company of Changchai Group Co., Ltd., which has been finished its reformation in 2004, and got out of the control of Changchai Group. The Company is trying to solve this guarantee. (VI) In the report period, the Company had not entrusted financing. (VII) The shareholder holding over 5% of the Company’s equity is Changzhou State-owned Assets Administration Bureau. In the report period no promise events occurred which would produce significant effects to the Company’s operation achievements or financial status. (VIII) The 6th meeting of the 4th Board of Directors examined and approved to reengage Jiangsu Gongzheng Certified Public Accountants Co., Ltd. and Hong Kong Horwath Certified Public Accountants as the domestic and overseas audit organizations of the Company in 2004. The public notice was published on Securities Times and Ta Kung Pao dated Apr. 16, 2004. The audit expense the Company paid Jiangsu Gongzheng Certified Public Accountants Co., Ltd and Hong Kong Horwath Certified Public Accountants for the year 2004 was respectively RMB 880,000. The above two audit organizations audited the annual financial report of the Company for three successive years. (IX) In the report period, no such situations occurred to the Company, the Board of Directors or Directors, such as being checked by CSRC, punished by the administration, or criticized and condemned by Shenzhen Stock Exchange Office. Page 21 X. Financial Report REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF CHANGCHAI COMPANY LIMITED (Incorporated in the People’s Republic of China with limited liability) We have audited the financial statements on pages 2 to 28 which have been prepared in accordance with International Financial Reporting Standards, other than as set out below. Respective responsibilities of Directors and Auditors The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Basis of opinion We conducted our audit in accordance with International Standards on Auditing. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned our audit in accordance with International Standards on Auditing so as to obtain all the information and explanations which was considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. Qualified opinion arising from disagreement over accounting treatment and limitation in audit scope As set out in more details in note 2 to the consolidated financial statements, two of the Group’s subsidiaries (the “Unconsolidated Subsidiaries”) ceased operations in 2002 and no reliable financial information of the Unconsolidated Subsidiaries is available. As of 31 December 2004, the Group accounted for its interests in the Unconsolidated Subsidiaries using the cost method of accounting. Provision for impairment loss has been made at 31 December 2004 to write down the Group’s interests in the Unconsolidated Subsidiaries to their expected net realisable value of Nil. In our opinion, the financial statements of the Unconsolidated Subsidiaries should have been consolidated into the Group’s consolidated financial statements in accordance with IFRS 27 “Consolidated financial statements and accounting for investments in subsidiaries”. However, there were no practical audit procedures that we could perform to obtain reliable financial information of the Unconsolidated Subsidiaries and report on the amounts which should have been consolidated. Except for any adjustments that might have been found to be necessary had the above disagreement over accounting treatment not existed, in our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2004 and of its profit and cash flows for the year then ended. HORWATH HONG KONG CPA LIMITED 2001 Central Plaza Certified Public Accountants 18 Harbour Road Wanchai 21 March 2005 Hong Kong Chan Kam Wing, Clement Practising Certificate number P02038 Page 22 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 (Amounts expressed in thousands of RMB, except earnings per share) 2004 2003 Note RMB’000 RMB’000 Turnover 4 1,664,723 1,542,780 Cost of sales (1,460,586) (1,312,032) Gross profit 204,137 230,748 Other operating income 9,925 25,147 Selling expenses (59,134) (75,307) General and administrative expenses (97,661) (100,369) Other operating expenses - (14,452) Profit from operations 5 57,267 65,767 Finance costs, net 6 (21,180) (26,001) Share of profits/(losses) from associates 1,089 (1,294) Other investment income 13,641 1,170 Gain on disposal of property, plant and equipment 1,371 290 Impairment loss on property, plant and equipment (made) / reversed (540) 1,241 Gain on disposal of subsidiaries 35,983 6,732 Other expenses, net (3,922) (8,028) Profit from ordinary activities 83,709 39,877 Taxation 7 (150) (395) Net profit after taxation 83,559 39,482 Minority interests 1,975 3,150 Net profit after taxation and minority interests 85,534 42,632 Earning per share – Basic 8 RMB0.23 RMB0.11 The notes on pages 8 to 28 form part of these financial statements. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2004 (Amounts expressed in thousands of RMB) 2004 2003 Note RMB’000 RMB’000 Assets and liabilities Non-current assets Land use rights 9 59,640 61,113 Property, plant and equipment 9 441,801 504,539 Construction in progress 10 70,568 74,881 Interests in associates 11 10,798 9,751 Other long-term investments 12 132,624 116,876 715,431 767,160 Current assets Inventories 13 308,583 245,480 Value-added tax recoverable 18,490 13,556 Due from holding company 14 53,655 96,121 Due from related parties 15 40,159 87,745 Trade and other receivables 298,801 349,895 Prepayments 12,291 24,027 Pledged bank deposits 49,647 36,804 Cash and cash equivalents 370,298 339,633 1,151,924 1,193,261 Total assets 1,867,355 1,960,421 The notes on pages 8 to 28 form part of these financial statements. CONSOLIDATED BALANCE SHEET (CONTINUED) AS AT 31 DECEMBER 2004 (Amounts expressed in thousands of RMB) 2004 2003 Note RMB’000 RMB’000 Capital and reserves Share capital 17 374,250 374,250 Reserves 18 478,000 392,466 852,250 766,716 Minority interests 7,901 9,876 Non-current liabilities Borrowings – long term portion 16 8,500 37,500 Current liabilities Borrowings 16 342,825 433,675 Other payables, advances from customers and accruals 197,139 217,279 Tax payable 4,913 3,413 Dividends payable 3,040 3,040 Due to related parties 15 - 12,082 Notes and trade payables 450,787 476,840 998,704 1,146,329 Total equity and liabilities 1,867,355 1,960,421 These financial statements were approved and authorised for issue by the board of directors on 21 March 2005 ………………………………………….. ………………………………………….. Zhang Jun Yuan Xue Guo Jun Chairman Director & General Manager The notes on pages 8 to 28 form part of these financial statements. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2004 (Amounts expressed in thousands of RMB) Reserves Statutory Statutory Retained surplus public earnings/ Share Capital reserve welfare (accumulated Total Total capital reserve fund fund losses) reserves equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 17) (Note 1 8(b)) (Note 1 8(c)) (Note 1 8(d)) Balance at 1 January 2003 374,250 694,182 89,467 89,467 (523,282) 349,834 724,084 Net profit for the year - - - - 42,632 42,632 42,632 Profit appropriations - statutory surplus reserve fund - - 4,015 - (4,015) - - - statutory public welfare fund - - - 4,015 (4,015) - - Transfer from Reserve - (529,317) (396) (396) 530,109 - - Balance at 31 December 2003 374,250 164,865 93,086 93,086 41,429 392,466 766,716 Net profit for the year - - - - 85,534 85,534 85,534 Disposal of subsidiaries - - (3,141) (1,482) 4,623 - - Profit appropriations - statutory surplus reserve fund - - 3,557 - (3,557) - - - statutory public welfare fund - - - 3,557 (3,557) - - Balance at 31 December 2004 374,250 164,865 93,502 95,161 124,472 478,000 852,250 The notes on pages 8 to 28 form part of these financial statements. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 (Amounts expressed in thousands of RMB) 2004 2003 RMB’000 RMB’000 Operating activities Operating profit before taxation 83,709 39,877 Adjustments for: Share of results of associates (1,089) 1,294 Interest income (2,588) (1,452) Interest expenses 23,579 26,181 Dividend income (3,585) - Depreciation and amortisation 45,226 48,509 Gain on disposal of subsidiaries (35,983) (6,732) Gain on disposal of property, plant and equipment (1,371) (290) Provision for bad and doubtful debts (reversed) / made (4,686) 5,795 Provision for / (release of) inventories 7,546 (8,160) Impairment loss on property, plant and equipment and construction in progress made / (released) 540 (1,241) Construction in progress written off 3,165 - Cash flows before changes in working capital 114,463 103,781 (Increase) / decrease in inventories (88,964) 30,101 Decrease / (increase) in due from holding company 42,466 (60,301) Net decrease in trade and other receivables, amounts due from related parties, and prepayments 63,887 129,269 Net increase / (decrease) in amounts due to related parties, notes and trade payables, tax payable, advances from customers, other payables and accruals 25,293 (25,494) Cash generated from operations 157,145 177,356 Interest paid (23,579) (26,181) Income tax paid - (1,213) Net cash generated from operating activities 133,566 149,962 The notes on pages 8 to 28 form part of these financial statements. CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2004 (Amounts expressed in thousands of RMB) Note 2004 2003 RMB’000 RMB’000 Investing activities Disposal of subsidiaries, net of cash disposed of 19 277 (719) Acquisition of property, plant and equipment (2,936) (6,072) Expenditures on construction in progress (8,223) (7,195) Increase in amounts due to associates 42 - Increase in pledged bank deposits (12,843) (26,011) Purchase of long-term investments (15,748) - Proceeds from disposal of property, plant, equipment and land use rights 3,057 7,800 Interest received 2,588 1,452 Dividend received 3,585 - Net cash used in investing activities (30,201) (30,745) Financing activities Proceeds from bank loans 405,700 615,920 Repayment of bank loans (478,400) (756,065) Net cash used in financing activities (72,700) (140,145) Net increase / (decrease) in cash and cash equivalents 30,665 (20,928) Cash and cash equivalents, beginning of year 339,633 360,561 Cash and cash equivalents, end of year 370,298 339,633 The notes on pages 8 to 28 form part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS (Expressed in Renminbi thousands) 1. Organisation and principal activities Changchai Co., Ltd. (the “Company”) was established as a joint stock limited company in the People’s Republic of China (the “PRC”) in 1994. The address of the Company’s registered office is No.123 Huai De Zhong Rd., Changzhou, Jiangsu Province. The Company’s domestic investment ordinary shares (“A shares”) and domestically listed foreign investment ordinary shares (“B shares”) have been listed on the Shenzhen Stock Exchange since 1994 and 1996 respectively. The Company is principally engaged in the manufacture and sale of small and medium diesel engines under the “Changchai” brand name for use in agricultural machinery such as tricycles, tractors and water pumps, and agricultural product processing machinery such as rice mills, oil presses and pulverizing machinery. The principal activities of its subsidiaries are shown in Note 23. The Company together with its subsidiaries are listed in Note 23 and hereinafter collectively referred to as the “Group”. 2. Summary of significant accounting policies The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Group also prepares financial statements which comply with accounting regulations in the People’s Republic of China. A reconciliation of the Group’s results and shareholders’ equity under IFRS and PRC accounting regulations is presented in Note 25. The principal accounting policies adopted are as follows: (a) Basis of preparation The consolidated financial statements have been prepared based on the books and records maintained by the Company and its subsidiaries. Two of the Group’s subsidiaries, Chengdu Changwan Diesel Engines Co., Ltd. (“CCDE”) and Chongqing Wanchou Changwan Diesel Engines Spare Parts Co., Ltd. (“CWCD”), did not have any operation during the year. They did not have any key management staff, accounting staff or reliable financial information of their results and financial position. As a result, certain account balances and transactions of CCDE and CWCD as reflected in their financial statements for the year ended 31 December 2004 could not be satisfactorily substantiated or supported. The financial statements of CCDE and CWCD have not been consolidated into the Group’s consolidated financial statements. The Group’s interests in these subsidiaries were accounted for using cost method of accounting as at 31 December 2004. (b) Consolidation The consolidated financial statements of the Group incorporate the financial statements of the Company and all other operating subsidiaries that are controlled by the Company. Where an entity either began or ceased to be controlled by the Company during the year, the results are included only from the date control commenced or up to the date control ceased. All material intra-group transactions and balances are eliminated on consolidation. (c) Subsidiary A subsidiary is a company, in which the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. Details of the Company’s subsidiaries as of 31 December 2004 are set out in Note 23 to the financial statements. (d) Associated company An associate is a company, other than a subsidiary, in which the Company has a long term equity interest and over which the Company is in a position to exercise significant influence in management, including participation in financial and operating policy decisions. Associated companies are accounted for using the equity method of accounting. As at the balance sheet date, the Group’s interest in the associate is carried at the amount that reflects its share of the net assets of the associate. (e) Joint venture A jointly controlled entity is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity. The consolidated income statement and balance sheet include the Group’s share of the results of jointly controlled entities for the year, and their assets and liabilities, are accounted for using the proportionate consolidation method. (f) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisition is reported in the balance sheet as an intangible asset and amortised using the straight-line method over a period of 5 years. The carrying amount of goodwill is reviewed annually and written down for permanent impairment where it is considered necessary. The gain or loss on disposal of an entity includes the unamortised balance of goodwill relating to that entity. (g) Other investments Other investments are recognised on a trade date basis and are initially measured at cost. 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. Investment 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, based on quoted market prices at the balance sheet date. Where securities are held for trading purposes, unrealised gains and losses are included in net profit or loss for the period. For available -for-sale investments, unrealised gains and losses 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. For available-for-sale investments that do not have quoted market prices, the fair value is constructed on the basis of the market prices of the similar consolidated financial statements or derived from cash flow model. For available -for-sale investments that the fair value cannot be reliably determined, the investments are carried at cost less accumulated impairment losses. (h) Land use rights Land use rights are stated at cost less accumulated amortisation and any impairment losses. Amortisation is provided using the straight line basis over their estimated useful lives. (i) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the consolidated income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the property, plant and equipment, the expenditure is capitalised as additional cost of the property, plant and equipment. Depreciation is provided using the straight line method to write off the cost of property, plant and equipment, over their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values. The estimated useful lives of property, plant and equipment are as follows: Buildings 20-30 years Plant and machinery 6-15 years Motor vehicles 5-10 years Furniture, fixtures and equipment 5-10 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated income statement. (j) Construction in progress Construction in progress comprises factory and office buildings, plant and machinery under construction or installation, including the related furniture, fixtures and office equipment, and is stated at cost less any impairment losses. Construction in progress is transferred to property, plant and equipment when it is ready for its intended use. No provision for depreciation is made on construction in progress. (k) Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised in the consolidated income statement for items of assets carried at cost. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit. (l) Inventories Inventories comprise raw materials, work-in-progress and finished goods. Inventories are stated at the lower of cost and net realisable value. Cost includes direct materials, direct labour costs and overheads that have been incurred in bringing the inventories and work in progress to their present location and condition and is calculated using the weighted average method. Net realisable value is estimated by the management and is determined by reference to the selling price less all costs to completion and costs to be incurred in selling and distribution. Spare parts and consumables are stated at cost less any provision for obsolescence. (m) Receivables Trade receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at the year-end. Bad debts are written off during the year in which they are identified. (n) Short term investments Short term investments are stated at market value at balance sheet date. Unrealised gains and losses are included in net profit or loss for the year. (o) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand, deposits held at call with banks, and investments in money market instruments, net of bank overdrafts. In the consolidated balance sheet, bank overdrafts are included in borrowings in current liabilities. (p) Pension obligations As a statutory requirement, the Company and its subsidiaries have to contribute 21% of total salaries as retirement benefits for employees to a government agency. All contributions are dealt with in the income statement. (q) Provisions A provision is recognised when, and only when an enterprise has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditure expected to be required to settle the obligation. (r) Foreign currencies The Group’s maintains its books and records in RMB. Foreign currency transactions during the year are translated into RMB at the rates of exchange prevailing at the transaction dates as quoted by the People’s Bank of China (“PBOC”). Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the rates prevailing at the balance sheet date as quoted by the PBOC. Exchange differences arising are included in consolidated income statement. (s) Related party Parties are considered to be related if one party has the ability, directly or indirectly, to control the other or exercise significant influence over the other party in making financial and operating decision. Related parties include the holding company, fellow subsidiaries, associates and joint ventures of the Company, or any persons or its close family members who are in a position to exercise significant influence over that related party. (t) Financial assets and liabilities Investments, trade receivables and marketable securities are stated at carrying amounts determined in accordance with Notes 2(g), (m) and (n) respectively. Other financial assets and financial liabilities are stated at cost. (u) Revenue recognition i) Sales are recognised upon delivery of products and customer acceptance. ii) Service income is recognised upon deliver of services. iii) Interest income is recognised on a time proportional basis, taking into account the principal amounts outstanding and the interest rates applicable. (v) Deferred taxation Deferred taxation is provided under the liability method in respect of significant temporary differences between the tax base of an asset or lia bility and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which the deductible temporary difference can be utilised. Deferred taxation is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. (w) Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to be ready for their intended use or sale are capitalised as part of the assets. All other borrowing costs are recognised as an expense in the period in which they are incurred. (x) Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. 3. Segment information (a) Primary reporting format - business segments The Group is principally engaged in the production and sale of small and medium diesel engines and related products and operates in the PRC. (b) Secondary reporting format - geographical segments In 2004, over 90% of sales of the Group were generated from sales in the PRC. 4. Turnover Turnover represents the gross value of goods and services invoiced to customers, net of value-added tax, additional tax and allowances for discounts and returns. 5. Profit from operations 2004 2003 RMB’000 RMB’000 Profit from operations is stated after charging/(crediting): Depreciation of property, plant and equipment and amortisation 43,753 47,113 Amortisation of land use rights 1,473 1,396 (Reserved of) / provision for doubtful debts (4,686) 5,795 Provision for inventories made / (reversed) 7,546 (8,160) Research and development expenses 881 1,701 Staff costs - Salaries and welfare 91,894 84,151 - Contributions to statutory pension scheme 13,633 15,219 6. Finance costs 2004 2003 RMB’000 RMB’000 Interest expenses on bank loans 23,579 26,181 Interest income from bank deposits (2,588) (1,452) Others 189 1,272 21,180 26,001 7. Taxation (a) Taxation in the consolidated income statement represents: 2004 2003 RMB’000 RMB’000 Current year taxation 150 395 The Company is subject to an EIT rate of 33% on taxable income determined according to the PRC tax laws. As certified by Jiangsu Science and Technology Commission, the Company has been granted a New and High Technology Enterprise. With the approval from local tax authorities, some of the Company’s subsidiaries enjoy preferential EIT rates ranging from 0% to 15% on their taxable income. According to Circular Guofa [2000] No.2 issued on 11 January 2000, effective from 1 January 2002, the above tax benefits and financial refund would require approval from the State Council. There was no assurance that the above preferential tax treatment would still be available to the Company and its subsidiaries in future. (b) Deferred taxation No provision for deferred taxation has been made in the financial statements as the directors are of opinion that the recognition of deferred tax assets arising on the temporary differences are uncertain. 8. Earning per share Earning per share is calculated based on the profit attributable to shareholders for the year of approximately RMB85,534,000 (2003: RMB42,632,000) by the number of shares in issue during the year of 374,250,000 shares (2003 : 374,250,000 shares). 9. Land use rights, property, plant and equipment Furniture, fixtures Land use Plant and Motor and rights Buildings machinery vehicles equipment Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost: At 1 January 2004 73,369 465,678 383,077 29,065 47,506 998,695 Additions - 331 1,484 967 154 2,936 Transfer from construction in progress - 1,023 4,570 2,979 474 9,046 Disposal - (72) (5,156) (5,400) (4,267) (14,895) Disposal of subsidiaries - (20,828) (28,228) (4,128) (927) (54,111) At 31 December 2004 73,369 446,132 355,747 23,483 42,940 941,671 Accumulated depreciation: At 1 January 2004 12,256 102,824 229,338 22,493 23,461 390,372 Charge for the year 1,473 14,893 23,270 1,975 3,615 45,226 Written back on - Disposal - (59) (4,290) (4,410) (3,480) (12,239) - Disposal of subsidiaries - (5,507) (16,052) (3,374) (437) (25,370) At 31 December 2004 13,729 112,151 232,266 16,684 23,159 397,989 Impairment loss: At 1 January 2004 - 29,270 13,401 - - 42,671 Addition during the year - - 540 - - 540 Written back on disposal - - (970) - - (970) At 31 December 2004 - 29,270 12,971 - - 42,241 Net book value: At 31 December 2004 59,640 304,711 110,510 6,799 19,781 501,441 At 31 December 2003 61,113 333,584 140,338 6,572 24,045 565,652 As of December 31, 2004, the Group’s property, plant and equipment with an aggregate net book value of approximately RMB 147,684,000 (2003: approximately RMB168,177,000) had been pledged as collateral for certain bank loans (see Note 16). 10. Construction in progress 2004 2003 RMB’000 RMB’000 Cost: At beginning of the year 90,881 106,693 Additions 8,223 7,195 Disposal of subsidiaries (325) (137) Other disposals (3,165) (3,147) Transfer to property, plant and equipment (9,046) (19,723) At end of the year 86,568 90,881 Provision for impairment loss: At beginning and end of the year 16,000 16,000 Net book value 70,568 74,881 11. Interests in associates 2004 2003 RMB’000 RMB’000 Share of net assets of associates 10,849 9,760 Amounts due to associates (51) (9) 10,798 9,751 The Group’s major associates were incorporated and are operating in the PRC, as follows: Percentage holding 2004 2003 Name of associates % % Nature of business Direct holding: Changzhou Fuji Changchai 33 33 Manufacture and sale of Robin Gasoline Engine Co., gasoline engines and relevant Ltd. components Beijing Tsinghua Xing Ye 25 25 Project investment, business Investment Management Co., administration consulting and Ltd. investment consulting Shenzhen Gamma Web System 34 34 Provision of internet service, Co., Ltd. (“Shenzhen Gamma”) development and sale of computer software and hardware The names of the above associates were directly translated from their Chinese names and may not represent their legal names. 12. Other long-term investments 2004 2003 RMB’000 RMB’000 Unlisted investments, at cost 133,424 117,676 Less : Provision (800) (800) 132,624 116,876 13. Inventories 2004 2003 RMB’000 RMB’000 Raw materials 271,973 177,195 Work in progress 50,383 43,207 Finished goods 9,738 64,274 332,094 284,676 Less : Provision for inventory obsolescence (23,511) (39,196) 308,583 245,480 14. Due from holding company As of 31 December 2004, 40.92% (2003: 40.92%) of the Company’s share capital (the “State-owned shares”) was registered in the name of Changzhou State Assets Bureau (“CSAB”). Pursuant to documents issued by Changzhou Municipal Government and CSAB, Changchai Group Company Limited (“CGC”) is entitled to dividends derived from the state-owned shares. The Company’s management is of the view that CGC is able to exercise control over the Company. The balance is unsecured, interest free (2003: Included a loan of RMB 2,660,722 which bore interest at rate of 6.72% per annum) and had no fixed repayments terms. 15. Due from/(to) related parties The balances are unsecured, interest-free and have no fixed terms of repayment. 16. Borrowings 2004 2003 RMB’000 RMB’000 The bank loans are repayable as follows: Within one year 342,825 433,675 In the second year - - In the third to fifth years inclusive 8,500 37,500 351,325 471,175 Less : amount due within one year shown under current liabilities (342,825) (433,675) Amount due for settlement after one year 8,500 37,500 Secured 202,000 168,700 Unsecured 149,325 302,475 351,325 471,175 Interest rates for bank loans are charged in the range of 5.040% - 7.722% per annum (2003: 5.040% - 7.722% per annum). 17. Share capital 2004 2003 RMB’000 RMB’000 Registered, issued and fully paid shares of RMB 1 each State-owned shares 153,160 153,160 Legal person shares 10,064 10,064 A shares – PRC investors 111,026 111,026 274,250 274,250 B shares 100,000 100,000 374,250 374,250 The B Shares rank pari passu in all respects with the A Shares. 18. Reserves (a) Pursuant to the relevant PRC regulations and the Articles of Association of the Company, profit after taxation shall be appropriated in the following sequence: (i) make up accumulated losses. (ii)transfer 10% of the profit after tax to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the paid up share capital, such transfer need not be made. (iii) transfer 5% to 10% of the profit after tax to the statutory public welfare fund. (iv) transfer such amount to the discretionary surplus reserve as approved by the shareholders in general meetings. (v) distribute dividends to shareholders. The amounts of transfer to the statutory surplus reserve and statutory public welfare fund shall be based on profit after tax in the statutory accounts prepared in accordance with PRC accounting standards and regulations. (b) Statutory surplus reserve According to the relevant PRC regulations, statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of losses incurred, other usage should not result in the statutory surplus reserve falling below 25% of the registered capital. (c) Statutory public welfare fund According to the relevant PRC regulations, statutory public welfare fund is restricted to capital expenditure for employees’ collective welfare facilities. Staff welfare facilities are owned by the Group. The statutory public welfare fund is not normally available for distribution to shareholders except in liquidation. (d) Profit distribution Pursuant to the relevant PRC regulations and the Articles of Association of the Company, profit distributable to shareholders shall be the lower of the amount determined in accordance with the PRC accounting standards as stated in the statutory financial statements and that adjusted in accordance with IFRS. In the PRC statutory financial statements as at 31 December 2004, retained profits carried forward amounted to RMB138,545,000 (2003 : RMB97,094,000). 19. Disposal of subsidiaries In January 2004, the Group disposed of a 60% equity interest in Changchai Yinchuan Diesel Engines Co. Ltd. and a 15% equity interest in ChangZhou Vehicle Co., Ltd. for a consideration of RMB900,000. The net liabilities of the subsidiaries at the date of disposal were as follows: RMB’000 Property, plant and equipment 28,741 Construction in progress 325 Inventories 18,315 Trade and other receivables 45,254 Prepayments 1,027 Cash and cash equivalents 264 Tax payable (491) Borrowings (47,150) Notes and trade payables (48,431) Other payables, advances from customers and accruals (33,296) (35,442) Expenses incurred during the disposal 359 Gain on disposal 35,983 Total consideration 900 Satisfied by: Cash 900 Net cash inflow arising on disposal: Cash consideration 900 Expenses incurred during the disposal (359) Bank balances and cash disposed of (264) 277 20. Related party transactions During the year, the Group entered into the following transactions with related parties which are not members of the Group: 2004 2003 RMB’000 RMB’000 Sale of goods to related companies controlled by holding company 58,096 67,120 21. Contingent liabilities As at 31 December 2004, the Group had outstanding guarantees in favour of banks for bank loans made to the following parties: 2004 2003 RMB’000 RMB’000 Related companies - 17,560 Third parties 157,950 166,830 157,950 184,390 22. Pension schemes The Group participates in a defined contribution retirement scheme (the “Scheme”) arranged by the Shanghai Municipal Government. The Group is obligated to make an annual contribution based on 21% (2003: 21%) of the aggregate payroll. Total contributions made by the Group under the Scheme during the year amounted to RMB13,633,000 (2003 : RMB15,219,000). 23. Principal subsidiaries At 31 December 2004, the Company held shares in the following subsidiaries, all of which are unlisted and incorporated in the PRC:- Percentage holding 2004 2003 Name of subsidiaries % % Nature of business Changchai Wanxian Diesel 60 60 Manufacture and sale of diesel Engines Co., Ltd. engines Changzhou Changchai Benniu 75 75 Manufacture and sale of spare Diesel Engines Spare Parts Co., parts for diesel engines Ltd. Chengdu Changwan Diesel 51 51 Sale of diesel engines Engines Co., Ltd. * Chongqing Wanchou Changwan 96.67 96.67 Sales of diesel engines spare Diesel Engines Spare Parts Co., parts Ltd. * * The financial statements of these subsidiaries were excluded from the consolidated financial statements on the grounds that they ceased operations during the year and no reliable financial information were available. The investments in these subsidiaries under cost accounting are included in other investments. The names of the above companies were directly translated from their Chinese names and may not represent their legal names. 24. Financial assets and liabilities (a) Interest rate risk The interest rates of unsecured bank loans are shown in Note 16 to the financial statements. Other financial assets and liabilities do not have material interest rate risk. (b) Credit risk Trade receivables of the Group are spread among a number of customers in the PRC. Other than that, financial assets of the Group do not represent a concentration of risk. The carrying amount of financial assets best represents their maximum credit risk exposure at the balance sheet date. (c) Fair value The fair value of cash and bank balances, trade receivables, other receivables, amounts due from/to associated/related companies, trade payables and other payables are not materially different from their carrying amounts. Fair value of financial assets or financial liabilities have been determined by generally acceptable valuation methods and are subject to assumptions. Changes in valuation methods and assumptions may significantly affect the estimates. 25. Impact of IFRS adjustments on profit after taxation and minority interests and shareholders’ equity The statutory accounts of the Group are prepared in accordance with PRC accounting regulations applicable to joint stock limited companies. These accounting principles differ in certain significant respects from IFRS. The effects of these differences on the profit after taxation and minority interests for the year ended 31 December 2004 and shareholders’ funds at that date are summarised as follows: Profit after taxation and minority Shareholders’ interests equity RMB’000 RMB’000 As determined pursuant to PRC accounting regulations 46,034 852,849 Net gain on disposal of a subsidiary - Jiang Su Yu Tie Electronic Group Co., Ltd - 10,000 - Changchai Yinchuan Diesel Engines Co., Ltd and Changzhou Vehicle Co., Ltd.. 35,442 - Consolidation of unrecognised losses of subsidiaries 2,435 - Excess loss shared by minority not recognised 1,623 (10,596) As determined pursuant to IFRS 85,534 852,253 26. Language The English text of the financial statements is a translated version for the convenience of English readers and for reference only. The Chinese text of the financial statements will prevail over the English text. XI. Documents Available for Reference The following documents includes: 1. Text of Annual Report 2004 carrying the signature of Chairman of the Board; 2. Accounting statements carrying the signatures and seals of the Company’s principal in charge of accounting and accounting organization; 3. Text of Auditors’ Report carrying the seal of certified public accountants and signature and seal of CPA 4. All originals and original manuscripts of the Company’s documents and notices ever disclosed in Securities Times and Ta Kung Pao designated by CSRC in the report period 5. The Articles of Association of the Company The said documents available for reference are completely prepared in Secretariat of the Board of Directors of the Company. The Annual Report is prepared both in Chinese and English. In the event of any interpretations between these two versions, the Chinese one will prevail. Board of Directors of Changchai Company, Limited Mar. 24, 2005