威孚高科(000581)苏威孚Ｂ2005年年度报告（英文版）

WEIFU HIGH-TECHNOLOGY CO., LTD. ANNUAL REPORT 2005 April 21, 2006 1 Contents Section I. Important Notes--------------------------------------------------------3 Section II. Company Profile------------------------------------------------------3 Section III. Summary of Accounting and Business Data---------------------5 Section IV. Changes in Share Capital and Shareholders----------------------6 Section V. Particulars about Directors, Supervisors, Senior Administrative Personnel and Workers----------------------------9 Section VI. Management of the Company-------------------------------------15 Section VII. Particulars about Shareholders’ General Meeting-------------17 Section VIII. Report of the Board of Directors-------------------------------17 Section IX. Report of the Supervisory Committee---------------------------23 Section X. Significant Events---------------------------------------------------24 Section XI. Financial Report----------------------------------------------------26 Section XII. Documents for Reference----------------------------------------78 2 WEIFU HIGH-TECHNOLOGY CO., LTD. ANNUAL REPORT 2005 Section I. Important Notes Board of Directors and Supervisory of Committee of Weifu High-Technology Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives collectively and individually accept full responsibility for the authenticity, accuracy and completeness of the information contained in this report and confirm that there are no false statements and material omissions which would make any statement in this report misleading. The domestic Jiangsu Gongzheng Certified Public Accountants Co., Ltd. and the overseas PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd. issued the unqualified Auditors’ Report for the Company respectively. Mr. Xu Liangfei, legal representative of the Company, Mr. Han Jiangming, General Manager of the Company, and Ms. Sun Qingxian, Deputy General Manager as well as person in charge of Financing confirm that the Financial Report enclosed in the Annual Report 2005 is authentic and complete. Section II. Company Profile 1. Legal Name of the Company: In Chinese: 无锡威孚高科技股份有限公司 Abbreviation: G高科、苏威孚B In English: WEIFU HIGH-TECHNOLOGY CO., LTD. Abbreviation: WFHT, SU WF-B 2. Legal Representative: Mr. Xu Liangfei 3. Secretary of Board of Directors: Mr. Zhou Weixing Authorized Representative of Stock Affairs: Mr. Gu Yiming Contact Address: No.107, Renmin (W) Road, Wuxi, Jiangsu, China Tel: (86) 510-82719579 Fax: (86) 510-82751025 E-mail: wfjt @ public1.wx.js.cn 4. Registered Address: Plot 46, Wuxi National High-Tech Industrial Development Zone Head Office: No.107, Renmin West Road, Wuxi Postal Code: 214031 Homepage: http://www.weifu.com.cn E-mail: web@weifu.com.cn 5. Information Disclosure Media: Securities Times, China Securities and Wen Wei Po Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report Is Prepared and Placed: Securities Dept. of the Company 3 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Weifu High- Tech, Su Weifu-B Stock Code: 000581, 200581 7. Other Related Information of the Company (1) Initial registration date: Oct. 22, 1988 Address: No.107, Renmin West Road, Wuxi Registration Date after Change: Sep. 28, 1995 Address: Plot 46, Wuxi National High-Tech Industrial Development Zone (2) Registration Number of enterprise legal person’s business license: 3200001103404 (2/2) (3) Registration Number of taxation: 320208250456967 (4) Certified Public Accountants engaged by the Company: Domestic: Jiangsu Gongzheng Certified Public Accountants Co., Ltd. Address: No.28, Liangxi Road, Wuxi Overseas: PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd. Address: 12th Floor, Shui On Plaza, 333 Huaihai (M). Road, Shanghai, P.R.C. 4 Section III. Summary of Accounting and Business Data I. Major accounting data 1. Major accounting data of 2005 Unit: RMB’000 Total profit 236,141 Net profit 183,379 Profit from main operations 639,418 Other operating profit -21,748 Operating profit 290,076 Investment income 25,556 Subsidy income － Net non-operating income/expenses － Net cash flow arising from operating activities -491,007 Net increase in cash and cash equivalents -140,441 2. Balance of net profit calculated according to international and domestic accounting standards and regulations, and explanations Unit: RMB’000 As reported in the statutory accounts 181,905 Adjustment on income/(loss) from associates 3,050 Reversal of amortisation of goodwill in accordance with IFRS 3 4,590 Amortisation of investment tax credit recognised as deferred income 647 Government grant not recognised as income -6,785 Provision for deferred tax 5,421 Negative goodwill recognised in income statement 3,018 Unrealized profit result from purchase of goods from the unconsolidated subsidiaries -6,461 Staff welfare fund appropriated -615 Effect on minority interests as a result of the above adjustments -1,391 As restated under IFRS 183,379 II. Key accounting data and financial indexes over the previous three years Indexes/ items Unit 2005 2004 2003 Income from main operations RMB’000 2,842,021 2118745 1640793 Net profit RMB’000 183,379 227,287 239,557 Total assets RMB’000 4,482,217 4,195,117 2,888,951 Shareholder’s equity (excluding RMB’000 2,186,558 2,046,544 minority interests) 2,326,301 Earnings per share (Diluted) RMB/share 0.32 0.52 0.55 Earnings per share (Weighted) RMB/share 0.37 0.52 0.55 Net assets per share 4.10 5.01 4.69 Net assets per share after adjustment RMB/share 4.10 5.01 4.69 Net cash flow per share arising RMB/share -0.87 0.41 0.02 operating activities Return on net assets (diluted) % 7.30 10.39 11.71 (weighted) % 8.12 10.74 12.16 Net cash rising from operation RMB’000 -491,007 179,736 8,659 activities 5 Note: 2005 Annual Shareholders’ General Meeting of the Company approved plan on distribution of 2005, that is: offering 3 shares for each 10 shares held as well as distributing cash bonus RMB 1.00 (tax included), so change occurred in total share equity. III. Weighted average return on net assets calculated based on the net profit after deducting non-recurring gains and losses of 2005 in accordance with Editing and Reporting Rules No. 9 Regarding Information Disclosure for Companies Publicly Issuing Securities promulgated by China Securities Regulatory Commission Earnings per share Return on net assets (%) Profit in the report period (RMB) Items (RMB’000) Fully Weighted Fully Weighted diluted average diluted average Profit from main 639,418 operations 25.44% % 1.13 1.27 Operating profit 290,076 11.54% % 0.51 0.58 Net profit 183,379 7.30% % 0.32 0.37 IV. Changes in shareholders’ equity and relevant explanations Unit: RMB’000 Total Share Surplus Statutory Items Capital reserve Retained profit shareholder’s capital reserve welfare funds equity Amount at the 436,366 911,496 222,716 73.694 615,980 2,186,558 period-begin Increase in this 130,910 44,733 14,328 138,646 183,379 period Decrease in this - 174,546 43,636 period Amount at the 567,276 911,496 267,449 88,022 580080 2,326,301 Period-end Reason for Share Increased Withdrawal Withdrawal in Payoff and change offering consolidated in 2005 2005 distribution in statement 2005 Section IV. Changes in Share Capital and Shareholders I. Change in shares Unit: share Before the change Increase or decrease of this time (+) After the change Capitalization Items Additional Share of Amount Proportion Others Subtotal Amount Proportion issuance offering public reserve I. Unlisted 131966150 30.24 39589845 39589845 171555995 30.24 shares 1. Sponsors’ 121566150 27.86 36469845 36469845 158035995 27.86 shares Including state-owned 121566150 27.86 36469845 36469845 158035995 27.86 share Domestic legal person’s share Foreign legal person’s share 6 Other 2. Raised legal 10400000 2.38 3120000 3120000 13520000 2.38 person’s share 3. Inner employees’ share 4. Preference share or others II. Listed 304400000 69.76 91320000 91320000 395720000 69.76 shares 1. RMB ordinary 215921900 49.48 64776570 6290 64782860 280704760 49.48 shares 2. Domestically 88400000 20.26 26520000 26520000 114920000 20.26 listed foreign shares 3. Overseas listed foreign shares 4. Others (senior administrative 78100 0.02 23430 -6290 17140 95240 0.02 personnel’s shares) III. Total 436366150 100 130909845 130909845 567275995 100 shares II. Particulars about issuance and listing of shares 1. The previous three year ended the period-end; the Company issued neither new share nor derived securities. 2. In July 2005, the Company implemented the distribution plan of offering 3 shares fro each 10 shares held as well as dividends RMB 1.00 (Tax included) so that the total share equity increased from 436366150 shares up to 567275995 shares. 3. There existed no inner employees’ shares in the Company. III. Particulars about shareholders 1. Total Number of Shareholders at the end of report period: 54821 2. Ended Dec. 31, 2005, particulars about the top ten shareholders of the Company: (unit: share) Total number of shareholders 54821 Particulars about shares held by the top ten shareholders Pledged or Nature of Proportion of Total number Non-circulating Name of shareholders frozen shareholders shares held shares held shares held shares WUXI WEIFU GROUP State-owned 27.86% 158,035,995 158,035,995 COMPANY LIMITED shareholder Foreign ROBERT BOSCH GMBH 3.24% 18,387,200 shareholder YINFENG SECURITIES Other 1.96% 11,129,284 INVESTMENT FUNDS FORTIS HAITONG Other INCOME INCREASE 1.76% SECURITIES INVESTMENT FUNDS 10,000,000 7 CMBLSA RE FTIF Foreign TEMPLETON ASIAN GRW 1.50% 8,508,087 shareholder FD GTI 5496 BOSHI SELECTED STOCKSECURITIES Other 1.50% 8,489,687 INVESTMENT FUNDS SYWG BNP PARIBAS SHENGLI SELECTED Other 1.38% 7,827,461 SECURITIES INVESTMENT FUNDS LION BALANCE SECURIITIES Other 1.25% 7,116,304 INVESTMENT FUNDS YULONG SECURITIES Other 1.00% 5,682,524 INVESTMENT FUNDS BAO STEEL FINANCE Other 1.00% 5,681,060 CO., LTD Particulars about shares held the top ten shareholders of tradable shares Shareholders’ name Holding circulated shares Type ROBERT BOSCH GMBH 18,387,200 B-share YINFENG SECURITIES 11,129,284 A-share INVESTMENT FUNDS FORTIS HAITONG INCOME INCREASE SECURITIES 10,000,000 A-share INVESTMENT FUNDS CMBLSA RE FTIF TEMPLETON 8,508,087 B-share ASIAN GRW FD GTI 5496 BOSHI SELECTED STOCKSECURITIES 8,489,687 A-share INVESTMENT FUNDS SYWG BNP PARIBAS SHENGLI SELECTED SECURITIES 7,827,461 A-share INVESTMENT FUNDS LION BALANCE SECURIITIES 7,116,304 A-share INVESTMENT FUNDS YULONG SECURITIES 5,682,524 A-share INVESTMENT FUNDS BAO STEEL FINANCE CO., LTD 5,681,060 A-share HTHK/CMG FSGUFP-CMG FIRST STATE CHINA GROWTH 5,431,701 B-share FD Explanations on associate BOSHI SELECTED STOCKSECURITIES INVESTMENT FUNDS and relationship among the above YULONG SECURITIES INVESTMENT FUNDS belong to the same fund shareholders management company among the top ten shareholders. 3. Particulars about the holding shareholder and actual controller of the Company A shareholder who has the actual holding right to the Company is Wuxi Weifu Group Company Limited, as well as state-owned sole enterprise, whose legal representative is Mr. Xu Liangfei. The said company was founded on Dec. 14, 1994, its registered capital was RMB 134,830,000, and it was mainly engaged in Processing and manufacturing of general machinery, instruments and meters, import and export. In the report period, the holding shareholder remained unchanged. Block diagram for property right and controlling relationship among actual controllers and the Company: 8 State-owned Assets Supervision & Administration Commission of Wuxi Municipality of Jiangsu Province ↓100% Wuxi Weifu Group Company Limited ↓27.86% Weifu High-technology Co., Ltd. Section V. Particulars about Directors, Supervisors, Senior Administrative Personnel and Workers I. Directors, supervisors and senior administrative personnel 1. Basic information Shares Total Office Shares held at held at Reason for Name Gender Age Position payment term the year-begin the change (RMB’0000) year-end Xu Male 61 Chairman of Jun. 2005 - 12800 16640 Share Drew no Liangfei the Board Jun. 2008 offering payment in the Company Han Male 54 Vice Jun. 2005 - 12800 16640 Share 20.2 Jiangming Chairman of Jun. 2008 offering the Board & General Manager Wang Male 40 Director Jun. 2005 - 8000 10400 Share Drew no Weiliang Jun. 2008 offering payment in the Company Gao Male 51 Director Jun. 2005 - 6500 8450 Share Drew no Guoyuan Jun. 2008 offering payment in the Company Ge Male 51 Director Jun. 2005 - 0 20900 Purchase-in Drew no Songping Jun. 2008 payment in the Company Shi Male 43 Director & Jun. 2005 - 2000 2600 Share 16.2 Xingyuan Deputy Jun. 2008 offering General Manager Chen Male 48 Director Jun. 2005 - - - Drew no Zhaolin Jun. 2008 payment in the Company Zhang Male 61 Independent Jun. 2005 - - - 5 Xiaoyu director Jun. 2008 Ouyang Male 47 Independent Jun. 2005 - - - 5 Minggao director Jun. 2008 Chen Male 55 Independent Jun. 2005 - - - 5 Qilong director Jun. 2008 Chen Male 66 Independent Jun. 2005 - - - 5 Juchang director Jun. 2008 Chen Male 38 Chairman of Jun. 2005 - 2000 2000 Share 16.1 9 Xuejun the Jun. 2008 offering Supervisory Committee Li Male 56 Supervisor Jun. 2005 - - - Drew no Guodong Jun. 2008 payment in the Company Zhang Male 36 Supervisor Jun. 2005 - - - Drew no Jiming Jun. 2008 payment in the Company Ou Male 39 Supervisor Jun. 2005 - 0 500 Purchase-in Drew no Jianbin Jun. 2008 payment in the Company You Male 38 Supervisor Jun. 2005 - 6400 8320 Share 4.7 Jianzhong Jun. 2008 offering Sun Female 52 Deputy Jun. 2005 - - - 16.3 Qingxian General Jun. 2008 Manager & Financial Chief Miao Male 42 Deputy Jun. 2005 - - - 16.2 Yuming General Jun. 2008 Manager Wang Male 50 Chief Jun. 2005 - 16.8 Yawei engineer Jun. 2008 Deng Male 42 Deputy Jun. 2005 - 4800 6240 Share 14.4 Xijiang General Jun. 2008 offering Manager Zhou Male 42 Secretary of Jun. 2005 - 1500 1950 Share 9.5 Weixing the Board Jun. 2008 offering 2. Directors and Supervisors holding the position in Shareholding Companies Name Shareholding companies Position in shareholding companies Office term Xu Liangfei Wuxi Weifu Group Company Limited Chairman of the Board, General Manager Till now Wang Weiliang Wuxi Weifu Group Company Limited Director, Deputy General Manager Till now Gao Guoyuan Wuxi Weifu Group Company Limited Director, Deputy General Manager Till now Ge Songping Wuxi Weifu Group Company Limited Director, Deputy General Manager Till now Chen Zhaolin Bosch (China) Investment Co., Ltd. CEO Till now Li Guodong Wuxi Guolian Development Group Manager of the Investment Management Till now Co., Ltd. Dept. Zhang Jiming State Investment Machinery and Light Senior Manager of Automobile Parts Till now Industrial Co., Ltd. Investment Dept. 3. Main work experiences of the directors, supervisors and senior administrative personnel in the latest five years and position and part-time job in other organ excluding shareholder’s company (1) Main work experiences in the latest five years Mr. Xu Liangfei: he has served successively as the Chairman of the Board, General Manager and Secretary of CPC of Wuxi Weifu Group Co., Ltd.; now he took post of Chairman of the Board of the Company, Chairman of the Board, General Manager, Secretary of CPC of Wuxi Weifu Group Co., Ltd and Deputy to the National People’s Congress. Mr. Han Jiangming: he has successively as Vice Chairman of the Board and General Manager of the Company; he is now in charge of Vice Chairman of the Board and General Manager of the Company. 10 Mr. Wang Weiliang: Director: He has served successively as Director and concurrently Deputy General Manager of Wuxi Weifu Group Co., Ltd.; now he is in charge of Director and concurrently Deputy General Manager of Wuxi Weifu Group Co., Ltd. and Director of the Company. Mr. Gao Guoyuan: he has served successively as Deputy General Manager of the Company and Director and concurrently Deputy General Manager of Director Wuxi Weifu Group Co., Ltd.; At present, he is Director and Deputy General Manager of Wuxi Weifu Group Co., Ltd. and Director of the Company. Mr. Ge Songping: he has served successively as Deputy General Manger of the Company and Director & concurrently Deputy General Manager of Wuxi Weifu Group Co., Ltd.; At present, he is Director and Deputy General Manager of Wuxi Weifu Group Co., Ltd. and Director of the Company. Mr. Shi Xingyuan: he has served successively as Director and concurrently Deputy General Manger of the Company; he is now Director and Deputy General Manager of the Company. Chen Zhaolin: he has served successively as Director of the Company and General Supervisor of Business Development of Bosch (China) Investment Co., Ltd.; He now is Director of the Company and General Supervisor of Business Development of Bosch (China) Investment Co., Ltd. Mr. Zhang Xiaoyu: he has served successively as Independent Director of the Company, Executive Vice-president of China Machinery Industry Federation, Director-General of Society of Automobile Engineers of China (SAE China), Honorary Director General of China Association of Automobile Manufacturers, Director General of Chinese Society for Internal Combustion Engines (CSICE) and Committee member of China Association for Science & Technology; now he is Independent Director of the Company, Executive Vice-president of China Machinery Industry Federation, Director-General of Society of Automobile Engineers of China (SAE China), Honorary Director General of China Association of Automobile Manufacturers, Director General of Chinese Society for Internal Combustion Engines (CSICE) and Committee member of China Association for Science & Technology. Mr. Ouyang Minggao: he has served successively as Independent Director of the Company, Appointed Professor of Cheung Kung Scholars of Ministry of Education of PRC, Dean of the Automobile Engineering Department of Tsinghua University, Director of the State-level Lab of Automotive Security and Energy-Saving, and concurrently Director of Engine Institute of SAE China and as well as member of the (Electricity-Powered Automobile) Priority Expert Group of the “10th Five-Year Plan” 863 Program; now he is in charge of Independent Director of the Company, Appointed Professor of Cheung Kung Scholars of Ministry of Education of PRC, Dean of the 11 Automobile Engineering Department of Tsinghua University, Director of the State-level Lab of Automotive Security and Energy-Saving, and concurrently Director of Engine Institute of SAE China and as well as member of the (Electricity-Powered Automobile) Priority Expert Group of the “10th Five-Year Plan” 863 Program and standing member of committee of CPPCC National Committee. Mr. Chen Qilong: he has served successively as Independent Director of the Company and General Manager of Wuxi United Small and Medium Enterprises Guarantee Company; and now he is Independent Director of the Company and General Manager of Wuxi United Small and Medium Enterprises Guarantee Company. Mr. Chen Juchang, he has served successively as Independent Director of the Company and President of Wuxi Association of Automobile Manufacturers; he is now in charge of Independent Director of the Company and President of Wuxi Association of Automobile Manufacturers. Mr. Chen Xujun: he has served successively as Chairman of Supervisory Committee, Secretary of CPC, and Secretary of the Commission for Disciplinary Inspection of the Company; he now took post of Chairman of Supervisory Committee, Secretary of CPC, and Secretary of the Commission for Disciplinary Inspection of the Company. Mr. Li Guodong: he has served successively as supervisor of the Company and General of Investment Management Department of State-owned Assets Investment & Development Corporation of Wuxi Municipality; now he holds the post of supervisor of the Company and General of Investment Management Department of State-owned Assets Investment & Development Corporation of Wuxi Municipality. Mr. Zhang Jiming: he has served successively as Supervisor of the Company and Senior General of State Investment Machinery and Light Industrial Co., Ltd.; he now holds the post of Supervisor of the Company and Senior General of State Investment Machinery and Light Industrial Co., Ltd. Mr. Ou Jianbin: he has served successively as Chairman of the Board and General Manager of Wuxi Weifu Lida Catalytic Converter Co., Ltd.; now he is in charge of Supervisor of the Company and General Manager of Wuxi Weifu Lida Catalytic Converter Co., Ltd. Mr. You Jianzhong: he has served successively as Supervisor of the Company, Branch Union President of Oil Pump Plant; now he takes the post of Supervisor of the Company, Branch Union President of Oil Pump Plant. Ms. Sun Qingxian: she has served successively as Deputy General Manager and concurrently financial charger of the Company; now she is Deputy General Manager and concurrently financial charger of the Company. 12 Mr. Miao Yuming: he has served successively as Assistant to the General Manager and Deputy General Manager of the Company; he now takes the post of Deputy General Manager of the Company. Mr. Deng Xijiang: he has served successively Supervisor, assistant to General Manager and Deputy General Manager of the Company; now he is Deputy General Manager of the Company. Mr. Zhou Weixing: he has served as chief director of Securities Department of the Company; now he is Secretary of the Board and chief director of Securities Department of the Company. (2) Position and part-time job in other organ excluding shareholder’s company: Relationship with the Name Position and part-time job organ Title Company Wuxi Weifu Automotive Diesel System Co., Ltd. Holding subsidiary of the Chairman of the Board Company Nanjing Weifu Jinning Co., Ltd. Holding subsidiary of the Chairman of the Board Company Wuxi Weifu Lida Catalytic Converter Co., Ltd Holding subsidiary of the Vice Chairman of the Board Company Bosch Automotive Diesel System Co., Ltd. Joint stock company of the Chairman of the Board Xu Liangfei Company Wuxi Weifu World Trade Co., Ltd Joint stock company of the Chairman of the Board Company Zhonglian Automotive Electronic Systems Co., Joint stock company of the Vice Chairman of the Board Ltd. Company Wuxi Wandi Power Engineering Group Co., Ltd. No relation Chairman of the Board Wuxi Weifu Automotive Diesel System Co., Ltd. Holding subsidiary of the Director Company Nanjing Weifu Jinning Co., Ltd. Holding subsidiary of the Vice Chairman of the Board Company Wuxi Weifu Lida Catalytic Converter Co., Ltd Holding subsidiary of the Director Han Jiangming Company Wuxi Weifu Mashan Fuel Injection Equipment Co., Holding subsidiary of the Director Ltd. Company Bosch Automotive Diesel System Co., Ltd. Joint stock company of the Director Company Wang Weiliang Wuxi Weifu Automotive Diesel System Co., Ltd. Holding subsidiary of the Director Company Bosch Automotive Diesel System Co., Ltd. Joint stock company of the Director Company Gao Guoyuan Wuxi Weifu World Trade Co., Ltd Joint stock company of the Director & General Manager Company Wuxi Weifu Lida Catalytic Converter Co., Ltd Holding subsidiary of the Director Company Bosch Automotive Diesel System Co., Ltd. Joint stock company of the Supervisor Ge Songping Company Wuxi Wandi Power Engineering Group Co., Ltd. No relation Director Wuxi Xitong Property Management Co., Ltd No relation Chairman of the Board Shi Xingyuan Nanjing Weifu Jinning Co., Ltd. Holding subsidiary of the Director Company Wuxi Weifu Chang’an Fuel Injection Equipment Holding subsidiary of the Director Sun Qingxian Co., Ltd. Company 13 Wuxi Weifu Lida Catalytic Converter Co., Ltd Holding subsidiary of the Director Company Wuxi Weifu Automotive Diesel System Co., Ltd. Holding subsidiary of the Director Company Nanjing Weifu Jinning Co., Ltd. Holding subsidiary of the Supervisor Company Wuxi Weifu Mashan Fuel Injection Equipment Co., Holding subsidiary of the Supervisor Ltd. Company Miao Yuming Wuxi Weifu Automotive Diesel System Co., Ltd. Holding subsidiary of the Director Company Deng Xijiang Wuxi Weifu World Trade Co., Ltd Joint stock company of the Director Company Chen Xuejun Nanjing Weifu Jinning Co., Ltd. Holding subsidiary of the Director Company Wuxi Weifu Automotive Diesel System Co., Ltd. Holding subsidiary of the Supervisor Company Ou Jianbin Nanjing Weifu Jinning Co., Ltd. Holding subsidiary of the Director & General Manager Company Wuxi Weifu World Trade Co., Ltd Joint stock company of the Director Company 4. Annual Remuneration for Directors, Supervisors and Senior Executives (1) Procedure and reference of decision-making for directors, supervisors and senior executives: Payments for senior executives of the Company depends on relevant wages and remuneration policy of state and province and performance situation of the Company’s benefit, confirmed referring to measures of assessment on state-owned large and medium enterprise of city government. Annual remuneration was divided into two parts of post wages and wages based on benefits. The former is confirmed by post title and the later is directly connected to economic benefits and paying according to various benefit indexes performance situations. (2) In the report period, there were 9 directors, supervisors and senior executives drew remuneration from the Company and totaled to RMB 1.304 million. (3) In the report period annual allowance of independent directors amounted to RMB 50,000 (After tax), applying for reimburse of traveling charges for attending Board meeting and Shareholders’ General Meeting on fact. 5. Changes on Directors and Supervisors On May 10, 2005 the 9th Union Executive Meeting of the Company elected Mr. Chen Xuejun and Mr. You Jianzhong as employees’ supervisor of the Company. The public notice has been published on China Securities, Securities Times and Ta Kung Pao and website (www.cninfo.com.cn) dated June 10, 2005. On June 9, 2005, Annual Shareholders’ General Meeting for 2004 of the Company examined and approved Proposal on Nomination of Candidate of the 5th Board of the Company, Proposal on Nomination of Candidate of the 5th Supervisory Committee, elected the members of the 5th Board of Directors as follows: Mr. Xu Liangfei, Mr. Hanjiang, Mr. Wang Weiliang, Mr. Gao Guoyuan, Mr. Ge Songping, Mr. Shi Xingyuan, Mr. Chen Zhaolin, Mr. Zhang Xiaoyu, Mr. Ouyang Minggao, Mr. Chen Juchang and Mr. Chen Qilong (including: Mr. Zhang Xiaoyu, Mr. Ouyang Minggao, Mr. Chen Juchang and Mr. Chen Qilong are independent directors); elected members of the 5th Supervisory Committee as follows: Mr. Li Guodong, Mr. Zhang Jiming and Mr. Ou 14 Jianbin, shareholder supervisors Mr. Li Guodong, Mr. Zhang Jiming and Mr. Ou Jianbin which elected from Shareholders’ General Meeting and employees’ supervisors Mr. Chen Xuejun and Mr. You Jianzhong which elected from the 9th Union Executive Meeting of the Company both make up the 5th Supervisory Committee; public notice has been published on China Securities, Securities Times and Ta Kung Pao and website (www.cninfo.com.cn) dated June 10, 2005. The 1st Meeting of the 5th Board of the Company elected Mr. Xu Liangfei as Chairman of the Board, Mr. Han Jiangming as Vice Chairman of the Board; engaged Mr. Han Jiangming as General Manager, Mr. Shi Xingyuan, Mr. Sun Qingxian, Mr. Miao Yuming, Mr. Wang Yaguang and Mr. Deng Xijiang as Deputy General Manager, Mr. Zhou Weixing as Secretary of the Board, Mr. Gu Yiming as Securities Representative; the 1st Meeting of Supervisory Committee of the Company elected Mr. Chen Xuejun as Chairman of Supervisory Committee; public notice has been published on China Securities, Securities Times and Ta Kung Pao and website (www.cninfo.com.cn) dated June 10, 2005. II. Staff of the Company 1. Numbers of the staff Dated Dec.31, 2005, the total number of the registered workers of the Company was 2766. 2. Classification of the staff Unit: person Classification Number of the staff Percentage (%) Production 2063 74.58 Sales and marketing 171 6.18 Technology 218 7.88 Finance 25 0.90 Administration 158 5.71 Others 131 4.74 3. Education degree of the staff Education degree Number of staff Percentage (%) Senior high school 931 33.66 Technical secondary school 1279 46.24 Junior college 359 9.36 Bachelor 176 6.36 Master 21 0.76 Doctor 4. Particulars about the retirees The payments for the retirees are born by the society endowment insurance. SECTION VI. Management of the Company I. Supervisory system profile Conformity to the requirements by the Company Law, the Securities Law and the relevant laws and regulations promulgated by the State Securities Regulatory Commission, the Company has amended and improved its Articles of Association, and set up the corresponding normative systems of Corporate Supervisory. Therefore the Company has been up to the relevant requirements on listed companies by the State Securities Regulatory Commission in terms of the corporate supervisory system. 15 Performance of the Independent Directors II. Conformity to the requirements by Administration rules on Listed Companies and the Guideline Opinion for Establishing Independent Director System among Listed Companies, the Company has engaged 4 independent directors. In accordance with the requirement of “the Guideline Opinion”, the independent directors of the Company could consciously performed their duties to express independent opinions with regard to the significant policy decision upon attending the Board meetings and relevant meetings in 2005. Particulars about independent directors attending Board Meeting: Times are supposed Present in Entrusted Name Absence Remark to be attended person presence Zhang Xiaoyu 4 4 0 0 Ouyang 4 2 2 0 Due to Minggao business Chen Juchang 4 4 0 0 Chen Qilong 4 4 0 0 Particulars about objection on relevant issues presented by independent director: Issues presented Name Contents of the objection presented Remark objection Zhang Xiaoyu Naught Naught Ouyang Minggao Naught Naught Chen Juchang Naught Naught Chen Qilong Naught Naught III. Separation between the Company and principal shareholders in business, assets, personnel, organizations, and finance 1) Business Independence The Company has its own completed production system, supply chain and sales channels. It has the ability to operate facing to the market. It’s not been restricted by principal shareholders. 2) Assets Independence At the time of the Company’s B Shares issuance in 1995, definition and transfer on assets were made clearly, and relevant registration procedures for properties were finished accordingly. As a result, explicit assets relations have been formed between the Company and Wuxi Weifu Group Co., Ltd. 3) Financial Independence With an integral financial department, the Company has installed and maintained a complete accounting and financial system for internal control and subsidiaries management. The relevant financial functions have been performed independently, including opening accounts with banks, paying taxations as well as making financial decisions. 4) Personnel The Company has its own independent operational and administrative departments (including labor, personnel and wages management). Senior executives, including 16 marketing manager, principal treasurer and secretary of the board of directors, all hold full-time positions and received payment accordingly from the Company. Appointments of directors have all been conducted subject to the nomination by the board of directors and approved by the shareholders’ meeting, and there existed no Directors or General Manager nominated by government institutions; there existed no intervention about the engagement and disengagement decision-making of the Board of Directors and Shareholders’ General Meeting by Wuxi Weifu Group Co., Ltd. and government institutions. 5) Functional Organization As a legal person, the Company has installed a well-functioned internal organization for its daily operation. 4. Performance Assessment and Incentive Mechanism The Company democratically conducted the performance assessments for its senior managements personnel with emphasis on the innovation and working results. The payment was confirmed by the assessing result. SECTION VII Particulars about Shareholders’ General Meeting In the report period, the Company held one Shareholders’ General Meeting with contents as follows: On June 9, 2005 the Company held 2004 Annual Shareholders’ General Meeting and the public notice has been published on China Securities, Securities Times and Ta Kung Pao and website (www.cninfo.com.cn) dated June 10, 2005. SECTION VIII REPORT OF THE BOARD OF DIRECTORS I. Discussion of the Board of Directors 1. Review on operations in the report period In 2005, influenced by various elements the state’s macro regulations and control adjustment, rising petroleum price, tightening administration of overloading, etc., so structure adjustment of automotive industry was further enhanced. Heavy duty truck which takes diesel as power material fully entered adjustment period after experiencing high speed development in 2004 and dropped down to 38% compared with the same period of last year, which resulted in server challenge to production operation of the Company. In order to ensure the sustainable and steady development of the Company, the Board of Director carried out arrangement on time, adjusted products structure of the Company and reasonably allotted various production elements, overcame rising material price and short-term benefit pressure resulting from joint stock and cooperation so as to maintain comparatively steady of economic benefits of the Company. 2. Particulars about core business and operations of the Company The Company belongs to machinery manufacturer enterprise, mainly engaging in production and sales of diesel & fuel oil injection system products. The Company realized income from core business and profit from core business respectively amounting to (RMB’000)2,842,021 and (RMB’000) 639,418 in the full year, increased by 34.14% and 35.08% respectively over last year, and realized net profit amounting to (RMB’000) 183,379and decreased by 19.32% over last year. 17 Income from core business increased by 34.14% was because subsidiary Wuxi Weifu Automotive Diesel System Co., Ltd in consolidated statement increased income from core business by RMB 736,537,900. Profit from core business increased by 29.86% was because Wuxi Weifu Automotive Diesel System Co., Ltd increased profit from core business realized in the full year. Net profit decreased by 22.62% was due to: ① rising price in raw material; ② Decrease of investment benefits, Bosch Automotive Diesel System Co., Ltd invested by the Company still under construction, the said company contributed investment benefits amounting to RMB 59,034,000 in 2004 and undertook investment losses amounting to RMB 35.1 million. (I) Main operations classified according to products Unit: RMB’0000 Increase/decrease Increase/decreas Increase/decrease Income from Gross in income from Cost of main e in cost of main in gross profit ratio Items main profit main operations operations operations over over the last year operations ratio (%) over the last year the last year (%) (%) (%) Fittings and accessories of internal combustion 266,587.39 206,322.39 22.61 32.33 33.26 -0.54 engine Catalyst and muffler 12,507.66 9,990.37 20.13 65.57 78.98 -5.98 (II) Formation of main operations and its market share Unit: RMB’0000 Categories Income from main Market share (%) Place in the industry operations PS 7100 86,002.17 No. 1 50.35 PW 2000 22,262.76 No. 1 PW pump 15,871.13 47.84 No. 1 VE pump 49,706.58 100 No. 1 A pump 16,218.58 54.65 No. 1 I pump (including PL, 25,611.89 41.80 No. 2 IW and PM pump) Single plunger pump 5,695.68 27.59 No. 2 Injector 23,399.98 22.93 No. 1 Precision pump parts 18,603.57 31.09 No. 1 Data Source: Statistics Association of China’s Machinery Industry, Fuel Injection Sub-branch (2005) Statistical Data Collection in Fuel Injection Equipment Industry (III) Main suppliers and customers Unit: RMB’000 The total purchase Accounting for total amount from the top five 1,257,233 55.61 purchase amount % suppliers The total sales amount to Accounting for total sales 1,376,427 49.32 the top five customers amount % 18 3. Explanation on assets composition and material change in items of profit statement in the report period (1) Account receivable: amount at period-end amounting to (RMB’000) 765,952 increased 178,654 over period-begin, mainly because subsidiary Wuxi Weifu Automotive Diesel System Co., Ltd in consolidated statement increased account receivable with sales income in 2005. (2) Account pay in advance: amount at period-end amounting to (RMB’000) 10,217 decreased 22,275 over period-begin, mainly because technological reform transferred into construction in progress after it finished. (3) Construction in progress: amount at period-end amounting to (RMB’000) 68,878 decreased 35,402 over period-begin, mainly because technological reform transferred into fixed assets after it finished. (4) Short-term loans: amount at period-end amounting to (RMB’000) 1,088,914 increased 536,084 over period-begin, mainly because Wuxi Weifu Automotive Diesel System Co., Ltd increased capital demands with business expansion. (5) Account payable: amount at period-end amounting to (RMB’000) 304,473 decreased 534,793 over period-begin, mainly because subsidiary Wuxi Weifu Automotive Diesel System Co., Ltd in consolidated statement paid loans to Germany Bosch Corporation in time in 2005. (6) Long-term liability within one year: amount at period-end amounting to RMB 145 million increased RMB110 million over period-begin, mainly because parent company paid off the long-term loans within one year in the report period. (7) Cost from main operation: amounting to (RMB’000) 2,202,603 increased (RMB’000) 557,220 over the same period of last year, mainly due to increase of income from main operation. (8) Operation expenses: amounting to (RMB’000) 85,140 increased (RMB’000) 4,869 over the same period of last year, mainly due to subsidiary Wuxi Weifu Automotive Diesel System Co., Ltd in consolidated statement. (9) Administration expenses: amounting to (RMB’000) 248,832 increased (RMB’000) 60,221 over the same period of last year, mainly due to subsidiary Wuxi Weifu Automotive Diesel System Co., Ltd in consolidated statement and Nanjing Weifu Jinning Co., Ltd. (10) Financial expenses: amounting to (RMB’000) 63,851 increased (RMB’000) 32,595 over the same period of last year, mainly due to increase of liability of consolidated basis. 4. Material change in cash flow composition in the report period (1) Net cash flow rising from operation activities: amounting to (RMB’000) –491,007 but amounted to (RMB’000) 179,736 in last year. Mainly because huge change occurred in diesel automobile market so as to influence the market of fuel injection system products, account receivable increased (RMB’000) 178,654 over the same period of last year in the report period as well account payable decreased (RMB’000) 534,793 over the same period of last year. (2) Net cash flow rising from investment activities: amounting to (RMB’000) –110,204 but amounted to (RMB’000) –327,421 in last year. Mainly due to decrease of fixed assets investment in the report period. 19 (3) Net cash flow rising from finance activities: amounting to (RMB’000) 460,770, but amounted to (RMB’000) 443,590 in last year. Mainly due to return partial loans of bank 5. Utilization of equipments, obtain of orders, sales or backlog of products and change of technology personnel (1) In the report period, production equipments worked well and operating factor of main equipments was up to 95%. (2) In the report period, the products inventory of the Company increased (RMB’000) 50,091 at period-begin. (3) In the report period, technology personnel of the Company remain unchanged. 6. Main operation of holding company and joint stock company (1) Nanjing Weifu Jinning Co.,Ltd., whose 80% equity was held by the Company, was mainly engaged in the production of diesel and fuel injecting system products (the core product was VE distribution pump) with its registered capital amounting to RMB 256 million. At the end of year 2005 its total assets amounted to RMB 25,600 ten thousand and its net profit was RMB 2,816.07 ten thousand in 2005. (2) Wuxi Weifu Lida Catalytic Converter Co., Ltd, whose 94.81% equity was held by the Company, was mainly engaged in the production of such products as cleaners and mufflers of tail gas etc. with registered capital amounting to RMB 260 million. At the end of 2005, its total assets amounted to RMB 28,095.64 ten thousand and its net profit was RMB 153.23 ten thousand in 2005. (3) Bosch Automobile Diesel System Co.,. Ltd., whose 31.5% equity was held by the Company, It was mainly engaged in the production of electrical control diesel oil system series, and P and S series injectors and nozzles with registered capital amounting to USD 200 million, total capital amounting to RMB 226,832.84 ten thousand at the end of 2005, and it realized net profit amounting to -11,054.50 ten thousand in 2005. (4) Zhonglian Automobile Electronics Co., whose 20% equity was held by the Company, was mainly engaged in the production of automobile electronic control system products with registered capital amounting to RMB 600.62 million. Total capital amounted to RMB 108,042.43 ten thousand at the end of 2005 and its net profit was RMB 27,929.08 ten thousand in 2005. (5) Wuxi Weifu Automotive Diesel System Co., Ltd., whose 70% equity was held by the Company, was mainly engaged in the production of fuel spray series products, with registered capital amounting to RMB 200 million. At the end of 2005, its total assets amounted to RMB 103,162.71 ten thousand and its net profit was RMB 12,035.33 ten thousand in 2005. (II) Outlook on future development of the Company 1. Analysis on industry trends The Company belongs to machinery manufacturer enterprise, its products fuel injection system is core part of diesel automotive engine, is typical technology-intensive and capital-intensive industry. At present, comprehensive market share of products of the Company accounting for 50% or so. With gradually strict of the state’s emission regulations and real demand of energy saving, bring out new opportunity for development of the Company. Due to existing in the upgrading stage of industry technology platform, the said industry still remains turning point of development. 20 2. Future developing strategy of the Company According to arrangement of implementation of the state’s emission regulations and real demand of energy saving, it estimated that China would performance nation’s No.III Emission Regulation in 2007. The Company started to fully cooperate with German Bosch in order to meeting implementation of the nation’s No.III Emission Regulation and demand of energy saving in 2004, so as to establish joint stock enterprise, to produce products satisfying the nation’s No.III Emission Regulation or above, at present investment and various technology all set. Through cooperation with Bosch Corporation, the Company’s own technology platform also obtained upgrading, shortening the distance with international multinational corporation and laying the foundation for further development of the Company. 3. Capital demand for future development of the Company, financing and utilization plan Because projects of future development of the Company had been put in, so there is no capital demand in the near future, capitalized expenses in every year could be solved through its own accumulation; nowadays the Company establishes close relationship with bank so that current assets demanding for production could be completely solved through bank. 4. Risks existed in future development Fuel Injection System industry and automotive industry both severely influenced by nation’s policy, in 2005 influenced by nation’s overload administration and macro regulations & adjustment, the market of heavy duty truck started to slippery slope so that the whole said market glided down to 38%, time of duration was unprecedented, which brought difficulty to production operation of the Company in 2005. The continuous rising of the raw material increased the cost of the Company and influenced the operation achievements of the Company. The shortage of the energy and rising of price directly influenced the needs of commercial vehicles, thus influenced the sales of the Company. According to the aforesaid risks and disadvantages, the Company took the following measures: (1) In regarding of the changes of the national policy, the Company will strengthen the analysis to the tendency of the changes of the national macro-policy, timely grasp the policy guide and establish the correspondent countermeasures. Transform the marketing idea, strengthen the quality senses, and strive for winning customers with products of high quality and service. (2) Further perfect the work of Invitation to Tender (Submission of Tender) on Material Purchase, establish the long-term stable strategic partnership with the suppliers of high quality, and reduce the cost on the purchase of the raw material. (3) Perfect the product designing, further reduce the energy consumption to meet the demands on energy-saving of the customer on the basis of improving the reliability of products. II. Investment In the report period, the Company’s total investment in the technical reform projects 21 and external investment was RMB 192.7376 million. 1. Use of the raised proceeds In the report period, the Company didn’t raise proceeds. Raised proceeds last time were all used in the relevant investment projects approved by Shareholders’ General Meeting. 2. Investment with non-raised proceeds In the report period, the investments of non-raised proceeds of the Company were as follows: (1)On July, 2005, Wuxi Weifu Mashan Fuel Injection Equipment Co., Ltd, which is the controlling subsidiary of the Company, increased capital and share, of which the registered capital increased from RMB 12.2376 million to RMB 45 million. And the equity proportion of the Company adjusted from 72.78% to 92.60%. (2) In July, 2005, Wuxi Weifu Chang’an Fuel Injection Equipment Co., Ltd, which is the controlling subsidiary of the Company, increased capital and share, of which the registered capital increased from RMB 21.49 million to RMB 60 million. And the equity proportion of the Company adjusted from 85% to 94.63%. (3) In August, 2005, the Company and American Autocam set up Sino-foreign joint venture Wuxi Weifu Autocam Precision Machinery Co., Ltd with the registered capital of USD 6 million and the equity ratio of 50% held by the Company. Ended as Dec. 31, 2005, the paicl-up capital of the Company was USD 900,000, the Company invested USD 450,000. The company is still on the preparation. (4) In Sep. 2005, Wuxi Weifu Precision Machinery Manufacture Co., Ltd, which is the shareholding subsidiary of the Company, increased capital and share, of which the registered capital increased from RMB 6.9 million to RMB10 million. And the invested proportion of the Company adjusted from 28.99% to 20%. III. Routine work of the Board of Directors (I) Meetings and resolutions of the Board 1. On April 19, 2005, Board of Directors of the Company held the 20th meeting of the 4th Board of Directors, the resolutions were published on China Securities, Securities Times, Ta Kung Pao and www.cninfo.com.cn dated April 22, 2005. 2. On June 9, 2005, Board of Directors of the Company held the 1st meeting of the 5th Board of Directors, the resolutions were published on China Securities, Securities Times, Ta Kung Pao and www.cninfo.com.cn dated June 10, 2005. 3. On August 16, 2005, Board of Directors of the Company held the 2nd meeting of the 5th Board of Directors, the resolutions were published on China Securities, Securities Times, Ta Kung Pao and www.cninfo.com.cn dated August 18, 2005. 4. On October 24, 2005, Board of Directors of the Company held the 3rd meeting of the 5th Board of Directors, the resolutions were published on China Securities, Securities Times, Ta Kung Pao and www.cninfo.com.cn dated October 26, 2005. (II) Implementations of resolutions of the Shareholders’ General Meeting The proposal of distribution of bonus and dividend confirmed by 2004 Annual Shareholders’ General Meeting was implemented on July 22, 2005. IV. Profit distribution preplan for 2005 22 As audited by Jiangsu Gongzheng Certified Public Accountants Co., Ltd., the Company realized net profit totally RMB 181,905,000 in 2005, plus the retained profit at the end of 2004 amounting to RMB 619,996,400, the distributable profit for shareholders is RMB 801,901,400 in 2005. According to the regulation of Articles of Association of the Company, in the report period, 10% was appropriated as public reserve amounting to RMB 28,655,300 and 5% was appropriated as welfare fund amounting to RMB 14,327,700. In addition, Lida Environment Protection Corporation withdrew totally RMB 2,364,600 according to the accumulative distributable profits, of which 10% were appropriated as the reserve fund, 50% as rewards fund for workers and staff, and 5% as fund for enterprise development. After withdrawal of the aforesaid funds, according to the legal account in accordance with CAS, the distributable profits for the shareholder amounted to RMB 756,553,800. In 2005, the Company realized the profit distribution amounting to RMB 174,546,500; at the end of 2005, the surplus undistributed profit amounted to RMB 582,007,300. The preplan for 2005 profit distribution: The Company plan to take the total shares at the end of 2005 amounting to 567,275,995 as the cardinal number, and distribute 4 cash bonus for each 10 share to all the shareholders (including the tax). Section IX. Report of the Supervisory Committee I. Work of the Supervisory Committee The Supervisory Committee held three meetings in the report period: 1. The 8th meeting of the 4th Supervisory Committee was held on Apr. 18, 2005 and the examined topics were Work Report of the Supervisory Committee 2004, 2004 Annual Report of the Company and its Summary, Report of Financial Settlement and Profit Distribution Preplan for 2004 of the Company and the 1st Quarterly Report in 2005 of the Company; 2. The 1st meeting of the 5th Supervisory Committee was held on June 9, 2005 and Mr. Chen Xuejun was elected as the Chairman of the 5th Supervisory Committee. 3. The 2nd meeting of the 5th Supervisory Committee was held on Aug. 16, 2005 and the examined topics were Semi-annual Report in 2005 of the Company and its Summary and Report of Profit Distribution Preplan in the 1st Half Year of 2005. II. Independent opinion expressed by the Supervisory Committee for the following events: 1. Operations according to law. The Supervisory Committee believed that every decision-making procedure of the Company in the report period had been in accordance with laws, regulations and Articles of Association. While the Company’s directors and senior executives executed authorities, there found neither behavior of breaking laws, regulations and Articles of Association nor abusing authorities and damaging the interest of the Company and the Shareholders. 2. Check of the Company’s financial status. The members of the Supervisory Committee attended every meeting of the Board of Directors this year and examined annual, semiannual and quarterly report and other documents submitted by the Board of Directors. The Supervisory Committee believed that the financial report in every period 23 reflected objectively and truly the financial situation and operation result of the Company. 3. Related transactions. The Supervisory Committee believes the related transaction occurred in the report period had been conducted according to the Related Transactions Agreement signed between Wuxi Weifu Group Co., Ltd and the Company. And with the approval of the Shareholders’ General Meeting, related transactions could reflect the principle of market trading and had not done harm to the interest of the Company. Section X. Significant Events I. In the report period, the Company has no significant lawsuits and arbitrations. II. In the report period, the Company has no significant purchase, sale and disposal of assets. III. Significant related transactions between the Company and its principal shareholder, Wuxi Weifu Group Co., Ltd. in 2005 Unit:’0000 Items Amount in 2005 Amount in 2004 Purchase of goods 3,399.80 1,948.50 Sales of goods 21,473.60 19,484.00 Sales of fixed assets - 916.40 Land and trademark fees 490.30 450.10 Guarantee amount for the loans of 42,000.00 37,800.00 Company and subsidiaries Guarantee amount for the bank - 1,960.00 acceptance furnished by the Company The above associated transactions were executed strictly according to the associated contracts signed by the two parties and had no change in the respect of trading price, trading way and settlement. IV Significant contracts and implementation 1. In the report period, the Company had no entrustment, contracting or leasing from other companies; or other companies had no entrustment, contracting or leasing from the Company; 2. In the report period, the Company provided guarantee amounting to RMB 110 million for its controlling subsidiary Nanjing Weifu Jinning Co., Ltd, provided guarantee amounting to RMB 50 million for Wuxi Weifu Chang’an Fuel Injection Equipment Co., Ltd; thus the total amount for guarantee the Company provided was RMB 160 million. And there was no breaking guarantee. 3. In the report period, the Company did not entrust others to conduct management of cash and assets. V. Commitment events of the principal shareholder The principal shareholders holding over 5% equity of the Company had no commitment events in the report period or lasting in the report period. VI. Engagement and disengagement of Certified Public Accountants 24 In the report period, Jiangsu Gongzheng Certified Public Accountants Co., Ltd. and PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd. were reengaged as auditing institutions of the Company in 2005 and the remuneration that the Company paid to the Certified Public Accountants was: the auditing expense of 2005 (all expenses) for Jiangsu Gongzheng Certified Public Accountants Co., Ltd. was RMB 500,000 and it had provided services for the Company for 14 years; the auditing expense of 2005 (all expenses) for PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd. was RMB 1 million and it provided service for the Company for 10 years 25 Section XI. Financial Report TO THE SHAREHOLDERS OF WEIFU HIGH-TECHNOLOGY COMPANY LIMITED We have audited the accompanying consolidated balance sheet of Weifu High-Technology Company Limited (hereinafter referred to as “the Company”) and its subsidiaries (hereinafter together with the Company referred to as “the Group”) as of 31 December 2005 and the related consolidated statements of income, changes in equity and cash flows for the year then ended. These consolidated financial statements set out on pages 2 to 52 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian Certified Public Accountants Ltd. Co. 18 April 2006 Shanghai, The People's Republic of China 26 CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2005 (All amounts in RMB thousands) 31 December 31 December Notes 2005 2004 ASSETS Non-current assets Leasehold land 5 71,577 73,614 Property, plant and equipment 6 947,416 854,015 Intangible assets 7 72,520 70,207 Investments in associates 8 761,387 802,093 Investments in unconsolidated subsidiaries 9 113,310 46,678 Available-for-sale investments 10 75,360 29,520 Held-to-maturity investments - 3,000 Deferred tax assets 23(b) 11,272 5,851 Total non-current assets 2,052,842 1,884,978 Current assets Inventories 11 720,762 670,671 Due from related parties 27(e) 16,882 27,760 Dividend receivable - 91,173 Prepayments 10,217 32,492 Trade and other receivables 12 903,683 673,081 Cash and bank deposits 26(b) 777,831 814,962 Total current assets 2,429,375 2,310,139 Total Assets 4,482,217 4,195,117 27 CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2005 (All amounts in RMB thousands) 31 December 31 December Notes 2005 2004 EQUITY Capital and reserves attributable to equity holders of the Company Ordinary shares 13 567,276 436,366 Reserves 14 1,178,945 1,134,212 Retained earnings 15 580,080 615,980 2,326,301 2,186,558 Minority interests 187,116 143,974 Total Equity 2,513,417 2,330,532 LIABILITIES Non-current liabilities Long-term bank borrowings 18(b) 73,000 225,000 Long-term payables 19 47,827 56,822 Total non-current liabilities 120,827 281,822 Current liabilities Trade and other payables 16 568,631 1,000,747 Current tax liabilities (3,368) (28,991) Due to related parties 27(e) 30,035 7,780 Dividend payable 416 416 Short-term bank borrowings 18(a) 1,088,914 552,830 Accruals and other current liabilities 17 18,345 14,981 Current portion of long-term bank borrowings 18(b) 145,000 35,000 Total current liabilities 1,847,973 1,582,763 Total liabilities 1,968,800 1,864,585 Total Equity and Liabilities 4,482,217 4,195,117 28 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in Renminbi (“RMB”) thousands, except for earnings per share) Notes 2005 2004 Revenue, net 20,27 2,842,021 2,118,745 Cost of sales (2,202,603) (1,645,383) Gross profit 639,418 473,362 Other operating income 20 6,378 6,015 Distribution costs (85,140) (80,271) Administrative expenses (248,832) (188,611) Other operating expenses (21,748) (52,997) Profit from operations 22 290,076 157,498 Finance costs, net 21 (63,851) (31,256) Share of results of associates 8 25,556 141,333 Income/(loss) from unconsolidated subsidiaries 9 (4,640) 4,909 Impairment loss of investments 10 (11,000) (19,000) Profit before income tax 236,141 253,484 Income tax expense 23(b) (9,620) (19,533) Profit for the year 226,521 233,951 Attributable to: Equity holders of the Company 183,379 227,287 Minority interests 43,142 6,664 226,521 233,951 Earnings per share for profit attributable to the equity holders of the company - Basic 24 RMB 0.32 RMB 0.40 - Diluted Not applicable Not applicable 29 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands) Attributable to equity holders of the company Statutory Statutory public Discretion- Share Capital surplus welfare ary surplus Total Retained Minority capital surplus reserve fund fund reserve fund reserves earnings interests Total equity Note 13 Note14(a) Note 14(b) Note 14(c) Note 15 Balance as at 1 January, 2004 436,366 911,496 120,701 60,425 1,785 1,094,407 515,771 77,310 2,123,854 Dividends declared after 1 January, 2004 from retained earnings as of 31 December 2003 - - - - - - (87,273) - (87,273) Net profit for 2004 - - - - - - 227,287 6,664 233,951 Appropriations: - statutory surplus reserve fund - - 26,536 - - 26,536 (26,536) - - - statutory public welfare fund - - - 13,269 - 13,269 (13,269) - - Capital injection from Minority shareholders - - - - - - - 60,000 60,000 Balance as at 31 December 2004 436,366 911,496 147,237 73,694 1,785 1,134,212 615,980 143,974 2,330,532 Dividends declared after 1 January, 2005 from retained earnings as of 31 December 2004 (Note 25) 130,910 - - - - - (174,546) - (43,636) Net profit for 2005 - - - - - - 183,379 43,142 226,521 Appropriations: - statutory surplus reserve fund - - 30,405 - - 30,405 (30,405) - - - statutory public welfare fund - - - 14,328 - 14,328 (14,328) - - Balance as at 31 December 2005 567,276 911,496 177,642 88,022 1,785 1,178,945 580,080 187,116 2,513,417 30 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands) Notes 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Cash generated from/(used in) operations 26(a) (410,974) 227,508 Interest paid (62,216) (28,414) Income tax paid (17,817) (19,358) Net cash generated from/(used in) operating activities (491,007) 179,736 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of leasehold land - (25,612) Purchase of Intangible assets (6,502) (8,575) Purchase of property, plant and equipment (154,031) (217,478) Proceeds from disposals of property, plant and equipment 26(c) 7,150 6,875 Increase in investments in unconsolidated subsidiaries 9 (71,272) - Increase in investments in associates 8 - (152,732) Increase in available-for-sale investments 10 (56,940) (5,000) Proceeds from disposal of available-for-sale investments 10 100 - Purchase of held-to-maturity investments - (3,000) Proceeds from disposals of held-to-maturity investments 3,107 - Interest received 9,997 7,496 Dividends received 158,187 70,605 Net cash used in investing activities (110,204) (327,421) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short-term bank borrowings 536,084 357,330 Net increase/(decrease) in long-term bank borrowings (42,000) 100,000 Cash injection from minority shareholders - 60,000 Dividends paid (43,636) (87,273) Cash received from government grants 9,182 11,823 Increase in long-term payables 1,140 1,710 Net cash from financing activities 460,770 443,590 Net increase/(decrease) in cash and cash equivalents (140,441) 295,905 Cash and cash equivalents at beginning of year 783,162 487,257 Cash and cash equivalents at end of year 26(b) 642,721 783,162 31 1. GENERAL INFORMATION Weifu High-technology Company Limited (the “Company”) was incorporated in the People’s Republic of China (the “PRC”) on 22 October 1992 as a joint stock limited company. The Company is principally engaged in the manufacture and sale of fuel injection pumps for use in diesel engines and injectors and components for fuel injection pumps. The registered office of the Company is No.46, Wuxi State Hi-tech Industrial Development Zone, Jiangsu Province, and the Company has approximately 2,480 and 2,520 employees as of 31 December 2005 and 2004 respectively. The Company’s domestic listed foreign investment shares (“B share”) and domestic Renminbi ordinary shares (“A share”) are listed on the Shenzhen Stock Exchange. The Company together with its consolidated subsidiaries are hereinafter collectively referred to as “the Group”. 2. ACCOUNTING POLICIES The principal accounting policies adopted in preparation of these consolidated financial statements of the Group are set out below. (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”, which includes International Accounting Standards and Interpretations) as published by the International Accounting Standards Board. These consolidated financial statements have been prepared under the historical cost conversion with the exception of fair value measurement of certain financial instruments. This basis of accounting differs from that used in Group’s statutory accounts (“Statutory Accounts”) which are prepared in accordance with PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial information are disclosed in Note 4. 32 2. ACCOUNTING POLICIES (Continued) (a) Basis of preparation (Continued) Standards, interpretations and amendments to published standards effective in 2005. In 2005, the Group adopted the new/revised standards and interpretations of IFRS below, which are relevant to its operations. The comparatives of prior years have been amended as required, in accordance with the relevant requirements. IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 32 Financial Instruments: Disclosures and Presentation IAS 33 Earnings per Share IAS 36 Impairment of Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IFRS 2 Share-based payments IFRS 3 Business Combinations The adoption of new/revised IASs 1, 2, 8, 10, 16, 17, 21, 24, 27, 28, 32, 33, 39 and IFRS 2 did not result in substantial changes to the Group’s accounting policies. In summary: - IAS 1 has affected the presentation of minority interest, share of net results of associates and other disclosures. - IASs 2, 8, 10, 16, 17, 27, 28, 32, 33, 39 and IFRS 2 had no material effect on the Group’s policies. - IAS 21 had no material effect on the Group’s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency as the presentation currency for respective entity financial statements. - IAS 24 has affected the identification of related parties and some other related-party disclosures. 33 The adoption of IFRS 3, IAS 36 and IAS 38 results in a change in the accounting policy for goodwill. Until 31 December 2004, goodwill was: - Amortised on a straight line basis over its estimated useful life of one to five years if arising from business combination for which the agreement dated before 31 March 2004; 2. ACCOUNTING POLICIES (Continued) (a) Basis of preparation (Continued) - Not amortised if arising from business combination for which the agreement dated after 31 March 2004; and - Assessed for an indication of impairment at each balance sheet date. In accordance with the provision of IFRS 3 (see Note 2(g)): - The Group ceased amortisation of goodwill from 1 January 2005; - Accumulated amortisation as at 31 December 2004 has been eliminated with a corresponding decrease in the cost of goodwill; - From the year ended 31 December 2004 onwards, goodwill is tested annually for impairment, as well as when there is indication of impairment. The Group has reassessed the useful lives of its intangible assets in accordance with the provisions of IAS 38. No adjustment resulted from this reassessment. All changes in the accounting policies have been retrospectively made in accordance with the respective transitional provisions, wherever required or allowed. The accounting policies set out below have been consistently applied throughout the relevant years, other than: IAS 39 - generally does not permit to recognise, derecognise and measure financial assets and liabilities in accordance with this standard on a retrospective basis. IFRS 3 - prospectively after 1 January 2005. Standards, interpretations and amendments to published standards that are not yet effective. Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2006 or later periods but which the Group has not early adopted, as follows: IAS 1 Amendment − Capital Disclosures IAS 19 Amendment – Actuarial Gains and Losses, Group Plans and Disclosures 34 IAS 39 Amendment − Cash Flow Hedge Accounting of Forecast Intragroup Transactions IAS 39 Amendment – The Fair Value Option IAS 39 Amendment – Transition and Initial Recognition of Financial Assets and Financial Liabilities IAS 39 and IFRS 4 Amendment − Financial Guarantee Contracts IFRS 1 − First-time Adoption of IFRS, and IFRS 6 Amendment IFRS 6 − Exploration for and Evaluation of Mineral Resources IFRS 7 – Financial Instruments: Disclosures 2. ACCOUNTING POLICIES (Continued) (a) Basis of preparation (Continued) IFRIC amendment to SIC 12 – Scope of SIC 12 Consolidation – Special Purpose Entities IFRIC 1 – Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 − Members’ Shares in Co-operative Entities and Similar Instruments IFRIC 3 − Emission Rights (withdrawn in June 2005) IFRIC 4 − Determining whether an Arrangement contains a Lease IFRIC 5 − Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 - Liabilities arising from Participating in a Specific Market: Waste Electrical and Electronic Equipment The Group is still assessing the impact of these standards, amendments and interpretations on its results of operations and financial position. (b) Group accounting (1) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The Group adopted IFRS 3 “Business Combinations” to account for the acquisition of subsidiaries by the Group for which the agreement date is on or after 31 March 2004. In 35 applying the purchase method of accounting as determined by IFRS 3, the cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement (See Note 2(g)(3)). 2. ACCOUNTING POLICIES (Continued) (b) Group accounting (Continued) (1) Subsidiaries (Continued) Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an 36 impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. (3) Joint ventures A jointly controlled entity is a joint venture in respect of which a contractual arrangement is established between the participating venturers and whereby the Group together with the other venturers undertake an economic activity which is subject to joint control and none of the venturers has unilateral control over the economic activity. 2. ACCOUNTING POLICIES (Continued) (b) Group accounting (Continued) (3) Joint ventures (Continued) The Group’s interests in jointly controlled entities are accounted for by proportionate consolidation. Under this method the Group combines its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group’s consolidated financial statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the joint venture that is attributable to the other venturers. The Group does not recognise its share of profits or losses from the joint venture that result from the purchase of assets by the Group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately. (c) Foreign currency translation (1) Functional and presentation currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the functional currency”). The consolidated financial statements are presented in RMB, which is the functional and presentation currency of each entity in the Group. (2) Transactions and balances Transactions in other currencies are translated into RMB at the exchange rates prevailing at 37 the dates of transactions. Monetary assets and liabilities denominated in other currencies at the consolidated balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences arising from changes in exchange rates subsequent to the transaction dates are included in consolidated income statement. (d) Leasehold land Leasehold land represents land use fees paid for long term leasehold land and is classified as operating leases. The prepaid lease payments are amortized over the lease period (thirty to fifty years) on a straight-line basis. 2 ACCOUNTING POLICIES (Continued) (e) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price, construction cost and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated using the straight-line method to write off the cost, after taken into account the estimated residual value at 3% of cost, of each asset over its expected useful life. The expected useful lives are as follows: Buildings 20-35 years Machinery and equipment 10-16 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefit from items of property, plant and equipment. Expenditures incurred after the property, plant and equipment have become ready for its intended use, such as repairs and maintenance and overhaul costs, are recognised as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. When assets are sold or retired, their costs and accumulated depreciation and accumulated impairment losses are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated income statement. 38 Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. (f) Construction-in-progress Construction-in-progress represents properties and plant under construction and machinery and equipment under installation and testing, and is stated at cost. This includes cost of construction, site restoration cost, plant and equipment and other direct costs plus borrowing costs which mainly include interest charges arising from borrowings used to finance these projects during the construction period. Construction-in-progress is not depreciated until such time as the assets are completed and ready for their intended use. 2. ACCOUNTING POLICIES (Continued) (g) Intangible assets Intangible assets are recognised if it is probable that the future economic benefits that are attributable to the assets will flow to the Group; and the cost of the asset can be measured reliably. Intangible assets are measured initially at cost. Cost includes the fair value of the consideration given to acquire the assets and any costs directly attributable to the transaction. After initial recognition, intangible assets are carried at cost less any accumulated amortisation, when applicable, and any accumulated impairment losses. Intangible assets are amortized unless they have an indefinite useful life. Amortisation is calculated on a straight-line basis over the best estimate of the useful lives of the intangible assets. The useful lives and the amortisation method are re-assessed at every year end to ensure its consistency with the expected pattern of economic benefits from intangible assets. Intangible assets with definite useful lives are considered for impairment where there is an indicator that the asset has been impaired. Intangible assets with indefinite useful lives should be tested annually for impairment and whenever there is an indication of impairment. (1) Trademarks, licences, proprietary technologies and computer software Trademarks, licences, proprietary technologies and computer software are initially measured at historical cost, which comprises its purchase price and other directly attributable costs. Trademarks, licences, proprietary technologies and computer software have a definite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks, licences, proprietary technologies and computer software over their estimated useful lives (5-30 years). 39 The trademark was purchased from the related party – Wuxi Weifu Group Co., Ltd. by the Company’s subsidiary – Nanjing Weifu Jinning Company Limited and is registered with an unlimited usage period. The management considers the useful life of the trademark will not be less than 30 years, which is the operating period of Nanjing Weifu. (2) Research and development costs Expenditure for research is recognised as an expense when incurred. Expenditure on development is charged against income in the period incurred except for project development costs, which comply strictly with all of the following criteria: • the product or process is clearly defined and costs are separately identified and measured reliably; • the technical feasibility of the product is demonstrated; 2 ACCOUNTING POLICIES (Continued) (g) Intangible assets (Continued) (2) Research and development costs (Continued) • the product or process will be sold or used in-house; • the assets will generate future economic benefits (e.g. a potential market exists for the product or its usefulness in the case of internal use is demonstrated); and • adequate technical, financial and other resources required for completion of the project are available. Capitalization of costs starts when the above criteria are first met. Expenditure recognised as an expense in previous accounting periods is not reinstated. The recoverable amount of development costs is estimated whenever there is an indication that the asset has been impaired or that the impairment losses recognised in previous years no longer exist. In the year ended 31 December 2005, there was no capitalized expenditure on development. 40 (3) 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 / associate at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associate. In accordance with the transitional provision of IFRS 3, from 1 January 2005, the Group discontinued the amortisation of those previously recognised goodwill and eliminated the carrying amount of the related accumulated amortisation with a corresponding decrease in Goodwill. In addition, they are tested annually for impairment thereafter. Goodwill arising from business combinations for which the agreement date is on or after 31 March 2004 is not amortized but tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. 2 ACCOUNTING POLICIES (Continued) (g) Intangible assets (Continued) (3) Goodwill (Continued) Negative goodwill represents the excess of the fair value of the Group’s share of the net assets of the acquired subsidiary / associate over the cost of an acquisition. In accordance with the transitional provision of IFRS 3, the negative goodwill previously recognised is derecognised on 1 January 2005, with a corresponding adjustment to the retained earnings as at 1 January 2005. For negative goodwill arising from business combinations for which the agreement date is on or after 31 March 2004, the Group reassesses the identification and measurement of the identifiable assets and liabilities and contingent liabilities and the measurement of the cost of the combination. Any excess of the fair value of the Group’s share of net assets of the subsidiary / associate over the cost of the acquisition after that reassessment is recognised immediately in profit or loss. (h) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s 41 fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. 2 ACCOUNTING POLICIES (Continued) (i) Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets; for the purpose of these consolidated financial statements short term is defined as 3 months. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments are included in the consolidated income statement in the period in which they arise. Unrealised gain and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in equity. For the available-for-sales investments that have a quoted market price in an active market, the fair value is based on quoted bid prices; for available-for-sale investments that does not have a quoted market price, but the fair value can be reliably determined, the fair value is constructed on the basis of the market price of the similar financial instrument or derived from cash flow models; for available-for-sales investments that the fair value can not be reliably determined, are carried at cost less impairment. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities. 42 2 ACCOUNTING POLICIES (Continued) (j) Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. (k) Inventories Inventories are stated at the lower of cost and net realisable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (l) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (m) Cash and cash equivalents For the purposes of the cash flow statement, cash represents cash on hand and deposits with banks, which can be withdrawn on demand. Cash equivalents represent short-term, highly liquid investments, which are readily convertible into known amounts of cash with original maturity period of three months or less and are subject to an insignificant risk of change in value. 2 ACCOUNTING POLICIES (Continued) (n) Borrowings and borrowing costs Borrowings are initially recognised at the proceeds received, net of transaction costs incurred. They are subsequently stated at amortised costs using the 43 effective yield method; any difference between net proceeds and redemption value is recognised in the consolidated income statement over the period of the borrowings. Borrowing costs include interest charges and other costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of the property, plant and equipment that necessarily take a substantial period of time to get ready for its intended use in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. (o) Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (p) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group’s local staff are made monthly to a government agency based on certain percentage of the standard salary set by the provincial government. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group has no obligation for the payment of pension benefits beyond the contribution described above. These defined contributions are recognised as employee benefit expense when they are due. 44 2 ACCOUNTING POLICIES (Continued) (q) Government grants Grants from the government are recognised in the consolidated balance sheet at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the consolidated income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to the acquisition of property, plant and equipment are set off against their initial cost, resulting in being effectively credited to the consolidated income statement over the periods and in the proportions in which depreciation on these assets is charged. (r) Provisions A provision is recognised when, and only when the Group 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 expenditures expected to be required to settle the obligation. When a provision is no longer probable that an outflow of resources embodying economic benefit will be required to settle the obligation, the provision will be reversed. (s) Revenue recognition Revenue comprises the invoiced value for the sales of goods net off value-added tax, volume rebates and trade discounts, and after eliminating sales within the Group. Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised on the following basis: (i) Sales of goods Revenue is recognised when the significant risks and rewards of ownership of goods and materials have been transferred to the buyer. 45 2 ACCOUNTING POLICIES (Continued) (s) Revenue recognition (Continued) (ii) Interest income Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity. (iii) Dividend income Dividend income is recognised when the right to receive payment is established. (t) Dividends Dividends are recorded in the Group’s consolidated financial statements as liability in the period in which they are approved by the Group’s shareholders. (u) Segments A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. (v) Subsequent events Post year-end events that provide additional information about the Group’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate (adjusting events), are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material. (w) 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. 46 3 FINANCIAL RISK MANAGEMENT (a) Financial risk factors and financial risk management The Group activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. (1) Credit risks The Group has no significant concentration of credit risk with any single counter party or group counter parties. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. The Group has policies that deposits are put in reputable banks and limit the amount of credit exposure to any financial institution. (2) Liquidity risks Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. (3) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant long-term interest-bearing assets. The Group policy is to maintain all its borrowings in fixed rate instruments. The interest rates of borrowings are disclosed in Note 18. The Group has not used any interest rate swaps to hedge its exposure to interest rate risk. (4) Foreign exchange risk The Group purchases certain raw materials from Germany, therefore, the Group is exposed to foreign exchange risk primarily with respect to the EUR dollar (”EUR”). Foreign exchange risk arises from future commercial transactions, recognised liabilities denominated in EUR. To manage their foreign exchange risk arising from future commercial transactions and recognized liabilities, the Group uses forward contracts. As at 31 December 2005, the Group had no unsettled forward contracts. 47 3 FINANCIAL RISK MANAGEMENT (Continued) (b) Accounting for derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the derivative instruments that do not quality for hedge accounting are recognised immediately in the income statement. An embedded derivative is separated from the host contract and accounted for as a derivative only if: (i) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; (ii) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (iii) the hybrid instrument is not measured at fair value with changes in fair value recognised in profit or loss. If the fair value of an embedded derivative can not be determined reliably, the entire hybrid instrument are treated as held for trading and carried at fair value. (c) Fair value estimation The fair value of publicly traded trading securities is based on quoted market prices at the balance sheet date. In assessing the fair value of non-traded financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for the specific or similar instruments are used for long-term borrowings. Other techniques, such as estimated discounted value of future cash flows, are used to determine fair value for the remaining financial instruments. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. 4 CRITICAL ACCOUNTING ESTIMATES Estimates and judgements are continually evaluated and are based on historical experiences 48 and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Useful lives of property, plant and equipment The Group’s management determines the estimated useful lives for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. (b) Impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2(g). The recoverable amounts of cash-generated units have been determined based on value-in-use calculations. These calculations require the use of estimates. (c) Impairment of receivables The Group’s management determines the provision for impairment of trade and other receivables. This estimate is based on the credit history of its customers and the current market condition. Management reassess the provision on each of the balance sheet date. (d) Impairment of property, plant and equipment The impairment loss for property, plant and equipment is recognised for the amount by which the carrying amount exceeds its recoverable amount in accordance with the accounting policy stated in Note 2(e). The recoverable amount is the higher of an asset’s value in use and fair value less costs to sell, which is based on the best information available to reflect the amount that is obtainable at each of the balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs to disposal, or cash to be generated from continuously using the assets. 49 4 CRITICAL ACCOUNTING ESTIMATES (Continued) (e) Deferred tax assets Deferred tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax assets is realised or the deferred tax liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. The Group’s management determines the deferred tax assets based on the enacted or substantially enacted tax rates and best knowledge of profit projections of the Group for coming years during which the deferred tax assets are expected to be utilised. Management will revise the assumptions and profit projections by the balance sheet date. 5 Leasehold land 2005 2004 Cost Beginning of year 82,036 56,424 Additions - 25,612 End of year 82,036 82,036 Accumulated amortisation Beginning of year 8,422 6,718 Charge for the year 2,037 1,704 End of year 10,459 8,422 Net book value End of year 71,577 73,614 Beginning of year 73,614 49,706 Leasehold land represents land use fees paid for the right to use the parcels of land where the Group’s factory buildings in Wuxi and Nanjing are located. Since all land in the PRC is owned by the state or is subject to collective ownership, the risks 50 and rewards of the parcel of land remain with the state. As a result, such lease payment is accounted for under operating leases and is charged to the income statement on a straight-line basis over lease terms of thirty to fifty years. 6 Property, plant and equipment 2005 Machinery and Construction-in- Buildings equipment progress Total Cost Beginning of year 277,446 748,718 104,280 1,130,444 Additions 16,166 18,967 144,057 179,190 Disposals - (23,741) (215) (23,956) Transfer from construction in progress 61,735 117,509 (179,244) - End of year 355,347 861,453 68,878 1,285,678 Accumulated depreciation Beginning of year 54,795 214,000 - 268,795 Charge for the year 8,191 66,058 - 74,249 Disposals - (11,173) - (11,173) End of year 62,986 268,885 - 331,871 Accumulated Impairment losses Beginning of year - 7,634 - 7,634 Additions - 43 - 43 Disposals - (1,286) - (1,286) End of year - 6,391 - 6,391 Net book value End of year 292,361 586,177 68,878 947,416 Beginning of year 222,651 527,084 104,280 854,015 For the year ended 31 December 2005, borrowing cost (2005: interest rate 5.59% per annum; 51 2004: interest rate 5.51% per annum) attributable to property, plant and equipment amounted to approximately RMB 1,491,000 (2004: RMB 2,310,000), which was offset with the government grants relating to the acquisition of property, plant and equipment (Note 19) as a reduction of initial cost of related construction in progress. For the year ended 31 December 2005, government grants relating to the acquisition of property, plant and equipment credited to the depreciation on related fixed assets amounted to approximately RMB 7,308,000 (Note 19) (2004: nil). 6 Property, plant and equipment (Continued) 2004 Machinery and Construction-in-pr Buildings equipment ogress Total Cost Beginning of year 202,894 787,122 236,672 1,226,688 Additions 35 92,701 211,023 303,759 Disposals (10) (396,225) (3,768) (400,003) Transfer from construction in progress 74,527 265,120 (339,647) - End of year 277,446 748,718 104,280 1,130,444 Accumulated depreciation Beginning of year 48,287 252,062 - 300,349 Charge for the year 6,508 71,266 - 77,774 Disposals - (109,328) - (109,328) End of year 54,795 214,000 - 268,795 Accumulated impairment losses Beginning of year - 20,337 - 20,337 Reversals - (5,100) - (5,100) Disposals - (7,603) - (7,603) End of year - 7,634 - 7,634 Net book value 52 End of year 222,651 527,084 104,280 854,015 Beginning of year 154,607 514,723 236,672 906,002 7 Intangible assets 2005 Trade- Proprietary Computer mark Goodwill Licences technology Software Total Note(iii) Note(i) Note(ii) Note(iv) Cost Beginning of year, as previously reported 26,356 23,926 34,216 8,575 - 93,073 Adjustment due to change of accounting policy - (15,552) - - - (15,552) Beginning of year, as adjusted 26,356 8,374 34,216 8,575 - 77,521 Additions - - 2,894 - 5,308 8,202 End of year 26,356 8,374 37,110 8,575 5,308 85,723 Accumulated amortisation Beginning of year, as previously reported 5,329 15,552 1,711 274 - 22,866 Adjustment due to change of accounting policy - (15,552) - - - (15,552) Beginning of year, as adjusted 5,329 - 1,711 274 - 7,314 Charge for the year 876 - 3,856 858 299 5,889 End of year 6,205 - 5,567 1,132 299 13,203 Net book value End of year 20,151 8,374 31,543 7,443 5,009 72,520 53 Beginning of year 21,027 8,374 32,505 8,301 - 70,207 i. Pursuant to an agreement entered between the Company and Robert Bosch GmbH (“Bosch”), the Company shall pay to Bosch to acquire the right to manufacture certain licensed products for 10 years from July 2004 to July 2014. ii. The Group’s joint venture – Wuxi Weifu Environmental Catalyst Co., Ltd. ( “ Weifu Environmental Catalyst ” ) paid RMB 17,500,000 to acquire the proprietary technology in relation to the production of environmental catalyst products. The amount included in the consolidated balance sheet represents the Group’s 49% share of the intangible asset. Management estimated the useful life of the proprietary technology is 10 years. 7 Intangible assets(Continued) iii. Goodwill was resulted from the acquisition of Weifu Leader in December 2003. In accordance with the provision of IFRS 3, from 1 January 2005, the Group discontinued the amortisation of those previously recognised goodwill and eliminated the carrying amount of the related accumulated amortisation. iv. Computer software was SAP and other financial management software, which was amortized using the straight-line method over 5 years. 2004 Trade- Proprietary Computer mark Goodwill Licences technology Software Total Cost Beginning of year 26,356 23,926 - - - 50,282 Additions - - 34,216 8,575 - 42,791 End of year 26,356 23,926 34,216 8,575 - 93,073 Accumulated amortisation Beginning of year 4,453 13,459 - - - 17,912 Charge for the year 876 2,093 1,711 274 - 4,954 54 End of year 5,329 15,552 1,711 274 - 22,866 Net book value End of year 21,027 8,374 32,505 8,301 - 70,207 Beginning of year 21,903 10,467 - - - 32,370 8 Investments in associates 2005 2004 Beginning of year 802,093 475,365 Addition in investments in associates - 346,408 Share of results 25,556 141,333 Dividend declared (66,262) (161,013) End of year 761,387 802,093 As of 31 December 2005, the Group had the following associates: Place of Name registration Principal activities Carrying amount Percentage of equity interest 31 December 31 December 31 December 31 December 2005 2004 2005 2004 Directly Indirectly Directly Indirectly Bosch Automotive Diesel Wuxi, PRC Development, 527,300 559,352 30% 1.5% 30% 1.5% Systems Co., Ltd. manufacture and sale (“RBCD”, formerly of Diesel system. known as Wuxi Europe Asia Diesel Fuel Injection Co., Ltd. “Wuxi Europe Asia” (note (i)) Zhonglian Automobile Shanghai, Manufacture and sale 226,631 236,748 20% - 20% - Electronics Co., Ltd. PRC of automobile electronic equipment 55 Wuxi Weifu Mechanism Wuxi, PRC Manufacture and sale 4,112 3,126 20% - 28.98% - Manufacturing Co., Ltd. of diesel fuel (“Weifu Mechanism injection, automotive Manufacturing”) components Wuxi Weifu Wuxi, PRC Import and export of 3,044 2,667 15% 30% 15% 30% International Trading commodities and Co., Ltd. technologies (“Weifu International trading”) Wuxi Long Sheng Wuxi, PRC Development, 300 200 - 20% - 20% technology Co., Ltd. manufacture and sale (‘Wuxi Long Sheng”) of automotive components 761,387 802,093 (i) The excess of the cost of the investment over the fair value of the Group’s share of the associate’s identifiable net assets, amounting to RMB 6,801,187, is recorded as goodwill and included in the carrying amount of the investment. In accordance with the provision of IFRS 3, the goodwill is not amortised and included in the entire carrying amount of the investment for impairment testing. 9 Investments in unconsolidated subsidiaries 2005 2004 Beginning of year 46,678 41,769 Capital injection 71,272 - Share of results (4,640) 4,909 End of year 113,310 46,678 As of 31 December 2005, the Group had the following unconsolidated subsidiaries: Place of Name registration Principal activities Carrying amount Percentage of equity interest 31 December 31 December 31 December 31 December 2005 2004 2005 2004 56 Directly Indirectly Directly Indirectly Wuxi Weifu Mashan Fuel Injection Equipment Manufacture and sale Factory (“ Weifu of fuel injection Mashan “) Wuxi, PRC equipment 40,828 10,924 92.6% 7.4% 72.78% 12.22% Wuxi Weifu Chang’an Manufacture and sale Fuel Injection Co., Ltd. of injection (“ Weifu Chang’an “) equipment for Wuxi, PRC diesel 70,871 33,716 94.63% 5.37% 85% - Wuxi Weifu Jida New Manufacture and Material Development development of Co., Ltd. (“ Weifu metallic and Jida ”) non-metallic Wuxi, PRC materials 1,611 2,038 70% - 70% - 113,310 46,678 10 Available-for-sale investments 2005 2004 Beginning of year 62,686 57,686 Additions 56,940 5,000 Disposal (100) - End of year 119,526 62,686 Less: Accumulated impairment losses (44,166) (33,166) 75,360 29,520 Available-for-sale investments comprise investments in unlisted equity instruments, whose fair value cannot be reliably determined and are therefore carried at cost less accumulated impairment. As of 31 December 2005, impairments provided to those available-for-sale investments amounted to RMB 44,166,437. 11 Inventories 31 December 31 December 2005 2004 57 Raw materials 187,621 130,252 Work-in-progress 89,168 108,728 Finished goods 443,973 431,691 720,762 670,671 12 Trade and other receivables 31 December 31 December 2005 2004 Notes receivables 171 111, Accounts receivables 765,952 587,298 Other receivables 40,924 35,739 978,677 734,478 Less: Provision for bad and doubtful debts (74,994) (61,397) 903,683 673,081 13 Ordinary shares As of 31 December 2005 and 2004, the details of share capital (par value of RMB 1 each) were as follows: Number of shares Amount 31 December 31 December 31 December 31 December 2005 2004 2005 2004 State-owned legal person shares 158,035,995 121,566,150 158,036 121,566 Legal person shares 13,520,000 10,400,000 13,520 10,400 Employee shares 31,200,000 24,000,000 31,200 24,000 A shares 249,600,000 192,000,000 249,600 192,000 B shares 114,920,000 88,400,000 114,920 88,400 567,275,995 436,366,150 567,276 436,366 58 14 Reserves (a) Capital surplus 31 December 31 December 2005 2004 Share premium 908,919 908,919 Other capital surplus 2,577 2,577 911,496 911,496 In accordance with the provisions of the Company’s articles of association, the Company shall record the following as capital surplus: (i) Share premium arising from the issue of shares in excess of par value; (ii) Surpluses arising from revaluation of assets; and (iii) Other items in accordance with the Company’s articles of association and relevant regulations in the PRC. Share premium mainly represents total proceeds from the issuance of A and B shares and the rights issue in excess of par value, net of expenses relating to the issuance of the shares such as underwriting commissions, fees for professional advisors and promotional expenses. Share premium can be utilised to offset prior years’ losses or to issue bonus shares. Other capital surplus mainly represents the Company’s share of post – acquisition movements in reserves of the subsidiaries. These capital surplus can be utilized to issue bonus share when the Company disposes its investments in relevant subsidiaries. (b) Statutory reserves In accordance with the Company Law and the Company’s articles of association, the Company and its subsidiaries shall appropriate 10% of their annual statutory net profit (after offsetting any prior years’ losses) to the statutory surplus reserve fund account. When the balance of such reserve reaches 50% of each entity’s share capital, any further appropriation is optional. The statutory surplus reserve can only be utilised, upon approval by the relevant authority, to offset prior years’ losses or increase capital. However, such statutory surplus reserve must be maintained at a minimum of 25% of share capital after such issuance. 14 Reserves (Continued) (c) Statutory public welfare fund 59 According to the relevant financial regulations of the PRC and the articles of association of the Company, the Company and its subsidiaries are also required to appropriate 5% to 10% of their annual statutory net profit (after offsetting any prior year’s losses) to a statutory public welfare fund to be utilised to build or acquire capital items, such as dormitories and other facilities for the Company and its subsidiaries’ employees, and can not be used to pay for staff welfare expenses. Title to these capital items will remain with the Company and its subsidiaries. 15 Retained earnings According to the articles of association of the Company, the earnings available for distribution are the lower of the amount determined under the PRC accounting standards and the amount determined under IFRS. As of 31 December 2005, the earnings available for distribution were RMB 580,080,000 (2004: RMB 615,980,000) 16 Trade and other payables 31 December 31 December 2005 2004 Notes payable 178 72, Trade payables 304,473 839,266 Other payables 86,048 89,374 568,631 1,000,747 17 Accruals and other current liabilities 31 December 31 December 2005 2004 Accrued expenses 4,3 4,9 Salary and welfare payable 8,817 4,400 Advances from customers 3,025 3,428 Other levies payable 2,183 2,179 18,345 14,981 60 18 Borrowings (a) Short-term bank borrowings 31 December 31 December 2005 2004 Unsecured bank borrowings 842 434 Secured bank borrowings (i) 205,000 118,000 Collateralised bank borrowings (ii) 41,868 - 1,088,914 552,830 Short-term bank borrowings bear interest at rates ranging from 2.89% to 5.75% (2004: 4.35% to 5.58%) per annum. (i) These short-term bank borrowings are guaranteed by a related company – Weifu Group Co., Ltd. (“WFGC”) (2004: RMB 118,000,000 were guaranteed by WFGC). (ii) These short-term borrowings are collateralised by bank deposits of RMB 45,000,000 (2004: nil). (b) Long-term bank borrowings 31 December 31 December 2005 2004 Secured bank borrowings (i) 215 260 Collateralised bank borrowings (ii) 3,000 - Less: Amounts due within one year - Secured (145,000) (35,000) 73,000 225,000 Long-term bank borrowings bear interest at rates ranging from 5.49% to 5.76% (2004: 5.49% to 5.58%) per annum. 61 (i) These long-term bank borrowings are guaranteed by WFGC. The long-term borrowings are repayable within the period from year 2006 to year 2007. (ii) These long-term borrowings are collateralised by bank deposits of RMB 3,400,000. The long-term borrowings are repayable within year 2007. As at 31 December 2005, the carrying amount of long-tem bank borrowings approximates their fair value as these borrowings bear quoted market interest rates. 19 Long-term payables 31 December 31 December 2005 2004 Deferred government grants (i) 30, 35, Deferred income (ii) 5,177 5,824 Leasehold land payables (iii) 7,000 12,000 Long-term government borrowings 4,730 3,590 47,827 56,822 (i) Government grants represent funds received relating to acquisition and construction of property, plant and equipment as well as expenditures relating to certain research and development projects. The movement of government grants for the year ended 31 December 2005 were as follows: 2005 2004 Beginning of year 35,408 30,658 Receipt during the year 9,182 11,823 Amount recognised as income (4,871) (4,763) Amount allocated to offsetting initial costs of related construction-in-progress. (1,491) (2,310) Amount allocated to credit depreciation of related fixed assets. (7,308) - End of year 30,920 35,408 (ii) Deferred income represents investment tax credit granted to the Company on purchase of certain qualified equipments. It is recognised as income over the periods and in the 62 proportions in which depreciation on these assets is charged. The movement of deferred income for the year ended 31 December 2005 was as follows: 2005 2004 Beginning of year 5,824 - Granted during the year - 6,471 Recognised as income (647) (647) End of year 5,177 5,824 (iii) The Group acquired a parcel of leasehold land in Nanjing Hi-tech Development Zone at the cost of RMB 19,500,000, of which 7,000,000 will be repayable within the year of 2007. 20 Revenue and other operating income 2005 2004 Sales of goods 2,842,021 2,118,745 Other operating income - Government Grant ( Note 19) 5,518 5,410 Income from disposal of held-to-maturity investments 107 - Dividend income 753 605 6,378 6,015 The Group conducts the business within one business segment and the Group also operates within one geographical segment because its revenue are primarily generated in the PRC and its assets are located in the PRC. 21 Finance costs, net 2005 2004 Interest income - Bank deposits 9,997 7,496 Interest on - Bank borrowings 62,216 28,414 Less: amount capitalized in construction-in-progress (1,491) (2,310) 63 (Note 6) 60,725 26,104 - Cash discount on sales 13,123 12,648 73,848 38,752 (63,851) (31,256) 22 Profit from operation The following items have been included in arriving at profit from operations: 2005 2004 Depreciation on property, plant and equipment (Note 6) 66,941 77,774 Provision for (reversal of) impairment of property, plant and equipment (Note 6) 43 (5,100) Loss on disposal of property plant and equipment ( included in “ Other operating expenses ”)(Note 26 (c) ) 554 23,899 Amortisation of intangible assets - Goodwill (Note 7) - 2,093 - Trademark (Note 7) 876 876 - Licences (Note 7) 3,856 1,711 - Proprietary technology (Note 7) 858 274 - Computer software (Note 7) 299 - Amortisation of leasehold land (Note 5) 2,037 1,704 Research and development expenditures 44,752 24,248 Repairs and maintenance and overhaul costs of property, plant and equipment 8,295 29,535 Foreign exchange losses ( included in “ Other operating expenses ” ) 10,998 21,566 Operating lease rental payable-plant and machinery 689 5,727 Inventory - Cost of inventories recognised as expense 2,049,040 1,286,211 - Write-down (reversal) of inventory cost 19,437 (2,909) Impairment charge for bad and doubtful debts 15,793 8,215 Staff costs - Salaries and wages 118,361 121,450 - Staff and workers’ welfare fund 16,399 19,042 - Contribution to statutory pension scheme 24,942 25,179 - Provision for housing fund 10,394 11,725 64 The Company and its subsidiaries provide for staff welfare and contributions to the statutory pension fund based on a certain percentage of the total salaries. Staff welfare consists of staff welfare fund, medical insurance fund, housing fund, and unemployment insurance etc. The relevant percentages are as follows: Percentage Staff welfare fund 14% Medical insurance fund(included in Staff welfare fund) 8% Housing fund 8%~12% Unemployment fund 2% Statutory pension fund 21%-22% 23 Taxation (a) Value-added Tax (“VAT”) The Company and its subsidiaries are subject to VAT, which is charged on top of the selling price at a general rate of 17%. Input VAT from purchase of raw materials and other production materials can be net off against output VAT from sales. VAT payable or receivable is the net difference between periodic output and deductible input VAT. (b) Enterprise Income Tax (“EIT”) (1) Income tax expense in the consolidated income statement comprised: 2005 2004 Current tax 15,041 25,384 Deferred tax (Note 23 (b) (3)) (5,421) (5,851) Income tax expense 9,620 19,533 The Company and its subsidiaries - Wuxi Weifu Leader Catalytic Converter Company Limited. ( “ Weifu Leader ” ) and Wuxi Weifu Automotive Diesel System Company Limited. ( “ WADS ”) are high-technology enterprises registered in Wuxi Hi-tech Industrial Development Zone and are subject to EIT at a reduced rate of 15%. In accordance with Su Guo Shui Fa [2003] No.101 issued by local tax bureau on 20 May 2003, WADS, being a high-technology company incorporated in Wuxi Hi-tech Industrial Development Zone, is entitled to two years’ exemption from income taxes commencing from the first cumulative profit-making year net off losses carried forward. WADS’s first cumulative profit-making year was 2005, therefore, the applicable EIT 65 rate is zero for the year ended 31 December 2005. The Company’s Subsidiary - Nanjing Weifu Jinning Company Limited. ( “ Nanjing Weifu ” ), being a high-technology company registered in Nanjing Hi-tech Development Zone is also subject to EIT at a reduced rate of 15%. 23 Taxation (Continued) (b) Enterprise Income Tax (“EIT”) (Continued) (2) The reconciliation of the applicable tax rate to the effective tax rate is as follows: 2005 2004 Accounting profit before tax 236,141 253,484 Tax calculated at the applicable tax rate of 15% (2004: 15%) 35,421 38,023 Tax effect of utilisation of tax losses of subsidiaries 27 467 Tax effect of expenses that are not deductible in determining taxable profit (2,696) 733 Tax effect of income that are not taxable in determining taxable profit (23,132) (19,690) 9,620 19,533 (3) Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are enacted or substantively enacted by the balance sheet date. The movement of the deferred tax assets is as follows: 2005 2004 As at 1 January 2005 5,851 - Income statement credit 5,421 5,851 As at 31 December 2005 11,272 5,851 66 Provided for in respect of : Provision for impairment of receivables 4,408 2,517 Write-down of inventory 3,937 923 Provision for impairment of property, plant and equipment 511 704 Write-down of pre-operating expenses 186 198 Housing subsidies not deductible for tax 1,067 459 Accrued expenses not deductible for tax 1,163 1,050 11,272 5,851 23 Taxation (Continued) (b) Enterprise Income Tax (“EIT”) (Continued) The amounts shown in the balance sheet include the following: 2005 2004 -Deferred tax assets to be recovered after more than 12 months 1,524 1,055 -Deferred tax assets to be recovered within 12 months 9,748 4,796 11,272 5,851 24 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. 2005 2004 Net profit 183,379 227,287 Weighted average number of ordinary shares in issue (“ 000” ) 567,276 436,366 Number of bonus shares issued (“ 000” ) - 130,910 567,276 567,276 Basic earnings per share (RMB yuan) 0.32 0.40 The diluted earnings per share was not calculated, because no potential dilutive shares existed during the year. 25 Dividends 67 At the meeting of the board of directors dated 18 April 2006, the directors proposed a final dividend of RMB 0.4 per share, totalling RMB 226,910,398 (Note 32). These consolidated financial statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2006. The dividends declared in respect of 2004 were RMB 174,546,460, including cash dividend of RMB 43,636,615 and bonus shares of RMB 130,909,845. 26 Cash generated from operations (a) Reconciliation from net profit to cash generated from operations: 2005 2004 Net profit 183,379 227,287 Adjustments for: Minority interest 43,142 6,664 Income tax 9,620 19,533 Provision for doubtful debts and write-off of uncollectible accounts receivable 15,793 8,215 Write-down (reversal ) of inventory 19,437 (2,909) Loss on disposal of property, plant and equipment 554 23,899 Depreciation of property, plant and equipment 66,941 77,774 Provision for (reversal of ) impairment loss of property, plant and equipment 43 (5,100) Amortisation of intangible assets 5,889 4,954 Amortisation of leasehold land 2,037 1,704 Government grants recognised as income (5,518) (5,410) Share of results of associates (25,556) (141,333) Loss/(income) from unconsolidated subsidiaries 4,640 (4,909) Income from held-to-maturity investments (107) - Provision for impairment loss of available-for-sale investments 11,000 19,000 Dividend income (753) (605) Interest expense 60,725 26,104 Interest income (9,997) (7,496) Changes in working capital 381,269 247,372 Increase in inventories (69,528) (312,917) Increase in pledged deposits (103,310) (31,800) 68 Increase in trade and other receivables (246,395) (189,536) Decrease/(increase) in prepayments 22,275 (27,460) Decrease/(increase) in due from related parties 11,438 (8,962) Increase/(decrease) in trade and other payables (432,532) 622,312 Increase/(decrease) in due to related companies 25,904 (1,784) Increase/(decrease) in taxes payable 28,399 (34,393) Decrease in accrual and other current liabilities (28,494) (35,324) Cash generated from/(used in) operations (410,974) 227,508 26 Cash generated from operations (Continued) (b) Analysis of the balances of cash and cash equivalents 31 December 31 December 2005 2004 Cash on hand 145 151 Bank deposits 777,686 814,811 777,831 814,962 Less: Pledged deposits (135,110) (31,800) Cash and cash equivalents 642,721 783,162 The Group’s bank deposits of amount of RMB 86,710,000 were pledged as security for issuing notes payables and amount of RMB 48,400,000 were pledged as security for bank loans. (c) Other information Proceeds from disposal of property, plant and equipment comprise 2005 2004 Net book value 11,497 283,072 Less: Loss on sales of property, plant and equipment (554) (23,899) Increase in trade and other receivables - (18,547) Increase in due from related parties (560) (3,857) Decrease in trade and other payable - (36,218) Decrease in due to related parties (3,233) - 69 In exchange of shares of an associate - (193,676) Proceeds from disposal of property, plant and equipment 7,150 6,875 27 Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Name of related companies and relationship Name Relationship WFGC Shareholder which owns a 27.86% equity share of the Company RBCD Associated company Zhonglian Automobile Electronics Company Associated company Limited Weifu Mechanism Manufacturing Associated company Weifu International Trading Associated company Weifu Longsheng Associated company Weifu Mashan Unconsolidated subsidiaries Weifu Chang’an Unconsolidated subsidiaries Weifu Jida Unconsolidated subsidiaries (b) The Company and WFGC have entered into the following agreements: (1) Trademark licensing agreement The agreement is for a twenty-year term with effect from 1 May 1995. The Company shall pay WFGC a license fee of 0.3% of the sales value of the Company’s products bearing the licensed trademark, with an annual minimum fee of RMB 1,200,000. (2) Land use right leasing agreement The agreement is for a term of 50 years with effect from 1 March 1995. The annual rental for the first year is RMB 327,285, which is subject to an annual increment of 10%. 70 The agreement was revised at the meeting of the Board of Directors dated 19 April 2005. According to the revised agreement, the Group will pay an annual leasing fee of RMB 1,200,000 for the period from 1 January 2005 to 31 December 2014 and any leasing fees for the subsequent periods are to be determined according to the market price then. 27 Related party transactions (Continued) (c) Significant transactions with WFGC for the year ended 31 December 2005 are as follows: Except as disclosed in Note 18, significant transactions with WFGC for the year ended 31 December 2005 are as follows: 2005 2004 Purchases of materials 32,481 19,485 Sales of products 214,736 194,840 Purchases of services 1,517 - Sales of property, plant and equipment - 9,164 Fees for use of land and trademark 4,903 4,501 Bank deposits of WFGC pledged as security for the Company to issue notes payable - 19,600 (d) Significant transactions with other related companies for the year ended 31 December 2005 are as follows: 2005 2004 Purchase of materials from - Weifu Mechanism Manufacturing 95,296 85,552 - Weifu Mashan 95,308 71,812 - Weifu Chang’an 123,859 121,557 - RBCD 136,809 112,302 - Weifu International Trading 1,019 243 - Other state-owned companies 28,153 19,814 Sales of products to - Weifu Mechanism Manufacturing 19,554 24,068 - Weifu Mashan 10,447 21,035 71 - Weifu Chang’an 13,785 17,114 - RBCD 10,664 95,907 - Weifu International Trading 1,643 - - Other state-owned companies 1,800,108 1,265,372 Rental of equipments and machineries from - RBCD 689 - Rental of equipments and machineries to - RBCD - 5,727 27 Related party transactions (Continued) (d) Significant transactions with other related companies for the year ended 31 December 2005 (Continued) 2005 2004 Sales of property, plant and equipment to - Weifu Mechanism Manufacturing 622 3,510 - Weifu Mashan 2,032 - - Weifu Chang’an 102 5,890 Purchases of property, plant and equipment from - RBCD - 3,879 - Other state-owned companies 19,292 39,682 Guarantee for loan - Weifu Chang’an 47,000 50,000 Bank deposits of the Company pledged as security to issue notes payable - Weifu Chang’an 3,000 - Sales of services - RBCD 4,000 - Purchase of services - Weifu Mechanism Manufacturing 483 - - Weifu International Trading 361 - - RBCD 6,319 - Interest income - State-owned bank 9,997 7,496 Interest expenses paid - State-owned bank 60,725 26,104 72 27 Related party transactions (Continued) (e) Balances with related parties 31 December 31 December 2005 2004 Due to related parties - WFGC 13,879 7,371 - Weifu Chang’an 96 - - Weifu Mashan 12,542 - - Weifu International Trading 128 - - RBCD 2,991 - - Weifu Jida 399 409 30,035 7,780 31 December 31 December 2005 2004 Due from related parties - Weifu Mechanism Manufacturing 10,241 2,502 - Weifu Chang’an 6,465 14,463 - Weifu Mashan - 9,037 - RBCD 176 1,758 16,882 27,760 31 December 31 December 2005 2004 Due from other state-owned companies 494,710 378,776 Less: Provision for bad and doubtful debts (18,914) (18,941) 475,796 359,835 Due to other state-owned companies 46 - Bank deposits balance - State-owned bank 777,831 814,962 73 28 Principal subsidiaries The results of operations and net assets of certain subsidiary companies are not material to those of the group; hence, they have been excluded from consolidation. Investments in subsidiaries that are excluded from consolidated financial statements are accounted for by the equity method. As of 31 December 2005, the consolidated financial statements include the financial statements of the subsidiaries as follows: Place of Name of subsidiary registration Principal activities Registered capital Percentage of equity interest Consolidated 2005 2004 Directly Indirectly Nanjing Weifu Jinning Nanjing, Manufacture and sale of diesel 256,000 256,000 80% - Company Limited. PRC engines, machinery, electronic (“Nanjing Weifu”) products and automotive components. Wuxi Weifu Leader Wuxi, PRC Manufacture and sale of catalytic 260,000 260,000 94.81% - Catalytic Converter converter, catalyzer and Company Limited (“Weifu automotive components Leader”) Jiangsu Weifu Nanometer Wuxi, PRC Manufacture and sale of 30,000 30,000 80% - Technology Company nanometer material and products Limited (“Weifu Nanometer”) Wuxi Weifu Automotive Wuxi,PRC Manufacture and sale of diesel 200,000 200,000 70% - Diesel System Company engines, development of Limited mechanical technology (“WADS”) Place of Name of subsidiary registration Principal activities Registered capital Percentage of equity interest unconsolidated 2005 2004 2005 2004 Directly Indirectly Directly Indirectly Wuxi Weifu Mashan Wuxi, PRC Manufacture and 45,000 12,237 92.6% 7.4% 72.78% 12.22% Fuel Injection sale of fuel injection Equipment Factory equipment 74 (“Weifu Mashan”) Wuxi Weifu Chang’an Wuxi, PRC Manufacture and 60,000 21,490 94.63% 5.37% 85% - Fuel Injection Co., sale of injection Ltd. (“ Weifu equipment for Chang’an”) diesel Wuxi Weifu Jida New Wuxi, PRC Manufacture and 5,000 5,000 70% - 70% - Material Development development of Co., Ltd. (“Weifu metallic and Jida”) non-metallic materials 29 Interest in joint venture As of 31 December 2005, the consolidated financial statements include the Group’s share of the assets and liabilities, and income and expenses and cash flows of its joint ventures as follows: Place of (i) Name of the joint venture registration Principal activities Registered capital Percentage of equity interest 2005 2004 Directly Indirectly Wuxi Weifu Environmental Wuxi PRC Development, 50,000 50,000 - 49% Catalyst Co., Ltd. Manufacture and sale of (“Weifu Environmental Catalyst”) environmental catalyst products The following amounts represent the Group’s 49% share of the assets and liabilities, and sales and results of the joint venture: 2005 2004 Assets: Property, plant and equipment 7,219 5,293 Intangible assets 7,443 8,301 Current assets 25,307 14,796 39,969 28,390 Liabilities: Current liabilities 3,782 1,381 Net assets 36,187 27,009 Revenue 46,386 13,337 75 Expenses (36,592) (10,829) Profit after income tax 9,794 2,508 Proportionate interest in joint venture’s commitments - - Place of Registered capital (ii) Name of the joint venture registration Principal activities (USD’000) Percentage of equity interest 2005 2004 Directly Indirectly Wuxi Weifu Autocam Wuxi PRC Development, 6,000 - 50% - Precision Machinery Co., Ltd. Manufacture and sale of Precision accessory for automobile 29 Interest in joint venture (Continued) The following amounts represent the Group’s 50% share of the assets and liabilities, and sales and results of the joint venture: 2005 2004 Assets: Current assets 3,639 - Liabilities: - Net assets 3,639 - Revenue - - Expenses - - Profit after income tax - - Proportionate interest in joint venture’s commitments - - There are no contingent liabilities relating to the Group’s interest in the joint venture, and no contingent liabilities of the venturer itself. 30 Contingent and liabilities Except as disclosed in Note 27(d), the Group had no significant contingent liabilities as of 31 December 2005. 31 Commitments 76 Except as disclosed in Note 27(b), as of 31 December 2005, the Group had the following significant commitments: (1) Commitment to acquire property, plant and equipment amounting to approximately RMB 132,860,000 (2004: RMB 82,700,000). (2) Commitment of investment in the joint venture – Wuxi Weifu Autocam Precision Machinery Co., Ltd of USD 3,000,000 (2004: nil), of which USD 450,000 had been injected as of 31 December 2005. 32 Subsequent events On 21st March, 2006, the group’s proposal on share merger reform was approved by the State-owned Assets Supervision and Administration Commission of the Provincial Government of Jiangsu Province (Su Guo Zi Fu[2006] No.61) and passed by the A-share shareholders' meeting on 27th March, 2006 and implemented formally on 5th April, 2006. The abbreviation of the share was renamed from “Weifu High-tech” to “G-Weifu”. At the meeting of the Board of Directors dated 18th April, 2006, the directors proposed a final dividend of RMB 0.4 per share, totalling RMB 226,910,398 (Note 25). 33 Approval of financial statements The consolidated financial statements were approved for issuance by the Board of Directors of the Company on 18 April 2006. Impact of IFRS adjustments on net profit and net assets attributable to equity holders of the Company Net profit Shareholders’ equity 31 December 31 December 2005 2004 2005 2004 As reported in the statutory accounts 181,905 235,069 2,341,982 2,201,310 Adjustment on income/(loss) from associates 3,050 8,537 15,352 12,302 Adjustment for investment in associates arises from setting off government grant against the initial cost of leasehold land of - - (10,618) (10,618) 77 an associate Reversal of amortisation of goodwill in accordance with IFRS 3 4,590 1,324 5,914 1,324 Loss on disposal of property, plant and equipment in exchange for the share capital of the associate - (5,966) (5,966) (5,966) Amortisation of investment tax credit recognised as deferred income 647 (5,824) (5,177) (5,824) Government grant not recognised as income (6,785) (11,091) (17,876) (11,091) Provision for deferred tax 5,421 5,851 11,272 5,851 Negative goodwill recognised in income statement 3,018 230 - - Unrealized profit result from purchase of goods from the unconsolidated subsidiaries (6,461) - (6,461) - Staff welfare fund appropriated (615) - - - Effect on minority interests as a result of the above adjustments (1,391) (843) (2,121) (730) As restated under IFRS 183,379 227,287 2,326,301 2,186,558 SECTION XII DOCUMENTS FOR REFERENCE 1. Financial Statements carrying the signatures and seals of the Company’s legal representative, person in charge of financial affairs and person in charge of accounting; 2. Original Auditors’ Report carrying the seals of the accounting firms, the signatures and seals of the certified public accountants; 3. Originals of all released documents and announcements disclosed on the newspapers designated by the State Securities Regulatory Commission during this report period. Board of Directors of Wuxi Weifu High-Technology Co., Ltd. Apr. 21, 2006 78