张裕Ａ(000869)张裕Ｂ2005年年度报告（英文版）

YANTAI CHANGYU PIONEER WINE COMPANY LIMITED 2005 Annual Report 2006.03.25 Important The Board of Directors，the Board of Supervisors and directors, supervisors & senior management of the Company collectively and individually accept full responsibility for the truthfulness; accuracy and completeness of the information contained in this report and confirm that to the best of their knowledge and belief there are no unfaithful facts, significant omissions or misleading statements. Pricewaterhouse provides the audit report with standard and unreserved audit advice. Mr. Sun Liqiang (the Chairman of the Company), Mr. Zhou Hongjiang (the General Manager of the Company) and Mr. Jiang Jianxun (Chief Accountant) assure the truthfulness and completeness of the financial report in the annual report. The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. Unless otherwise indicated, the financial data in the Chinese version is cited from Chinese auditor’s report, while the financial data in the English version is cited from the international auditor’s report. 2 Content I. KEY COMPANY DATA OF RECORD …………………..……………………..…. 5 II. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION…….… 6 1. Summary of Financial Information for the Report Period…………………….... 6 Differences in Net Profit under the PRC Financial Report Standards and 2. 6 International Financial Report Standards……………………………………………..… Principal Accounting and Financial Information for the Preceding Three 3. 6 Years of the Report Period…………………………………………………………….……..….. 4. Changes of Shareholders’ Equity in the Report Period……………………… 6 III. CHANGES IN SHARE CAPITAL AND SHAREHOLDERS ………………...... 7 1. Changes in Share Capital 7 2. Information about Issuance and Listing of Stocks 7 3. Shareholders Introduction……………………………… 7 IV. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF….. 10 The Basic Information of Directors, Supervisors and Senior 1. 10 Management…. Information of Directors, Supervisors Who Hold Posts in Shareholder’s 2. 10 Company………………………………………………………………………………………………………… Annual Rewards Information of Directors, Supervisors and Senior 3. 10 Management…………………………………………………………………………………………………. 4. Change of Directors, Supervisors and Senior Management ……………………. 12 5. Staff of the Company………………………………………………….........................……. 12 V. CORPORATE GOVERNANCE STRUCTURE…………………..…….……..…. 12 1. Current Corporate Governance Situation of the Company …….……….......... 12 2. Duty of the Independent Directors ……………………..………..……………………….….. 13 Information for Personnel, Assets, Finance, Institution and Business 3. 13 Associated with Holding Shareholders……………………………………………..……..…. 4. Performance Evaluation and Encourage to Senior Management………………… 13 VI. BRIEF SUMMARY OF THE SHAREHOLDER’S MEETING………….….….. 14 VII. BOARD OF DIRECTIOR’S REPORT……………….…………………………….. 14 1. Discussion and Analysis of Management Team 14 2. Investment of the Company… 20 3. Audits and changes of accounting policies 20 3 4. Information of the Routine Work of Board of Directors…………………………… 20 5. Company’s Profit Distribution Plan 2005………………………………………………… 21 6. Other Disclosed Information…………………………………………………….….…..…………. 22 VIII. BOARD OF SUPERVISORS’ REPORT……………………..………….………… 22 1. Meetings of the Board of Supervisors………………………….……………………………… 22 Independent Comments of the Board of Supervisors for Relative Issues in 2. 22 2005…………… IX. MATERIAL EVENTS…………………………………………………………..……… 23 1. The Material Litigation and Arbitration………………………..………………………..……. 23 2. The Purchase, Sale or and Annexation of Assets………………………………....….… 23 3. Related Party Transaction…………………………………….………………………………..…..… 23 4. Material Contract and Its Executing…………………………………………….………….. 23 5. Events Undertook by the Company…………………….………...…………………………... 23 6. Appointing and Dismissing of Certified Public Accountants Firm…...…………. 23 7. Punishment by Monitoring Departments 24 8. Other Material Events………………………………….……………………………………..…..…… 24 X. FINANCIAL REPORT………………..………………………..…………………….. 25 XI. REFERENCE DOCUMENTS……………………………….. ..…………………….. 68 4 I. KEY COMPANY DATA OF RECORD 1. Legal Name in Chinese: 烟台张裕葡萄酿酒股份有限公司 Legal Name in English: Yantai Changyu Pioneer Wine Company Limited 2. Legal Representative: Sun Liqiang 3. Secretary to the Board of Directors: Qu Weimin Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633658 Facsimile: 0086-535-6633639 E-Mail: quwm@changyu.com.cn Authorized Representative of the Securities Affairs: Li Tingguo Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633656 Facsimile: 0086-535-6633639 E-Mail: stock@changyu.com.cn 4. Registered Address: 56, Dama Road, Yantai City, Shandong Province, the PRC Office Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Postal Code: 264000 Web Site: http://www.changyu.com.cn E-Mail: webmaster@changyu.com.cn 5. Publications: The newspapers in which the Company’s information is disclosed: “China Securities Newspaper” and “Securities Times” in the PRC “Hong Kong Commercial Daily” outside the PRC Web Site for carrying the report: http://www.cninfo.com.cn Annual Report kept at: BOD Office of the Company 6. Place of listing of the Shares: Shenzhen Stock Exchange Abbreviation of the Shares: Changyu A, Changyu B Code Number of the Shares: 000869, 200869 7. Other information of the Company: • The first registration date: September 18th, 1997 • The original place of registration: the Business Administration Bureau of Shandong Province • The registration amendment date: July 28th, 2004 • The registration amendment place: the Business Administration Bureau of Shandong Province • The business license number: 3700001806012 • The registration number of revenue: 37060216500338-1 in State Taxation Bureau 370601267100035 in Local Taxation Bureau • The International accountant appointed by the Company: Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited • The office address of the International accountant appointed by the Company: 11/F Pricewaterhouse Coopers Center 202 Hu Bin Road, Shanghai • The Chinese accountant appointed by the Company: Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited • The office address of the Chinese accountant appointed by the Company: 11/F Pricewaterhouse Coopers Center 202 Hu Bin Road, Shanghai • 5 II. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION 1. Summary of Financial Information for the Report Period Unit：CNY’000 Item Amount Total profit 442,802 Net profit 314,286 Profits from main operations 1,055,719 Profits from other operations 23,450 Operation profit 442,802 Investment earnings 0 Subsidy income 0 Net incomes and expenses from non-operation 0 Net cash flows from operating activities 104,269 Net increase in cash and cash equivalents -135,549 2. Differences in Net Profit under the PRC Accounting Standards and International Accounting Standards The net profit of the Company in 2005 was CNY312,369,566 as audited by Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited according to the PRC Accounting Standards and CNY313,269,379 after adjusted by Pricewaterhouse Coopers Zhong Tian Certified Accounts Company Limited according to the International Accounting Standards. Major differences in using the International Accounting Standards and the PRC Accounting Standards were as follows: CNY Net profit as stated under the PRC Accounting Standards 312,369,566 Adjustment according to the International Accounting Standards: ― Fixed assets depreciation (626,314) 1,526,127 ― Deferred tax Amount after the adjustment according to the International Accounting 313,269,379 Standards 3. Principal Accounting and Financial Information for the Preceding Three Years of the Report Period Unit：CNY’000 Item 2005.1-12 2004.1-12 2 003.1-12 Income on main operations 1,686,401 1,237,307 1,053,559 Net Profit 314,286 183,651 165,673 Total assets 2,369,408 2,188,454 1,983,421 Total shareholders’ equity (minor shareholders’ equity 1,867,479 1,757,009 1,604,951 excluded) Earnings per Share (CNY) 0.77 0.45 0.53 Overall sharing Net assets value per Share (CNY) 4.60 4.33 5.14 Rate of return of net assets Overall sharing 16.83 10.45 10.30 Net cash flows per Share from 0.26 0.92 1.00 operating activities (CNY) 4. Changes of Shareholders’ Equity in the Report Period Minority Attributable to equity holders of the Company interest Total equity Statutory Statutory Share Capital Fair value surplus public Retained capital reserve reserve reserve fund welfare fund earnings RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 18) Balance at 1 January 2004 312,000 765,169 7,313 74,129 74,128 372,212 27,694 1,632,645 Dividend relating to 2003 - - - - - (31,200) - (31,200) Capital injection of minority interest - - - - - - 8,611 8,611 Net profit for the year - - - - - 183,258 393 183,651 Appropriation from reserves 93,600 (93,600) - 20,412 20,413 (40,825) - - Balance at 31 December 2004 405,600 671,569 7,313 94,541 94,541 483,445 36,698 1,793,707 Balance at 1 January 2005 405,600 671,569 7,313 94,541 94,541 483,445 36,698 1,793,707 Dividend relating to 2004 - - - - - (202,800) - (202,800) Net profit for the year - - - - - 313,270 1,016 314,286 Appropriation from reserves - - - 31,237 31,237 (62,474) - - Balance at 31 December 2005 405,600 671,569 7,313 125,778 125,778 531,441 37,714 1,905,193 III. CHANGES IN SHARE CAPITAL AND SUBSTANTIAL SHAREHOLDERS 1. Changes in Share Capital Unit: share Amount before this change Change Amount after this change (+ -) Allot Distribute Transfer other Percentage Percentage Amount new bonus capital to others Sub total Amount % % share share share capital Non-listed shares 1.Promoter’s Shares 21840 53.85 21840 53.85 including: State Shares Shares held by domestic legal persons Shares held by 21840 53.85 -21840 -21840 0 0 foreign legal persons Others 2.Shares offered to legal persons 3.Shares offered to 21840 21840 21840 53.85 employees 4.Preferred Shares or others Listed Shares Shares listed in the PRC (A Shares) Domestic Shares 18720 46.15 18720 46.15 listed (B Shares) Shares listed 4992 12.30 4992 12.30 Overseas Others 13728 33.85 13728 33.85 Total number of Share issued 40560 100 40560 100 2. Information about Issuance and Listing of Stocks (1)The Company did not issue new stocks within three years by the end of report period. (2)During the report period, as the State Asset Supervisory and Administrative Commission of Yantai City (hereinafter referred to as “SASAC Yantai”) transferred 33% and 10% of the state-owned stock ownership held in Yantai Changyu Group Co., Ltd. (hereinafter referred to as “Group Company”), the controlling stockholder of Group Company, to two foreign investors respectively, the majority controlling party of the Company changed accordingly, making the property of Group Company’s stock become non-state stock from original State-owned stock. 3. Shareholders Introduction (1) Total amount of Shareholders at the end of report period By the end of report period, the Company had 12,174 shareholders including 6,772 shareholders with A shares and 7 5,402 shareholders with B Shares, 10,372 shareholders less compared with that in last year, while shareholders with A shares is decreased by 7,144 and shareholders with B Shares is decreased by 3,228. (2) The respective shareholding of top 10 shareholders By the end of report period, the only legal person holding more than 5% (including 5%) of the Company’s Shares is Group Company, which held 53.85% of the total shares of the Company and was not subject to any lien or frozen or under any legal disputes. The respective shareholding of the top 10 shareholders of the Company were as follows: Name of Shareholders Increase or Number of Percentage Type of Lien or The character of reduce shares hold (%) Shares frozen the shareholders shares YANTAI CHANGYU GROUP 0 218,400,000 53.85 Non-listed 0 Non-state CO.LTD. Shares owned GUOTAI JUNAN SECURTIES 2,175,663 2.49 Listed B shares HONG KONG LIMITED 10,115,703 shares 0 FIDELITY INVESTMENT FUNDS Listed B shares ICVC-FIDELITY SPECIAL 7,146,733 7,471,054 1.84 shares 0 SITUATIONS F HSBC CHINA 4,849,612 5,749,578 1.42 Listed 0 B shares MOMENTUM FUND shares WEST SECURITIES CO. LTD. 4,441,453 5,296,700 1.31 Listed A shares shares 0 GT PRC FUND 1,899,945 1.27 Listed B shares 5,149,923 shares 0 HTHK/CMG FSGUFP-CMG FIRST -1,799,916 1.08 Listed B shares STATE CHINA GROWTH FD 4,378,037 shares 0 BBH BOS S/A FIDELITY 1,575,700 0.98 Listed B shares FD-CHINA FOCUS FD 3,975,606 shares 0 DRAGON BILLION CHINA FUND 3,902,104 0.96 Listed B shares 3,902,104 shares 0 UBS SDIC 3,545,429 3,545,429 0.88 Listed A shares shares 0 The explanation for the relationship and accordant In the top 10 shareholders, Yantai Changyu Group Company Limited has no action of the top 10 shareholders associated relationship with the other 9 listed shareholders, and the relationship between the other shareholders is unknown. (3) Holding shareholders introduction During the report period, the holding shareholder of the Company has not changed and still is Yantai Changyu Group Company Limited, the only legal person holding more than 5% (including 5%) of the Company’s Shares, which is a non-stated owned limited company. The Group Company was established in 1994 with registered capital CNY 50 million. The legal representative of the Group Company is Mr. Sun Liqiang, the business scope of the Group Company includes wine, brandy, healthy liquor, drinks, production, distribution, the plant of primary products and the import & export business within permission scope. During the report period, after getting the approval of the People’s Government of Yantai City and the State Asset Supervisory and Administrative Commission under the State Council, the controlling party of Group Company - SASAC Yantai transferred 33% of it’s total 55% State-owned stock ownership in Group Company to ILLVA Italy and 10% of it to International Finance Corporation and now still holds the remaining 12% of it. Approved by the Department of Foreign Trade and Economic Cooperation of Shandong Province, Group Company has obtained the Certificate of Approval for Establishment of Enterprises with Foreign Investment in the People’s Republic of China issued by the People’s Government of Shandong Province and thus has legally become a Sino-foreign joint venture. Now, the actual controlling power over the Company has changed from the original one party or SASAC Yantai to the present four parties, they are SASAC Yantai, ILLVA SARONNO ITALY, International Finance Corporation and Yantai Yuhua Investment and Development Co., Ltd.. The above relative information about the equity transfer was disclosed in “China Securities Newspaper” , “Securities Times” in the PRC and “Hong Kong Commercial Daily” on Feb.17th, May 19th, and Oct.22nd, 2005 respectively. 4. Introduction for property right and control relations between the Company and its actual controllers 8 14 senior managerial staff of 12 department managers of Changyu Group changyu group 64% 36% Zhongcheng Entrust & Investment Yantai Yusheng Investment & 46 common employees of Changyu Co., Ltd Development Co., Ltd group 45% 17.22% 37.78% Yantai Yuhua Investment & IFC Development Co., Ltd YSASAC Illva Investment Italy 10% 45% 12% 33% Shareholders of listed Changyu group Shareholders of listed A share B share 12.30% 53.85% 33.85% The Company 5. Brief introduction for the top 10 listed shareholders Name of the shareholders Number of shares hold The character of the shareholders GUOTAI JUNAN SECURTIES HONGKONG LIMITED 10,115,703 B shares FIDELITY INVESTMENT FUNDS ICVC-FIDELITY B shares SPECIAL SITUATIONS F 7,471,054 HSBC CHINA MOMENTUM FUND 5,749,578 B shares WEST SECURITIES CO. LTD. 5,296,700 A shares GT PRC FUND 5,149,923 B shares HTHK/CMG FSGUFP-CMG FIRST STATE CHINA B shares GROWTH FD 4,378,037 BBH BOS S/A FIDELITY FD-CHINA FOCUS FD 3,975,606 A shares DRAGON BILLION CHINA FUND 3,902,104 B shares UBS SDIC 3,545,429 A shares HUAXIA RETURN SECURITES 3,383,108 A shares INVESTMENT FUND The explanation for the relationship and accordant action of The relationship between the top 10 listed shareholders is the top 10 shareholders unknown. 6. This Company had not finished the share structure reform by the end of report period. 9 带格式的: 左侧: 2.54 厘米, 右侧: 2.54 厘米, 节的起始位 IV. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF 置: 连续, 宽度: 21 厘米, 高 度: 29.7 厘米, 页眉到边缘 1. The basic information of directors, supervisors and senior management 距离: 1.5 厘米, 页脚到边缘 距离: 1.75 厘米, 距正文: -327.67 字符, 指定行网格 (1)Information for the holdingshares and salary of dirctors, supervisors and senior management Shares hold Shares hold Reason Total Salary drew Whether or NAME POST SEX AGE Term at the at the ends for from the company not draw the for Post beginning of the year change during the report salary from of the year period shareholder’s company and other related company Sun Liqiang Chairman to the M 58 2003.09.24— 0 0 --- 52.9 NO Board of Directors 2006.09.25 Zhou Vice-chairman to M 41 2003.09.24— 0 0 --- 52.9 NO Hongjiang the Board of 2006.09.25 Directors and general manager Fu Mingzhi Director M 52 2003.09.24— 0 0 --- 40.6 NO 2006.09.25 Leng Bin Director M 43 2003.09.24— 0 0 --- 40.6 NO 2006.09.25 Qu Weimin Director, M 48 2003.09.24— 0 0 --- 40.6 NO Vice-general 2006.09.25 manager and Secretary to the Board of Directors Li Jianjun Vice general M 46 2003.09.24— 0 0 --- 40.5 NO manager 2006.09.25 Geng Zhaolin Independent M 63 2003.09.24— 0 0 --- 3 NO Director 2006.09.25 Ju Guoyu Independent M 59 2003.09.24— --- 3 NO director 2006.09.25 Wang Shigang Independent M 40 2003.09.24— 0 0 --- 3 NO Director 2006.09.25 Zhang Hongxia Chairman for the F 49 2004.05.21— 0 0 --- 28.3 NO Board of 2007.05.20 supervisors Shi Shichun Supervisor M 41 2004.05.21— 0 0 --- 14.3 NO 2007.05.20 Zheng Wenping Supervisor F 37 2004.05.21— 6396 6396 --- 8.2 NO 2007.05.20 Yang Ming Vice-general M 47 --- 0 0 --- 40.6 manager Li Jiming General Engineer M 39 --- 0 0 --- 40.6 Jiang Hua Vice-general M 42 --- 0 0 --- 40.6 manager Jiang Jianxun Treasurer M 39 --- 0 0 --- 28.3 Wang Counselor M 66 --- 0 0 --- 4.9 Gongtang Total 6396 6396 --- 483 --- (2) Information of Directors, Supervisors Who Hold Posts in Shareholder’ Company Name Name of shareholder Post in shareholder’s company Term for the post Paid by shareholder’s company or not Sun Liqiang Yantai Changyu Group Chairman of the Board of 2003.2—2006.2 No Company LTD Directors and general manager Zhong Hongjiang Yantai Changyu Group Vice chairman of the Board of 2003.2—2006.2 No Company LTD Directors Fu Mingzhi Yantai Changyu Group Director and vice general 2003.2—2006.2 No Company LTD manager Leng Bin Yantai Changyu Group Director and chief accountant 2003.2—2006.2 No Company LTD Yang Ming Yantai Changyu Group Directors 2003.5—2006.2 No Company LTD Zhang Hongxia Yantai Changyu Group Chief of audit department Without No Company LTD 2. Principal Working Experiences of Incumbent Directors, Supervisors and Senior Managers (1) Members of the board of directors Mr. Sun Liqiang, Chairman, is a college graduate and senior economist. Now he is the representative of 10 Tenth National People’s Congress, Chairman and General manager of Changyu Group. He began serving as chairman of the Company on September 18, 1997 and has held the position ever since. Mr. Zhou Hongjiang, Vice Chairman and General Manager, is a mastership graduate and senior engineer. He began serving as general manager of the Company on December 28, 2001 and as Director, Vice Chairman and General Manager of the Company on May 20, 2002. Mr. Fu Mingzhi, Director, is a university graduate and senior economist. Currently he is the Vice Party secretary, Director and Deputy General Manager of Changyu Group. He began serving as a director of the Company on September 18, 1997. Mr. Leng Bin, Director, is a postgraduate and senior accountant and now is the Director and Accountant-in-General of Changyu Group. He began serving as a director of the Company on June 15, 2000. Mr. Qu Weimin, Director, holds a bachelor of engineering and is a senior economist. He began serving as Director, Deputy General Manager and concurrently as Secretary of the board of directors of the Company on September 18, 1997. Mr. Li Jianjun, Director, holds an MBA and is a senior engineer. He began serving as Director and Deputy General Manager of the Company on September 24, 2003. Mr. Geng Zhaolin, an Independent Director, is a postgraduate and senior engineer. He previously served as Director of the Food Industry Department of the Ministry of Light Industry of the People’s Republic of China, Director of the Food and Papermaking Department under Chinese Board of Light Industry, Director of the Scientific and Technological Development Department under Chinese Board of Light Industry, Director of the Scientific and Technological Development Department under National Association of Light Industry and Chairman of Chinese Association of Canned Food. He is currently Chairman of Chinese Association of Wine Industry, Deputy director of National Technology Commission for Food Standardization, an Expert of Experts Commission of Health Food under the Ministry of Public Health, and a member of the Standing Committee of Chinese Society of Food Science and Technology. He began serving as an independent director of the Company on May 20, 2002. Mr. Ju Guoyu, an Independent Director, is a professor and doctorate tutor. He previously served as Party secretary and Vice President of Economic Institute of Peking University and now is Vice President of the Economic Society of Beijing Municipality, Director of Economic Research Institute of Peking University. He began serving as independent director of the Company on September 24, 2003. Mr. Wang Shigang, an Independent Director, holds an MBA and is a Senior Accountant. He previously served as Manager of the Financial Department and Financial Supervisor of the Business Trusteeship Co., Ltd. of Shandong Province, Chairman and General Manager of Shandong Hengyuan Certified Public Accountants Firm and is currently Vice Chairman and Deputy General Manager of Shandong Tianhengxin Certified Public Accountants Firm and Director of Jinan Branch of said firm. He began serving as independent director of the Company on May 20, 2002. (2) Members of the Board of Supervisors Ms. Zhang Hongxia, Chairwoman, is a college graduate and senior accountant. She is presently Director of the Auditing Office of Changyu Group. She began serving as supervisor of the Company on September 18, 1997. Mr. Shi Shichun, a Worker Representative Supervisor, is a university graduate and engineer. He previously served as Deputy Manager and Manager of Brandy Company under the Company. He began serving as a supervisor of the Company on September 18, 1997. Ms. Zheng Wenping, Supervisor, is a university graduate and senior accountant. She previously served as 11 Auditor and Deputy Director of the Internal Auditing Office of Changyu Group. She began serving as supervisor of the Company on May 21, 2003. (3)Other Senior Managers Mr.Qu Weimin and Mr. Li Jianjun, Directors and Deputy General Managers, (please see the previous introduction of “Members of the Board of Directors” above). Mr. Yang Ming, Deputy General Manager, is a university graduate and applied researcher. He began serving as Deputy General Manager of the Company on August 12, 1998. Mr. Li Jiming, Chief Engineer, is a doctoratoral graduate and applied researcher. He began serving as Chief Engineer of the Company on September 14, 2001. Mr. Jiang Hua, Deputy General Manager, is a postgraduate and engineer. He began serving as Deputy General Manager of the Company on September 14, 2001. Mr. Jiang Jianxun, Financial Supervisor, holds an MBA and is an accredited accountant. He began serving as Financial Supervisor of the Company on May 20, 2002. Mr. Wang Gongtang, consultant of this company, is a postgraduate and senior engineer. He began serving as consultant of the Company on September 18, 1997. 3． Change of Directors, Supervisors and Senior Management During the report period, there is no any change in the directors and senior management. 4. Staff of the Company As to 31st December 2005, the staff number of the Company (including the headquarter and main controlling subsidiary company) was 2,801, including 973 production workers, 1379 sales persons, 60 technicians, 80 financial members, 309 administrative persons. Among the staff members, 1003 persons were university graduates, which is 35.8% of the total employees, 668 persons were college graduates, which is 23.8% of the total employees, 375 persons were Senior middle school graduates, which is 13.4% of the total employees, and 755 persons were graduated below senior middle school, which is 27.0% of the total employees. All the retired staff’s expenses were paid by social security system, not by the Company. V. CORPORATE GOVERNANCE STRUCTURE 1. Current Corporate Governance Situation of the Company The Company, in accordance with the state laws and rules such as “Company Law of the People’s Republic of China”, “Securities Law of the People’s Republic of China” and “Administration Rules of Listed Companies”, has increasingly perfected its structure and persistently carried out operations in a lawful manner. During the report period, the Company, in light of the documents of “Provisions on Better Protection of Public Stockholders’ Interests”, “Guidelines about E-Ballot of Stockholders’ Meeting of Public Companies (Trial)” and “Shenzhen Stock Exchange Rules on Securities Transaction” promulgated by the China Securities Regulatory Commission, revised and amended its “Articles of Association” and had it adopted during the stockholders’ meeting. To meet the requirements for business management, the Company promulgated over 10 new in-house rules. In reference to the normative documents of China Securities Regulatory Commission on public companies, the Company believes that its present condition after rectification conforms to the general requirements set forth in the said documents and basically forms a normative, effective and harmonious operating mechanism. 12 2. The Duty of the Independent Directors The Company has three independent directors which is 1/3 of the total BOD members. During the report period, all independent directors of the Company performed their duties conscientiously and de jure, attended all the board of directors’ meetings or came to the meetings as non-voting attendees in person, regularly inquired into the Company’s operations and listened to relevant reports, expressed their professional opinions on the major decisions, participated in examination of and declared themselves on the significant issues such as interrelated dealings and re-appointment of certified public accountants, played appropriate roles in terms of improving internal supervisory mechanisms and safeguarding the legal rights and interests of the Company and all its stockholders’. During the report period, none of the independent directors raised any objection to the Company’s activities. 3. Information for Personnel, Assets, Finance, Institution and Business Associated with Holding Shareholders (1) Personnel arrangement: this Company’s general manager, deputy general managers and other senior officers did not hold any post in the controlling parties, all of whom were paid by the Company. The Company was entirely independent in personnel arrangement, conclusion and adjustment of labor contracts thanks to its sound system in this regard. (2) Assets: intangible assets including physical assets, trademark, industrial property right and non-patent technologies were all clearly divided between the Company and the controlling stockholder. The Company being a legal independent entity consistently conducted business activities legally and provided no guarantee in any form with its assets for its stockholders or individuals’ liabilities or any other legal persons or natural persons. However, due to some issues from the past, transfer of some company assets are as yet incomplete. The intangible assets such as trademark ownership and land title still held by the controlling stockholder, will be actively negotiated with the controlling stockholder to rectify those long-standing problems step by step upon the precondition of no infringement on the Company and stockholders’ interests. (3) Finance: the Company has an independent finance department with an independent and standardized accounting system. It is run by financial supervisors and accountants who have established the Company’s own accounts, duly and legally paying taxes, workers insurance and other legal obligations. (4) Offices: the Company has set up a sound organizational framework, in which the board of directors and board of supervisors operate independently. No superior and subordinate relationship exists between the Company and the functional departments of the controlling stockholder. (5) Production activities: the production activities of the Company are independent of the controlling stockholder and the Company itself owns completely independent systems covering research and development, accounting, labor and personnel, quality control, raw materials procurement, production and sales, and is possessed of self-run capabilities, and has neither no relationship exists with the controlling stockholder in terms of supply and sales by proxy nor competition with each other. 4. Performance Evaluation and Encourage to Senior Management The Company has already established the system of evaluating the achievement of senior personnel and the related encouraging system, which linked the reward with the Company’s benefit, and personal achievement. The board of directors set up a salary and reward commission, which assumed the responsibility of making and checking the policy and project of the salary and reward. Basing on the production and operation goal, the commission took the examination to the senior personnel according to 13 their management achievement and index, and took these as grounds of awards or penalties. The Company will orient the market and complete the perfect establishment of evaluation and encourage system. gradually. Ⅵ. BRIEF INTRODUCTION TO THE SHAREHOLDER’S MEETING Totally 2 shareholders’ meetings were convened by the Company during the report period. 1. 2004 Shareholder’s Meeting The 2004 Shareholders’ Meeting was held in the Company on April 19th, 2005. The meeting notice was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on March 15th , 2005. The total attendees of shareholders or their representatives were 27, including 1 shareholder of state-owned stock, 14 shareholders or their representatives of CNY-denominated common stock listed domestically and 11 shareholders or their representatives of the stock listed domestically in foreign currency, totally representing 257,162, 388 shares, accounting for 63.58% of vote shares of the Company. Mr. Li Zhiqiang from Jinmao Law Office of Shanghai Municipality attended the meeting as a non-voter and issued a legal comment therein. Over the meeting, the attendees deliberated all the proposals one by one and passed the following resolutions by way of open ballot: (1). “2004 Work Report of Board of Directors”. (2). “2004 Work Report of Board of Supervisors”. (3). “2004 Annual Report”. (4). “2004 Finance Final Accounts”. (5). “2004 Scheme of Profit Distribution”. (6). “Proposal of Increasing Allowance for Independent Directors”. (7). “Proposal on Renewal of Contract with Accountants Firm” There was no veto for any proposal during the meeting. The resolution announcement of this Shareholders’ Meeting was published on 20th April, 2005 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. 3. 2005 Interim Shareholders’ Meeting The Company convened the 2005 interim stockholders’ meeting on July 15th, 2005, the announcement of which was published on June 2nd, 2005 in “China Securities News”, “Securities Times” and “Hong Kong Commercial News”. There were 5 stockholder attendees or their representatives including 1 stockholder representing State-owned stock, 2 stockholders of CNY-denominated common stock listed domestically and their representatives and 2 stockholders of the stock listed domestically in foreign currency and their representatives, together representing 228,312,658 shares accounting for 56.29% of the Company’s total voting rights. Mr. Li Zhiqiang from Shanghai Jinmao Law Office participated in the meeting as a nonvoting attendee and issued a legal comment therein. Those present at the meeting deliberated and approved the “Proposal on Revision of the Company’s Articles of Association” by way of open ballots. None of the proposals were vetoed during the meeting and the resolutions made then were made public on July 16th, 2005 in “China Securities News”, “Securities Times” and “Hong Kong Commercial News” Ⅶ. BOARD OF DIRECTOR’S REPORT 1. Discussion and Analysis of Management Team (1) Business condition during the report period 14 The Company is a light industrial manufacturer of which the principal business is the distilling, producing and distributing of wine, brandy, healthy liquor and sparkling wine using grapes as raw material, and its major products include dry red wine, dry white wine, XO brandy, VSOP brandy, VO Brandy, VS brandy, Special Quality Sanpien Jiu, Vermouth and sparkling wine. At present, the Company’s colligated output of wine, brandy, healthy liquor and sparkling wine is 100,000 tons. The Company’s sales network covers 29 provinces and municipalities all over the country, and has 1379 salesmen and over 3300 wholesalers & retailers. (a) General information of operations during the report period During the report period, the Chinese wine sector maintained rapid growth momentum. Under the management of the board of directors, the Company grasped each and every opportunity, to work hard and effectively at the central task of tapping market potential as best it could, to calmly coping with increasingly acute competition it made remarkable achievements. Following are the five main measures adopted by the Company during the report period: First, the Company further deepened its operating structure reforms for more efficient results. To adapt itself to the market competition, the Company did a lot in restructuring of its operating mechanism and as a result, the decision-making efficiency was obviously improved. During the report period, the Company made greater improvements in assessment mechanisms for the senior officers and perfecting its internal rules. Office reorganization combined the original 22 offices and departments of the headquarters to the present 10 and reduced the number of staff from 137 to the present 68. The back-up departments of the Sales Company were downsized to 7 and the number of staff was reduced from 135 to 93. Secondly, more work was done in exploiting existing markets to strengthen the Company’s competitiveness. During the report period, the Company continued optimization of market network set-up, increased attention to the performance of salesmen at different levels and in-house training, further normalized the supervision of seasonal employees, started the assessment system using profit indicators as the central focus for salesmen and sales departments at various levels so as to operationalize the concept of being guided by profits, improved monitoring and controls on the input-output ratio of sales spending, further adjusted product structure with increases to the portion of high-end products in the sales revenue, boosted sales revenue in 11 major cities by some 40% over the same period of last year further reducing the distance between the Company and the biggest occupants in those the local markets, and carried out a comprehensive direct sales program in the Yantai and Weihai Regions fostering a new point of profit growth. Third, steadfastly pursued technological innovation and enlarged production capacity. To help meet future development needs, the Company, during the report period, sought to apply technological innovation to bottlenecks in important throughput areas such as wine tanks, blending system and bottling lines, by which resulting in overall productivity enhancement and release of production potential to meet market needs and casting a solid foundation for future development. Fourth, speeding up the development of new products and technologies to strengthen the Company’s core competitive edges. During the report period, the Company developed several new kinds of brandy and vermouth, and completed lab experiments in ice wine. Initial successes were made in respect to the use of new oak barrels, oak planks and micro-oxidation technology that opened new opportunities for the storage of high-end wines in future. The standards , technological processes and the operating criteria for four categories of wine, brandy, healthy liquor and sparkling wine were once again gone over. Some research projects listed in the national “Tenth Five-year Brainstorm Projects” and undertaken by the Company including “Study on Distilled Cider” passed the appraisal and acceptance by competent authorities. 15 Fifth, stricter financial management and inner audits were executed and an effective internal supervisory system was established. During the report period, the Company amended more than 20 rules in terms of financial management including “Methods of Cost Evaluation” and “Provisions on Funds Management”, and the reporting procedures for major issues and production responsibility systems were established and perfected. Settlement of accounts receivable and far-off warehouses were finalized. Active financial management and inner audits ensured the safety and completeness of the Company’s assets and were proven to be effective means to control assets and prevent disastrous losses by theft or malpractice. The primary management achievement in 2005 is as following: Unit: CNY’0,000 Item Amount of this Amount of last More or less Proportion in More or less year year than last year(%) total profit (%) than last year(%) in 2005 Principal sales 168,640 123,731 36.30 380.85 -38.78 Principal profit 105,572 74,596 41.53 238.42 -14.57 Net profit 314,286 18,3651 71.13 70.98 8.70 Remark to the main factors causing major changes: During the report period, the principal sale and profit, net profit increases greatly due to distinct operation achievements realized by the Company, while the increasing rate for total profit is 5.23% higher than income on main operation, which caused 38.78% lower for proportion of income on main operation in total profits. (b) Sales and Profits of Principal Business Assorted by Products Type Unit: CNY More or less More or less More or less than last year Principal Principal Gross Profit than last year of than last year of Product of the Sales Cost Ratio (%) the principal the gross profit principal cost(%) ratio(%) sales(%) Wine 1,252,582,072 444,626,308 65 46.64 40.54 2 Brandy 339,654,050 143,235,030 58 22.10 18.12 2 Healthy Liquor 75,496,309 30,206,963 60 -16.74 -28.82 7 Sparkling Wine 18,668,640 12,613,950 32 30.52 11.57 11 Total 1,686,401,071 630,682,251 63 36.30 28.36 3 Related party - - - - - - transaction (c) Sales and Profits of Principal Business Assorted by Territory Distribution Unit: Unit：CNY’0,000 District Principal Sales More or less than last year of the principal sales(%) The coastal region 141,691 37.84 The middle region 18,679 23.06 The western region 8,270 16.13 Total 168,640 34.81 (d) Operation Situations of Key Products Taking over 10% of the Company’s Sales Wine and brandy sales took 10% of the Company’s principal business, and their sales revenue, sale cost and gross profit ratio were set below: Unit: CNY Product Name Sales Sale Cost Gross Profit Ratio (%) Wine 1,252,582,072 444,626,308 65 Brandy 339,654,050 143,235,030 58 During the report period, the Company’s principal business and its structure did not change a lot, compared 16 with that of the last year. (e) Major Suppliers and Clients Unit：CNY’0,000 Total purchases from the top 5 suppliers 7,323 Proportion of all purchases 19.4% Total products sold to the top 5 clients 21,910 Proportion of all products sold 12.0% (f) The Company’s asset compositions and changes of financial data Increase or December 31, 2005 December 31, 2004 decrease of Entry Amount Proportion in total Amount Proportion in proportion in (CNY’ 000) assets (%) (CNY’ 000) total assets (%) total assets Account receivable 124,742 5.26 143,380 6.55 -1.29 Inventory 530,044 22.37 419,520 19.17 3.20 Long-term investment 15,000 0.63 15,000 0.69 -0.06 Fixed assets 479,365 20.23 483,525 22.09 -1.86 Short-term loans 0 0 0 0 0 Long-term loans 0 0 0 0 0 Increased or decreased Entry Amount for this year (CNY’ 000) Amount for last year (CNY’ 000) amount (CNY’000) Operating cost 489,222 334,921 154,301 Overheads 147,145 126,019 21,126 Income tax 128,516 111,208 17,308 Remark to the main factors causing major changes: - The fast increasing on inventory is due to the Company’s storage increasing on raw materials and unfinished products, and also products specially for high seasons. - The operating cost is increased due to increasing on advertisement expenditure for sales improvement and transportation charge for enlargement of sales volume. - The overhead increase is caused by the improvement of salary and welfare of employees. (g) Relevant changes of the Company’s cash flow Entry Amount this year Amount last year Increased or decreased (CNY’000) (CNY’000) amount (CNY’000) Cash flow generated from operating activities Subtotal of cash inflow 215,937 466,613 -250,676 Subtotal of cash outflow 111,668 91,522 20,146 Net cash flow generated from 104,269 375,091 -270,822 operating activities Cash flow generated from investment activities Subtotal of cash inflow 16,561 119,494 -102,933 Subtotal of cash outflow 53,579 159,511 -105,932 Net cash flow generated from -37,018 -40,017 -2,999 investment activities Cash flow generated from capital-raising activities Subtotal of cash inflow 4,776 -4,776 Subtotal of cash outflow 202,800 33,852 168,948 Net cash flow generated from -202,800 -29,376 173,424 capital-raising activities Remark to the main factors causing major changes: - The great decrease on cash flow from operating activities caused by increase of investing events in bank deposits with maturity over three months. 17 - The great change on cash flow from investment is caused by the obvious decrease on cash received from investment recovery and other activities related to investment during the report period. - The great change on cash flow from capital-raising activities is produced by increase of cash dividends during the report period. (h) Utilization of the Company’s equipment, market and flow of technicians During the report period, the Company’s equipment was maintained in good running condition, production ran smoothly, capacity factors of equipment kept high, and no production accidents took place. By means of scientific planning and meticulous scheduling, the Company not only ensured stable production but also met market needs and with neither overstocking of products nor serious shortage of supply. There was no change of technicians and backups, thus no impact on the company’s operations and management. (i) . The Major Holding and Sharing Company Registered Sharing Business Major Products Assets Net Profit Company Name Capital Ratio Scope or Services (CNY’0,000) (CNY’0,000) (USD’0,000) Yantai To research, Dry red wine, dry Changyu-Castle produce and white wine and Wine Chateau Co. 70% sell wine and 500 9,153 3,877 sparking wine of LTD. sparkling Changyu-Castle wine Longfang To produce Dry red wine, Castel-Changyu Wine 49% 300 5,165 894 and sell wine Dry white wine Co. LTD. Yantai Kylin To produce Cork, aluminum Packaging Co. and sell 50% cap, PVC capsule 140 3,318 207 LTD. packaging and so on. material (2) Expectation of the Company’s future growth A. Developing trend of the sector the Company is engaged in and present situation of competition During the report period, the competition in domestic wine markets was very intensive due to Chinese custom tariff on wine reductions to 14%, with more and more competitions from foreign wines rushing in and increased competition from principal rivals trying their best and investing more in the market. Facing the situation, the Company sought to take advantage of rapid economic growth and upgrade of consumer goods in China, by sticking to principles of market focus through ongoing timely adjustments to product structure, adoption of stricter measures in all aspects of corporate governance so as to ensure sustainable and steady upswings in main operating indices. The board of directors foresees that the rapid growth of Chinese economy, acceleration of urbanization and especially, the steady increase of people’s incomes and the change of consumer notions, the Chinese wine sector shall prosper steadily for a period of time with increasing impetus. But on the other hand, the board of directors recognizes that competition in the domestic wine markets is getting more and more severe and marketing cost are getting increasingly heavier due to oversupply in the main markets of Europe and America, springing up of new winemaking countries and lowering of Chinese custom tariff imposed on imported wines. Rising grape prices in 2005 also weakens winemaking profitability. B. The Company’s developing strategies and operating plan In the coming year competitive challenge will continue from both home and abroad in the domestic market, the Company will continue product structural optimization in middle and high end product lines. 18 High end product differentiation strategies will seek to meet unique customer needs (“I have what others don’t have and mine is better than yours”) through product innovation, creation of new channels and reduced marketing cost, thus providing better service to consumers and invigorating competitiveness. Production and marketing of middle quality products, will be expanded to lower unit price through economies of scale and improved competitive edge. In addition to these product structure adjustments during 2006, the Company must pursue ongoing reforms of its operating mechanisms to quicken steps toward the innovation of management, technology and marketing. Strengthening profitability and further enhancing the Company’s value, will require the following efforts: (a) Adherence to a market focus as the core value. Make greater efforts to increase market share, further perfect the accounting system across the four levels of sales departments, branches, distribution offices and salesmen. Continuation of product structure adjustment, improve high-end sales of products like “Cabernet, Chateau Wine and XO Brandy”, reinforce market supervision and insure distribution network efficiency. Bring manpower, materials and financial resources to bear on the provinces and regions where wine is popular, continue development in China’s 11 key cities, seek easier way to regulate outlets while expanding direct e-sales, and special channels. (b)Investments in technology ensuring reliable supplies of raw grapes in essential quantities and quality.. The Company will continue with technical reforms of the existing production systems, enlarging storage and bottling capacity, speed up the construction of Beijing Chateau, steady investment in extensions in vineyard coverage to ensure the supply of raw grapes and effectively increase production capacity to meet the needs of the company for its future development. (c)Continue strengthening internal management to enhance operating efficiencies improve profits and reduce operating risks.. In terms of developing human resources, the Company will continue compensation system reforms, improving the motivating and control mechanisms to fully arouse the staff’s initiative and enthusiasm, increase employee training to enrich skills and operating knowledge, recruit capable individuals for key positions taken by capable persons and preserve a talent base for the Company’s sustainable development. And in terms of internal management, the Company will perfect the overall budget managing system, set up and perfect a profit based assessment system for production and marketing, further lower costs, reduce spending, enhance profitability, conduct stricter in-house audits focusing on the areas of accounts receivable, distant warehouses, advertisement expenditure, purchasing of raw materials, technical renovation, equipment procurement, etc. to prevent or eliminate operating risks from misappropriations and malpractice, and protect assets from loss and ensure the safety and completeness of the assets. C. Capital needed and its usage In 2006, the Company plans to invest CNY 175.63 million in construction of grape-growing bases, Beijing Chateau Changyu-Castel, the 2nd phase of bulk cabernet blending center, oak barrel renovations and import of wine production line equipment. The capital required shall come from the Company’s own accounts. D. Potential risks the Company has to face The Company may face two major risks. First, the yield and quality of grapes are subject to natural factors such as drought, rains, snow and frost and so on. Such force majeure generates impacts on the quantity and price of raw grape availability and makes the outcome of the Company’s production and profitability less predictable. Secondly, with intensified market competition and needs for expanded market exploitation, the Company must increasingly invest in the market. But the ratio of input to output from such investments can’t be precisely predicted as it is closely linked to multiple factors, with the risk 19 that inputs do not yield the targeted outputs. 2. Investment of the Company (1). The Uses of the Proceeds Collected in the Report Period The Company made a public offering of 32 million A Shares for capital increase in October of 2000, and received net proceeds of CNY 613.46 million. The Company invested in those projects as disclosed in the Prospectus. To the end of the report period, CNY 551.550 million has been invested, the un-invested fund of CNY 63.31 million is on deposit in the Company’s bank and is decreased CNY40.81 million than last year. Except those projects for improvement of middle procedures on production and sales which were difficult to rationally confirm the benefit, other productive projects all made good benefits. (2). Projects invested with non-raised capital The Company invested its own funds CNY 22.98 million in 2005 in the following 5 technological innovation projects: A. CNY 4.5 million for construction of bulk cabernet blending center, which is expected to be completed in March 2006. B. CNY 4.55 million for reconstruction of containers and manufacturing of tanks of sparkling company. The project was completed ahead of schedule in August this year, expanding the Company’s storing capacity. C. CNY 520,000 for tank manufacturing for Jingyang Wine Company, which was completed within the report period. D. CNY 1.8 million for reform of the brandy blending system of the Brandy Company. Completion is expected by the end of March 2006. E. CNY 1.68 million for improving automation of bottling lines. So far the installation and commissioning of the imported equipment in the bottling workshop of brandy and wine and the renovation for freezing ability of No.2 blending workshop in winery completed . 3. Audits and changes of accounting policies Puhua Yongdao Zhongtian Certified Public Accountants Co., Ltd. audited the Company’s 2005 financial report and accordingly compiled a standard auditing report with unreserved audit advice. During the report period, the Company didn’t made no correction of accounting policies, accounting estimates or significant accounting errors. 4. Information of routine work of the board of directors (1) Meetings and resolutions of the board of directors during the report period Six meetings of the board of directors were convened during the report period. ①The 8th meeting of the 3rd-term board of directors was held on March 12th , 2005, during which period the following proposals had been passed: (a) ‘2004 Working Report of the Board of Directors; (b) General Manager’s Working Report 2004; (c) Resolution on ’2004 Annual Report and Its Excerpts; (d) Report on ’2004 Finance Final Accounts; (e) ’2004 Scheme of Profit Distribution; (f) ’2004 Scheme of Technology Reform and Investment; 20 (g) Proposal of Increading Allowance for Independent Directors; (h) Proposal on Renewal of Contract with Auditors’ Firm; (i ) Proposal on Convening 2004 Shareholders’ Meeting; ②The 9th meeting of 3rd session board of directors was held on April 11th, 2005, during which the “Proposal on the 1st Quarter Report 2005” was deliberated and approved, and a decision was made to take part in the establishment of Dingtao (Yantai) Construction and Development Co., Ltd. with CNY 5 million, accounting for 16.67% of the registered capital of that company. ③The 3rd session board of directors 10th meeting was held on May 31st, 2005, during which the following proposal were deliberated and approved: (A) Report of rectification on the findings reported by China Securities Regulatory Commission Shandong Regulatory Bureau on its inspection to the Company. (B) Proposal on Ordinary Interrelated Deals 2005. (C) Proposal on Revision of the Company’s Articles of Association. (D) Proposal on Selling Assets to Controlling Stockholder. (E) Proposal on the Issues of 2005 Interim Stockholders’ Meeting ④ The 3rd session board of directors 11th meeting was held on August 15th, 2005, during which the following proposal were deliberated and approved: (a).Proposal on Biannual Report and Its Abstracts 2005. (b).Proposal on Biannual Profit Distribution 2005. ⑤ The 3rd session board of directors 12th meeting was held on October 24th, 2005, during which the “Proposal on the 3rd Quarter Report 2005 was deliberated and approved. (2) Information on the execution of the resolutions of shareholders’ meetings by the board of directors ①According to the resolutions made by 2005 Interim Stockholders’ Meeting, the board of directors revised the relevant clauses in the “Articles of Corporation”, and submitted to relative governmental department for recording. ②During the report period, the board of directors had realized the “2004 Scheme of Profit Distribution” based on 405,600,000 shares of the total stock capital up to the end of 2004, and in proportion of CNY 5.00 to per 10 shares in favor of the shareholders. The notice of dividends distribution was published in “China Securities Newspaper”, “Securities Time” and “Hongkong Commercial Daily” on April 28th, 2005. The last transaction date for both Stock A and Stock B was on April 29th, 2005. Until the middle of May 2005, the Company had already finished all dividends distribution. 5. Preliminary plan for profit distribution In the light of the stipulation that the minimum profit audited according to Chinese accounting standards and international accounting standards is taken as the base for distribution, the distributable net profit this year is CNY 778,984,984 consisting of CNY 312,369,566 of net profit made in this year and CNY466,615,418 of undistributed profit from the beginning of the year, and the undistributed profit at the end of this year is CNY 513,711,071 after deducting 10% of the net profit made in this year or CNY 31,236,956 for the legal public accumulation fund and 10% or CNY 31,236,957 for the public welfare fund and further deducting CNY 202,800,000 paid in cash dividends for 2005. The board of directors proposes to distribute the profits made in 2005 as follows: based on a total of 405.6 million shares of the Company registered on December 31, 2005 to pay CNY 7 in cash for every 10 shares (including personal income tax for CNY common stock) as dividends to all stockholders, totaling CNY 283.92 21 million. The cash dividends paid to the stockholders of domestically listed foreign-currency stock (Stock B) shall be transferred to the beneficiaries’ accounts in HKD at the middle rate of CNY to HKD listed by People’s Bank of China on the first working day after the day when the resolution of 2005 stockholders’ meeting was made. In the same, the share capital is proposed to be transferred by capital reserve : based on a total of 405,600,000 shares of the Company registered on December 31, 2005, to transfer 3 shares for every 10 shares, totaling 121,680,000 shares , and the total shares of the Company will be increased to 527,280,000. The above-mentioned preliminary scheme on profit distribution shall be referred to 2005 stockholders’ meeting for deliberation. 6. Other Disclosed Information The newspapers for the Company to disclose information remained the same and still are “China Securities Newspaper”, “Securities Times” in PRC and “Hong Kong Commercial Daily” at abroad. Ⅷ. BOARD OF SUPERVISORS’ REPORT 1. Information on meetings of the board of supervisors One meetings of the board of supervisors were convened during the report period. The 3rd meeting of the 2nd-term board of supervisors was held on March 12th , 2005, on which day the four resolutions were passed, they were “The Proposal about 2004 Annual Report and Its Excerpts”, “Report on 2004 Fiscal Year Final Financial Accounts”, “2004 Preliminary Plan of Profit Distribution” and “Proposal on Renewal of Contract with Auditors’ Firm”. The board of supervisors’ report was also passed during the meeting. 2、 Independent comments of the board of supervisors on relevant issues 2005 During the report period, the board of supervisors of the Company conscientiously performed its duties, was active in its work, attended several meetings of the board of directors as non-voter, carried out a series of supervisory and checking activities in the Company’s operations, financial condition, interrelated transactions, use of raised capital, etc.. The following comments are hereto written out after careful studies: (A) During the report period, the operation of the Company was completely in accordance with the Company Law of the People’s Republic of China, Articles of the Association, also relevant policies and statutes of state. The decision-making procedure of the Company was within the law, and the Company had established perfect inner management system. During the report period, the directors and senior managerial staff of the Company were honest and dedicated to their work, abided by laws and rules, could conscientiously execute the resolutions of the shareholders’ meetings and the decisions of the board of directors, followed the national laws, rules and the company-made regulations while performing their duties, safeguarded the interests of both the Company and all shareholders, and were found no conducts and behaviors against laws, rules, the company-made regulations or of infringements upon the interests of the Company. (B) During the report period, various expenses were generally reasonable and acceptable, the special funds withdrawn for future use were in accordance with the relevant laws, rules and the in-house regulations, the financial structure was good and the quality of assets was excellent. Pricewaterhouse Coopers Zhong Tian Certified Public Accountants Company Limited audited the financial statements ’05 fiscal year according to International Accounting Criteria and Chinese Accounting Regulations respectively, and provided the audit 22 report with standard and unreserved audit advice. The board of supervisors thinks the audit report presents the Company’s financial status, operation achievements and cash flow in truthful, impersonal and accurate way. (C) During the report period, the Company had no conduct of raising capital except the one occurred in October 2000 when the Company issued 32,000,000 shares of RMB-denominated common stock and the capital raised thereof was actually invested in the promised projects which were in conformity with those as written in the “Booklet of Directions on Stock Issuance”, and the said capital was not used for any other projects. The projects that have been put into operation have generated satisfactory investment cost recovery. (D) No conducts of underground deals and infringements upon shareholders’ interests or of making the losses of corporate assets were found. (E) The interrelated transactions occurred during the report period were carried out strictly in the light of the relevant state stipulations and with complete formalities and on the basis of impartial transaction, which were all for the good of the company and shareholders. The Company had no corporate or private guarantee/ pledge-related contracts. (F) The board of directors and managerial group of the Company fully executed all resolutions of shareholders’ meetings, and made well achievements on operation. IX．Major Issues 1.The Company had no major lawsuit and arbitration over the year. 2.The Company had no merger and acquisition, sales of assets during the report period. 3. Significant interrelated deals Read the remark of financial statements “7. Relationship between the Interrelated Parties and Their Deals” for the interrelated deals extended from the previous year(s) to the report period. CNY 46.58 million of the Company limited used by the controlling stockholder Yantai Changyu Group Co., Ltd. since the end of 2004 was paid back in full amount before the end of March 2005 and since then this Company has provided no funds either directly or indirectly to any other interrelated parties. 4.Major and important contracts and execution results (1) During the report period, the Company had no guarantee/ pledge-related contracts. It didn’t trust, contract or lease the assets of other companies, and vice versa. (2) Major guarantee During the report period, the Company neither had any immature guarantee nor provided any guarantee to any units including the subsidiary companies of the Company and individuals. (3) Financing entrustment During the report period, this Company established no trusteeship with any party in terms of its monetary capital nor was there entrusted financing extended from the previous year(s) to the report period 5.Issues Promised by the Company The Company and its shareholders who were holding 5% or more shares of the Company’s total had made no any promises during the report period and no any ones that had been extended to the report period from before either. 6.Information about appointing and dismissing certified public accountants firm 23 2004 shareholders’ meeting passed a resolution, in which the Company decided to appoint Pricewaterhouse Coopers Zhong Tian Certified Public Accountants Company Limited to be 2005 international auditor and domestic auditor for the Company for a length of one year. The auditing expenditure totaled HKD1,100,000 including travel fees and all operating cost. 7. Records of punishments, criticism in the form of circular or open reprimands made by the competent authorities and corresponding remedial measures taken During the report period, neither the board of directors nor the directors themselves were punished, criticized or reprimanded by any competent authorities. During the report period, Shangdong Securities Regulatory Bureau routinely made intermittent inspections to the Company and expressed its comments on the required operations and management. The Company took necessary actions on the defects found. (1) The Company’s Articles of Association and remedial actions taken of the defects found in the “Three Meetings” The Company’s Articles of Association has been revised according to the “Rules of Listing” and other regulations and approved during the 2005 interim stockholders’ meeting. The Company criticized the persons responsible for penalties due to incompleteness of the minutes of the “Three Meetings” and improper disposition of some meeting documents and in this regard, accordingly defined the their duties in detail, instructing the persons responsible to take detailed notes of the meetings especially of speaker’s keynotes and properly file the meeting documents. (2) Measures taken to correct the erroneous behaviors of issuing out-of-line guarantee(s) for the controlling stockholder and of asset transfers. Concerning the guarantee this company presented with a time deposit of CNY 45 million pledged to the bank in exchange for a short-term loan of 40 million in favor of its controlling stockholder, the controlling stockholder repaid in full the said loan in January 2005 releasing this company from the responsibilities for the guarantee and without loss. Concerning the issue that this Company sold its assets of CNY 15.935 million to the controlling stockholder at the end of 2004 without going through the necessary legal procedures, this company and the controlling stockholder made corrections on May 15th, 2005 with a transfer agreement on the assets, which was approved by the 3rd session board of directors 10th meeting held on May 31, 2005 with all related directors leaving the room during the vote. (3) Measures taken in terms of financial management and internal rules Concerning the issue of opening transitory clearance accounts of payment for goods in workers’ names, the company has stopped using those accounts and used the company’s accounts instead. Concerning the issue of excess outdated accounts that had not been brought up to the financial standards nor duly cancelled, this company has, together with the dealers and banks involved, checked all accounts of its kind one by one and closed unnecessary ones, and adopted appropriate measures to strengthen weak internal control links. The report of rectification on the above issues was disclosed in “China Securities News”, “Securities Times” and Hong Kong Commercial News” on June 2, 2005. 8. Other major issues (1) During the report period, the reduction in the yield of wine grapes of the main wine grape growing 24 areas in Chinese Jiaodong Peninsular was remarkable because of severe frost causing a shortage in the supply of raw grapes that triggered the Company’s average purchasing price in 2005 some 35% upward which will likely increase the Company’s production cost lower gross profit. To alleviate or offset the adverse impact of the rise of grape price, the Company has accordingly adjusted the prices of its main products upward since December 2005 and plans to do better in the optimization of product structure in 2006 and further augment the sales volume of the middle-range and high-end products to absorb the unfavorable influence of the rise in cost of raw grapes on gross profits. (2) Changes of actual controlling parties of the Company During the report period, as SASAC Yantai transferred 33% and 10% out of the State-owned equity it held then in the controlling stockholder of this company respectively to two foreign investors, the actual controlling power over the Company was changed from original one party or SASAC Yantai to present four parties or SASAC Yantai , ILLVA Italy, International Finance Corporation and Yantai Yuhua Investment and Development Co., Ltd.. (3) Progress of the reform of the Company’s stock ownership According to the motion on reform of stock ownership officially put forward by the controlling stockholder Yantai Changyu Group Co., Ltd., the Company published the “Suggestive Announcement about the Reform of Stock Ownership” in “China Securities News”, “Securities Times” and Internet on January 23rd, 2006, thus formally starting the revision of stock ownership. On February 9th, 2006, the Company disclosed in “China Securities News”, “Securities Times” and Internet the “Description on the Reform of Stock Ownership”, “Description on the Reform of Stock Ownership (Abstracts)”, “Legal Opinions of Jinmao Law Office on the Reform of Stock Ownership”, “Independent Directors’ Comments on the Reform of Stock Ownership”, “The Board of Directors’ Collection Letter of Appointed Voters”, “Guarantor’s Opinions of Guotai Junan Securities on the Reform of Stock Ownership” and “Notification on Stockholders’ Meeting about the Reform of Stock Ownership”. On February 14th, 2006, the Company published in “China Securities News”, Securities Times” and Internet the “Announcement on E-Communication with Investors about the Reform of Stock Ownership” and afterwards conducted the video and audio e-talk with investors on February 16th, 2006. On February 18th, 2006, the Company disclosed in “China Securities News”, “Securities Times” and Internet the revised “Description on the Reform of Stock Ownership”, “Description on the Reform of Stock Ownership (Abstracts)”, “Supplementary Legal Opinions of Jinmao Law Office on the Reform of Stock Ownership”, “Independent Directors’ Additional Comments on the Reform of Stock Ownership”, “The Board of Directors’ Collection Letter of Appointed Voters”, “Independent Directors’ Comments on the Reform of Stock Ownership” and “Guarantor’s Supplementary Opinions of Guotai Junan Securities on the Reform of Stock Ownership”. On March 10th, 2006, the Company’s board of directors called a stockholders’ meeting about the reform of stock ownership, during which the plan for reform of stock ownership was approved. On March 17th,2006, the Company disclosed in “China Securities News”, “Securities Times” and Internet “The Implement Announcement about Reform of Stock Ownership” On March 21st,2006, the Company disclosed in “China Securities News”, “Securities Times” and Internet “The Announcement about Change on Share Structure ” X. Financial report 25 普华永道中天会计师事务所有限公司 11/F PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai 200021, PRC People's Republic of China Telephone +86 (21) 6123 8888 Facsimile +86 (21) 6123 8800 www.pwccn.com REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF YANTAI CHANGYU PIONEER WINE COMPANY LIMITED We have audited the accompanying consolidated balance sheet of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2005 and the related consolidated statements of income, cash flows and changes in shareholders’ equity for the year then ended. These financial statements set out on pages 2 to 42 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2005, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian Certified Public Accountants Ltd.Co. 删除的内容: CPAs 22 March 2006 删除的内容: imi 删除的内容: e 删除的内容: 删除的内容: mpany Business is undertaken in the registered name of 普 华 永 道 中 天 会 计 26 师 事 务 所 有 限 公 司 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2005 (All amounts in Renminbi (“RMB”)) As at 31 December Note 2005 2004 RMB’000 RMB’000 ASSETS Non-current assets Leasehold land, net 5 14,429 14,882 Property, plant and equipment 6 479,365 483,525 Investment in associate 8 - - Held-to-maturity investment 9 15,000 15,000 Available-for-sale financial assets 10 12,000 2,000 Deferred tax assets 19 12,687 13,271 Other non-current assets 11 20,000 20,000 553,481 548,678 Current assets Inventories 12 530,044 419,520 Trade receivables 13 67,021 58,972 Prepayments and other receivables 14 56,958 37,829 Due from Changyu Group Company 28 763 46,579 Financial assets at fair value through profit or loss - 15,089 Bank deposits with maturity over 3 months and restricted cash 15 582,010 347,107 Cash and cash equivalents 16 579,131 714,680 1,815,927 1,639,776 Total assets 2,369,408 2,188,454 EQUITY Capital and reserves attributable to the Company’s equity holders Share capital 17 405,600 405,600 Other reserves 930,438 867,964 Retained earnings 531,441 483,445 1,867,479 1,757,009 Minority interests 37,714 36,698 Total equity 1,905,193 1,793,707 LIABILITIES Non-current liabilities Deferred tax liabilities 19 4,014 6,124 Current liabilities Trade payables 121,917 100,308 Other payables and accrued liabilities 20 201,234 139,671 Salaries payable 68,597 77,413 Taxes payable 68,453 71,231 460,201 388,623 Total liabilities 464,215 394,747 Total equity and liabilities 2,369,408 2,188,454 The notes on pages 6 to 42 are an integral part of these consolidated financial statements. 27 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB) Year ended 31 December Note 2005 2004 RMB’000 RMB’000 Sales 1,686,401 1,237,307 Cost of goods sold (630,682) (491,351) Gross profit 1,055,719 745,956 Selling and marketing costs (489,222) (334,921) Administrative expenses (147,145) (126,019) Other gains - net 21 23,450 9,843 Profit before income tax 442,802 294,859 Income tax expense 24 (128,516) (111,208) Profit for the year 314,286 183,651 Attributable to: Equity holders of the Company 313,270 183,258 Minority interest 1,016 393 314,286 183,651 Earnings per share for profit attributable to the equity holders of the Company during the year - Basic and diluted 25 RMB0.77 RMB0.45 The notes on pages 6 to 42 are an integral part of these consolidated financial statements. 28 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB) Minority Note Attributable to equity holders of the Company interest Total equity Statutory Statutory Share Capital Fair value surplus public Retained capital reserve reserve reserve fund welfare fund earnings RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 18) Balance at 1 January 2004 312,000 765,169 7,313 74,129 74,128 372,212 27,694 1,632,645 Dividend relating to 2003 26 - - - - - (31,200) - (31,200) Capital injection of minority interest - - - - - - 8,611 8,611 Net profit for the year - - - - - 183,258 393 183,651 Appropriation from reserves 18 93,600 (93,600) - 20,412 20,413 (40,825) - - Balance at 31 December 2004 405,600 671,569 7,313 94,541 94,541 483,445 36,698 1,793,707 Balance at 1 January 2005 405,600 671,569 7,313 94,541 94,541 483,445 36,698 1,793,707 Dividend relating to 2004 26 - - - - - (202,800) - (202,800) Net profit for the year - - - - - 313,270 1,016 314,286 Appropriation from reserves 18 - - - 31,237 31,237 (62,474) - - Balance at 31 December 2005 405,600 671,569 7,313 125,778 125,778 531,441 37,714 1,905,193 The notes on pages 6 to 42 are an integral part of these consolidated financial statements. 29 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDARIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB) Year ended 31 December Note 2005 2004 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 27 199,495 454,115 Interest received 16,442 12,498 Income tax paid (111,668) (91,522) Net cash generated from operating activities 104,269 375,091 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (43,579) (64,511) Proceeds from disposals of property, plant and equipment 27 689 15,866 Purchase of held-to-maturity investment - (15,000) Purchase of available-for-sale financial assets (10,000) - Proceeds from sale of held-to-maturity investment - 15,722 Interest income of held-to-maturity 783 - investment Purchase of financial assets at fair value through profit or loss - (80,000) Proceeds from sale of financial assets at fair value through profit or loss 15,089 87,906 Net cash used in investing activities (37,018) (40,017) CASH FLOWS FROM FINANCING ACTIVITIES Repayments of short-term bank borrowings - (2,652) Capital injection of minority interest - 4,476 Dividends paid (202,800) (31,200) Net cash used in financing activities (202,800) (29,376) Net (decrease)/increase in cash and cash equivalents (135,549) 305,698 Cash and cash equivalents at beginning of the year 714,680 408,982 Cash and cash equivalents at end of the 579,131 714,680 year The notes on pages 6 to 42 are an integral part of these consolidated financial statements. 30 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED 31 AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR ENDED 31 DECEMBER 2005 1 ORGANIZATION AND OPERATIONS Yantai Changyu Pioneer Wine Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) on 18 September 1997. As part of the reorganization (the “Reorganization”), the Company issued 88,000,000 domestically listed foreign shares (“B Shares”). The Reorganization involved a reorganization carried out by Yantai Changyu Group Co., Ltd. (“Changyu Group Company”), the promoter and the parent company of the Company, which injected certain assets and liabilities in relation to the brandy, wine, sparkling wine and cider and tonic wine production and sales businesses to the Company. The Company’s B Shares were listed on the Shenzhen Stock Exchange on 23 September 1997. In October 2000, the Company issued 32,000,000 domestic investment ordinary shares (“A Shares”). The Company’s A Shares were listed on Shenzhen Stock Exchange on 26 October 2000. The Company and its subsidiaries (the “Group”) are principally engaged in the production and sales of wine, brandy, sparkling wine and cider and tonic wine. The registered office address of the Company is 56 Dama Road, Yantai City, Shandong Province, the PRC. These consolidated financial statements have been approved for issue by the Board of Directors on 22 March 2006. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain property, plant and equipment and financial assets at fair value through profit or loss. 31 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Basis of preparation (continued) 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. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Although the Group makes estimates and assumptions based on management’s best knowledge concerning the future, the resulting accounting estimates will, by definition, seldom equal the related actual results. During the year, the Group has no 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. Interpretations and amendments to published standards effective in 2005 The following amendments and interpretations to standards are mandatory for the Group’s accounting periods beginning on or after 1 September 2004: - IFRIC 2, Members’ Shares in Co-operative Entities and Similar Instruments (effective from 1 January 2005); - SIC 12 (Amendment), Consolidation - Special Purpose Entities (effective from 1 January 2005); and - IAS 39 (Amendment), Transition and Initial Recognition of Financial Assets and Financial Liabilities (effective from 1 January 2005). Management assessed the relevance of these amendments and interpretations with respect to the Group’s operations and concluded that they are not relevant to the Group. 32 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Basis of preparation (continued) 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 19 (Amendment), Employee Benefits (effective from 1 January 2006). This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group has no possibility of recognition of any actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will not have any impact to the consolidated financial statements. The Group will apply this amendment from annual periods beginning 1 January 2006. - IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from 1 January 2006). The amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in the consolidated financial statements, provided that: (a) the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction; and (b) the foreign currency risk will affect consolidated profit or loss. This amendment is not relevant to the Group’s operations, as the Group does not have any intragroup transactions that would qualify as a hedged item in the consolidated financial statements as of 31 December 2005 and 2004. - IAS 39 (Amendment), The Fair Value Option (effective from 1 January 2006). This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Group believes that this amendment should not have a significant impact on the classification of financial instruments, as the Group should be able to comply with the amended criteria for the designation of financial instruments at fair value through profit and loss. The Group will apply this amendment from annual periods beginning 1 January 2006. 33 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Basis of preparation (continued) - IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts (effective from 1 January 2006). This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognised at their fair value and subsequently measured at the higher of: (a) the unamortised balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date. Management considered this amendment to IAS 39 and concluded that it is not relevant to the Group. - IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006). These amendments are not relevant to the Group’s operations as the Group is not a first-time adopter of IFRS and does not carry out exploration for and evaluation of mineral resources. - IFRS 6, Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006). IFRS 6 is not relevant to the Group’s operations. - IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The Group assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of IAS 1. The Group will apply IFRS 7 and the amendment to IAS 1 from annual periods beginning 1 January 2007. - IFRIC 4, Determining whether an Arrangement contains a Lease (effective from 1 January 2006). IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. Management assessed the impact of IFRIC 4 and concluded that it is not relevant to the Group’s operations. 34 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Basis of preparation (continued) - IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (effective from 1 January 2006). IFRIC 5 is not relevant to the Group’s operations. - IFRIC 6, Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment (effective from 1 December 2005). IFRIC 6 is not relevant to the Group’s operations. This basis of accounting differs from that used in the statutory accounts of the Group companies which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises in the PRC (“PRC GAAP”). (b) Consolidation (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 purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. 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. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 35 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Consolidation (continued) (2) Transactions and minority interests The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. (3) Associate An associate is an entity over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investment in associate is accounted for using the equity method of accounting and is initially recognised at cost. The Group’s share of its associate’s 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 associate are eliminated to the extent of the Group’s interest in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of an associate have been changed where necessary to ensure consistency with the policies adopted by the Group. 36 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Segment reporting 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 are subject to risks and returns that are different from those of segments operating in other economic environments. (d) Foreign currency translation (1) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in RMB, which is the Company’s functional and presentation currency. (2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. (e) Leasehold land Leases of land acquired are classified as operating leases. The prepaid lease payments are amortised over the lease period (50 years) on a straight-line basis. (f) Property, plant and equipment Property, plant and equipment is shown at fair value, based on periodic valuations by external independent valuers, less subsequent depreciation for property, plant and equipment. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset, and the net amount is restated to the revalued amount of the asset. All other property, plant and equipments acquired subsequent to last valuation are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. 37 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Property, plant and equipment (continued) Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Increases in the carrying amount arising on revaluation of property, plant and equipment are credited to other reserves in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against fair value reserve directly in equity; all other decreases are charged to the income statement. Each year the difference between depreciation based on the revalued carrying amount of the asset charged to the income statement and depreciation based on the asset’s original cost is transferred from fair value reserve to retained earnings. Depreciation is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: Buildings 30-40 years Machinery and equipment 10-20 years Motor vehicles 6-12 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2(g)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings. Construction-in-progress represents plant and property under construction and machinery under testing and installation and is stated at cost. This includes cost of construction, plant and equipment and other direct costs. Construction-in-progress is not depreciated until such time as the relevant assets are completed and put into operational use. 38 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Impairment of non-financial 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 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 (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (h) Financial assets The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, held-to-maturity and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date. (1) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. (2) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 2(j)). 39 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Financial assets (continued) (3) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. They are included in non-current assets, except for those with maturities less than 12 months from the balance sheet date, which are classified as current assets. (4) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Regular purchases and sales of investments are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Investment in equity instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured, is measured at cost. Gains or losses arising, from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category, including interest and dividend income, are presented in the income statement within ‘other gains – net’ in the period in which they arise. Changes in the fair value of other monetary securities denominated in a foreign currency and classified as available for sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences are recognised in profit or loss, and other changes in carrying amount are recognised in equity. Changes in the fair value of other monetary securities classified as available-for-sale and non-monetary securities classified as available for sale are recognised in equity. 40 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Financial assets (continued) When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as ‘gains and losses from investment securities’. Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the Group’s right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2(j). (i) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. 41 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. (k) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (l) Share capital Ordinary shares are classified as equity. Incremental cost directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (m) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it 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. Deferred income tax is determined using tax rates (and laws) 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 income 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. 42 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Deferred income tax (continued) Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. (n) Employee benefits Contribution to pension scheme are recognised as an expense in the income statement as incurred. Pursuant to the PRC laws and regulations, contributions to the basic pension scheme for the Group’s local staff are to be made monthly to a government agency based on 25% of the standard salary set by the provincial government, of which 20% is borne by the Group and the remainder is borne by the staff. (o) Provisions Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 43 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (p) Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown, net of value-added tax (“VAT”), estimated returns, rebates and discounts and after eliminated sales within the Group. Revenue is recognised as follows: (1) Sales of goods Sales of goods are recognised when a Group entity has delivered products to the customer, the customer has accepted the products and collectibility of the related receivables is reasonably assured. (2) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (3) Dividend income Dividend income is recognised when the right to receive payment is established. (q) Leases Leases in which 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 income statement on a straight-line basis over the period of the lease. (r) Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. 44 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 3 FINANCIAL RISK MANAGEMENT (a) Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out by the Finance Department under policies approved by the Board of Directors. (1) Market risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. The Group is not significantly exposed to equity securities or commodity price risk. (2) Credit risk The Group has no significant concentrations of credit risk with any single counterparty or group counterparties. It has policies in place to ensure that sales of products are made to customers with an appropriate credit history. (3) Liquidity risk 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. (4) Cash flow and fair value interest rate risk As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. (b) Fair value estimation The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. In assessing the fair value of financial instruments that are not traded in an active market, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values. 45 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 4 SEGMENT INFORMATION The Group conducts its business within one business segment - the business of production and sales of wine products in the PRC. No segment statement of income has been prepared by the Group for the year ended 31 December 2005. The Group also mainly operates within one geographical segment because its revenue is primarily generated in the PRC and its assets are located in the PRC. Accordingly, no geographical segment data is presented. 5 LEASEHOLD LAND, NET 2005 2004 RMB’000 RMB’000 Cost Beginning / End of year 16,422 16,422 Accumulated amortisation Beginning of year 1,540 1,108 Additions 453 432 End of year 1,993 1,540 Net book value End of year 14,429 14,882 Beginning of year 14,882 15,314 Amortisation expense of RMB453,000 (2004: RMB432,000) has been charged in ‘administrative expenses’ (Note 22). 46 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 6 PROPERTY, PLANT AND EQUIPMENT Movements in property, plant and equipment were as follows: Machinery and Construction Buildings equipment Motor vehicles -in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2004 Valuation 253,915 219,594 11,980 9,233 494,722 Accumulated depreciation (7,415) (298) (255) - (7,968) Net book amount 246,500 219,296 11,725 9,233 486,754 Year ended 31 December 2004 Opening net book amount 246,500 219,296 11,725 9,233 486,754 Additions 112 17,899 785 38,722 57,518 Transfers 40,278 - - (40,278) - Disposals (15,567) (5,259) (234) - (21,060) Depreciation charge (9,234) (28,748) (1,705) - (39,687) Closing net book amount 262,089 203,188 10,571 7,677 483,525 At 31 December 2004 Cost or valuation 272,079 217,755 12,103 7,677 509,614 Accumulated depreciation (9,990) (14,567) (1,532) - (26,089) Net book amount 262,089 203,188 10,571 7,677 483,525 Year ended 31 December 2005 Opening net book amount 262,089 203,188 10,571 7,677 483,525 Additions 5,331 12,539 470 16,146 34,486 Transfers 10,017 7,627 - (17,644) - Disposals - - (2,114) - (2,114) Depreciation charge (7,565) (27,137) (1,830) - (36,532) Closing net book amount 269,872 196,217 7,097 6,179 479,365 At 31 December 2005 Cost or valuation 287,427 237,921 8,812 6,179 540,339 Accumulated depreciation (17,555) (41,704) (1,715) - (60,974) Net book amount 269,872 196,217 7,097 6,179 479,365 47 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 6 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The property, plant and equipment of the Group as of 31 December 2002 were revalued by Shandong Zhengyuan Hexin Certified Public Accountants, independent professional valuers. The independent valuers determined the fair value of the property, plant and equipment based on the replacement cost and open market value methods. According to the revaluation result, a revaluation surplus net of applicable deferred income tax of approximately RMB7,313,000 was credited to the fair value reserve in shareholders’ equity. Management of the Company estimates that there have been no significant changes in economic circumstances since the last valuation that would affect the fair value of the property, plant and equipment carried at revalued amounts at the balance sheet date. Depreciation expense of RMB26,915,000 (2004: RMB30,215,000) has been charged in ‘cost of goods sold’, RMB7,066,000 (2004: RMB6,220,000) in ‘selling and marketing costs’ and RMB2,551,000 (2004: RMB3,252,000) in ‘administrative expenses’ (Note 22). As of 31 December 2005, the registration of the legal title of buildings with net book value of approximately RMB42,062,000 was in process. If property, plant and equipment were carried at cost less accumulated depreciation, the amounts of each category of property, plant and equipment would be as follows: Machinery and Construction Buildings equipment Motor vehicles -in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 31 December 2005 Cost 292,093 314,932 11,821 6,179 625,025 Accumulated depreciation (33,468) (121,029) (3,566) - (158,063) 258,625 193,903 8,255 6,179 466,962 At 31 December 2004 Cost 276,745 294,766 15,112 7,677 594,300 Accumulated depreciation (26,496) (99,042) (3,716) - (129,254) 250,249 195,724 11,396 7,677 465,046 No borrowing costs were capitalised in 2005. 48 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 7 INVESTMENT IN SUBSIDIARIES In 2005, the Group had the following consolidated subsidiaries. All subsidiaries were incorporated in the PRC: Percentage of Percentage of Date of equity interest equity interest Paid-in Principal Name of company establishment held directly held indirectly capital activities Yantai Changyu Pioneer Wine Machine 1 December 1992 100% - RMB300,000 Machinery Packaging Co., Ltd. sub-contracting and repairing Yantai Changyu Pioneer Vehicular Transport 1 December 1992 100% - RMB300,000 Transportation Co., Ltd. service Changyu (Jingyang) Pioneer Wine Co., Ltd. 5 December 2001 90% 10% RMB1,000,000 Production and sales of wine Yantai Changyu Pioneer Wine Sales Co., Ltd. 24 December 2001 90% 10% RMB8,000,000 Sales of wine Dalian Changyu Sales and Distribution Co., Ltd. 23 January 1998 70% 30% RMB500,000 Sales of wine (d) Changsha Changyu Sales and Distribution Co., 22 January 1998 70% 30% RMB500,000 Sales of wine Ltd. (d) Wuhan Changyu Sales and Distribution Co., Ltd. 12 January 1998 70% 30% RMB500,000 Sales of wine (d) Taiyuan Changyu Sales and Distribution Co., 20 January 1998 70% 30% RMB500,000 Sales of wine Ltd. (d) Shijiazhuang Changyu Sales and Distribution 2 April 1998 70% 30% RMB500,000 Sales of wine Co., Ltd. (d) Beijing Changyu Sales and Distribution Co., Ltd. 14 July 1998 70% 30% RMB500,000 Sales of wine Guangzhou Changyu Sales and Distribution Co., 15 May 1998 70% 30% RMB500,000 Sales of wine Ltd. (d) Yantai Changyu-Castel Wine Chateau Co., Ltd. 3 September 2001 70% - USD5,000,000 oduction and (“Changyu-Castel”) (c) ales of wine Yantai Changyu Foreign Wine Sales Co., Ltd. 29 September 2005 70% 30% RMB500,000 Import and expor (e) of wine Beijing Changyu Castel Wine Chateau Co., Ltd. 27 October 2005 60% 5% RMB50,000,00 Production and 0 ales of wine Shanghai Changyu Sales and Distribution Co., 28 April 2003 60% 40% RMB500,000 Sales of wine Ltd. Yantai Changyu-Trade Winds Co., Ltd. 17 June 2004 51% - USD1,100,000 Production and sales of fru wine Yantai Kylin Packaging Co., Ltd. (“Kylin 29 September 1999 50% - USD1,400,000 Production o Packaging”) (a) packaging materials Langfang Development Zone Castel-Changyu 1 March 2002 49% - USD3,000,000 Production and Wine Co., Ltd. (“Langfang Castel”) (b) sales of wine Changyu (Jingyang) Pioneer Wine Sales Co., 8 April 2002 10% 90% RMB1,000,000 Sales of wine Ltd. Langfang Changyu Pioneer Wine Sales Co., Ltd. 19 April 2002 10% 90% RMB1,000,000 Sales of wine 49 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 7 INVESTMENT IN SUBSIDIARIES (CONTINUED) (a) The Company has more than one half of voting power in the board of directors of Kylin Packaging and has the power to control its strategic operating, investing and financing policies, therefore the financial statements of Kylin Packaging are consolidated in the Group’s financial statements. (b) Langfang Castel is a sino-foreign joint venture established by the Company and a foreign investor. According to an operation contract signed by the Company, Langfang Castel and the foreign investor, the Company is entrusted to manage Langfang Castel and therefore has the power to control its strategic operating, investing and financing policies. The foreign investor is not entitled to any profit sharing. In return the Company is required to pay an annual guaranteed fee to the foreign investor. Hence the financial statements of Langfang Castel are consolidated in the Group’s financial statements (Note 30(c)). (c) Changyu-Castel is a sino-foreign joint venture established by the Company and a foreign investor. According to an operation contract signed by the Company, Changyu-Castel and the foreign investor, the Company is entrusted to manage Changyu-Castel and therefore has the power to control its strategic operating, investing and financing policies. The foreign investor is not entitled to any profit sharing. In return the Company is required to pay an annual guaranteed fee to the foreign investor (Note 30(c)). (d) These subsidiaries were dissolved in 2005. (e) Yantai Changyu Foreign Wine Sales Co., Ltd. was renamed as Yantai Changyu Pioneer International Co., Ltd. on 24 January 2006. 8 INVESTMENT IN ASSOCIATE 2005 2004 RMB’000 RMB’000 Beginning of year - - Share of results - - End of year - - 50 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 8 INVESTMENT IN ASSOCIATE (CONTINUED) As of 31 December 2005, the Company had the following unlisted associate which was incorporated in the PRC: Cost of investment / Percentage Date of of equity interest held Registered Principal Name of company establishment directly capital activities Yantai Sino-French Pegase 25 February RMB703,000 / 40% French Franc Manufacture and Brandy Company Limited 1992 1,604,060 sale of brandy Before 2005, the Company had recognised accumulated losses of the associate amounting to RMB703,000. For the year ended 31 December 2005, there was no significant unrecognised share of loss of the associate. 9 HELD-TO-MATURITY INVESTMENT On 30 November 2004, the Company and Guotai Junan Securities Co., Ltd. (“GTJA”) signed a contract whereby the Company acquired RMB15,000,000 bonds with nominal value of RMB100 per unit issued by GTJA. The period of the bonds is from 1 November 2004 to 31 December 2009. The nominal interest rate is based on a basic interest rate equal to the rate of one-year fixed bank deposit published by the People’s Bank of China plus a fixed interest rate at 2.97% per annum. According to the relevant agreement, Shanghai State-owned Assets Management Co., Ltd. provides a guarantee for all the issuing terms of the bonds. For the year ended 31 December 2005, the Group received and recognised interest income of RMB783,000 in ‘other gains-net’ (Note 21). 10 AVAILABLE–FOR–SALE FINANCIAL ASSETS 2005 2004 RMB’000 RMB’000 Available-for-sale investment - Unlisted shares, at cost 12,000 2,000 Non-current available-for-sale investment comprises a 5% shareholding in Shenzhen Jiadeyu Information Business Co., Ltd. and a 17% shareholding in Yantai Dingtao Construction and Development Co., Ltd. at cost of RMB2,000,000 and RMB10,000,000, respectively. It is not practicable to determine the fair values of these investments because there is no quoted market price available in an active market, nor any other alternative method available that can reasonably estimate the fair values of the investments. 51 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 11 OTHER NON-CURRENT ASSETS 2005 2004 RMB’000 RMB’000 Prepayment for acquisition of an associate 20,000 20,000 Pursuant to an agreement between the Company and Tiantong Securities Co., Ltd., the Company acquired 20% equity interest in Tiantong Funds Management Co., Ltd. (renamed as Wanjia Funds Management Co., Ltd. on 17 February 2006) at a consideration of RMB20,000,000 in 2004. The other non-current asset represents the consideration paid for the acquisition. As of 31 December 2005, the relevant legal approvals were still in progress and the consideration paid was accounted for as a prepayment. 12 INVENTORIES 2005 2004 RMB’000 RMB’000 Raw materials 46,591 36,180 Work in progress 275,002 197,270 Finished goods 208,451 186,070 530,044 419,520 The cost of inventories recognised as expense and included in ‘cost of goods sold’ amounted to RMB595,097,000 (2004: RMB437,224,000). 13 TRADE RECEIVABLES 2005 2004 RMB’000 RMB’000 Accounts receivable 85,334 83,595 Notes receivable 6,587 3,080 91,921 86,675 Less: Provision for impairment of receivables (24,900) (27,703) 67,021 58,972 52 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 13 TRADE RECEIVABLES (CONTINUED) The fair values of trade receivables are as follows: 2005 2004 RMB’000 RMB’000 Accounts receivable 60,434 55,892 Notes receivable 6,587 3,080 67,021 58,972 There is no concentration of credit risk with respect to trade receivables, as the Group has a large number of customers, domestically dispersed. The Group has reversed impairment of RMB2,803,000 of its trade receivables (2004: provision of RMB2,148,000). The provision and reversal of provision for impaired receivables have been included in ‘administrative expenses’ in the consolidated income statement (Note 22). 14 PREPAYMENTS AND OTHER RECEIVABLES 2005 2004 RMB’000 RMB’000 Prepayments to suppliers 19,947 11,041 Interest receivable from bank deposits 9,402 4,082 Public housing fund receivable 15,202 12,775 Others 14,383 10,876 58,934 38,774 Less: Provision for impairment of receivables (1,976) (945) 56,958 37,829 The Group has made a provision of RMB1,031,000 for the impairment of its other receivables (2004: Nil). The provision for impaired receivables has been included in ‘administrative expenses’ in the consolidated income statement (Note 22). 53 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 15 BANK DEPOSITS WITH MATURITY OVER 3 MONTHS AND RESTRICTED CASH 2005 2004 RMB’000 RMB’000 Bank deposits with maturity over 3 months 579,547 341,834 Restricted cash 2,463 5,273 582,010 347,107 The effective interest rate on bank deposits with maturity over 3 month was 2.20% (2004: 1.94%); these deposits had an average maturity of 215 days. 16 CASH AND CASH EQUIVALENTS 2005 2004 RMB’000 RMB’000 Cash at bank and in hand 342,531 347,152 Short-term bank deposits 236,600 367,528 579,131 714,680 The effective interest rate on short-term bank deposits was 2.24% (2004: 1.83%); these deposits had an average maturity of 65 days. 17 SHARE CAPITAL As of 31 December 2005, the outstanding share capital comprised Domestic Legal Person Shares, A Shares and B Shares. All the A and B shares rank pari passu in all respects. 2005 2004 2005 2004 Number of shares (’000) RMB’000 RMB’000 Issued and fully paid: Listed - A Shares of RMB1 each 49,920 49,920 49,920 49,920 - B Shares of RMB1 each 137,280 137,280 137,280 137,280 187,200 187,200 187,200 187,200 Unlisted - Domestic Legal Person Shares of RMB1 each 218,400 218,400 218,400 218,400 405,600 405,600 405,600 405,600 54 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 18 RESERVES (a) Capital reserve In accordance with the Company’s articles of association, the Company shall record the followings as capital reserve: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the articles of association and relevant regulations in the PRC. Capital reserve may be utilised to offset prior years’ losses or for the issuance of bonus shares. (b) Statutory reserves In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital, and thereafter any further appropriation is optional. The SRF can be utilised to offset prior years’ losses or for the issuance of bonus shares. However, such SRF shall be maintained at a minimum of 25% of share capital after such issuance. In accordance with the Company Law of the PRC and the Company’s articles of association, the Company also shall appropriate 5% to 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory public welfare fund (“PWF”). PWF shall be utilised for collective staff benefits such as building of staff quarters or housing. No distribution of the fund shall be made other than on liquidation of the Company. For the year ended 31 December 2005, the board of directors of the Company proposed that 10% (2004: 10%) of the net profit as reported in the statutory accounts be appropriated to each of SRF and PWF respectively, totalling approximately RMB62,474,000 (2004: approximately RMB40,825,000). The resolution is subject to the approval by the shareholders in the Annual General Meeting. 55 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 19 DEFERRED INCOME TAX Deferred tax assets / liabilities were calculated in full on temporary differences under the liability method using a principal tax rate of 33% (2004: 33%). Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes related to the same fiscal authority. The offset amounts are as follows: 2005 2004 RMB’000 RMB’000 Deferred tax assets: -Deferred tax assets to be recovered after more than 12 months (12,687) (13,271) Deferred tax liabilities: -Deferred tax liabilities to be recovered after more than 12 months 1,904 3,807 -Deferred tax liabilities to be recovered within 12 months 2,110 2,317 4,014 6,124 (8,673) (7,147) The gross movement on the deferred income tax account is as follows: 2005 2004 RMB’000 RMB’000 Beginning of the year (7,147) (5,688) Income statement credit (Note 24) (1,526) (1,459) End of the year (8,673) (7,147) 56 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 19 DEFERRED INCOME TAX (CONTINUED) The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Charged/ (Credited) Beginning to the income Ending of of year statement year RMB’000 RMB’000 RMB’000 Deferred tax liabilities: Year ended 31 December 2004 - Revaluation surplus on property, plant and equipment 8,441 (2,317) 6,124 - General and administrative expenses recorded using the accrual basis 6,883 (6,883) - - Fair value gain on financial assets at fair value through profit or loss 279 (279) - 15,603 (9,479) 6,124 Year ended 31 December 2005 - Revaluation surplus on property, plant and equipment 6,124 (2,110) 4,014 Deferred tax assets: Year ended 31 December 2004 - Loss on disposals of property, plant and equipment (2,267) - (2,267) - Loss on write-off of inventories (8,729) 8,729 - - Provision for impairment of receivables (10,295) (709) (11,004) (21,291) 8,020 (13,271) Year ended 31 December 2005 - Loss on disposals of property, plant and equipment (2,267) - (2,267) - Write-back of provision/(Provision) for impairment of receivables (11,004) 584 (10,420) (13,271) 584 (12,687) The above deferred taxes arise in the following circumstances: - Disposals of property, plant and equipment and loss on write-off of inventories are not tax deductible until approved by the local tax bureau; - Provision for impairment of receivables is not tax deductible until approved by the local tax bureau; - As revaluation is for accounting purpose only, depreciation charge of property, plant and equipment stated at fair value is different from that for tax purpose; - Certain accrued expenses are not tax deductible until payments are made; and - Fair value gain on financial assets at fair value through profit or loss is not subject to income tax until the income is realised upon the trading of the investment. 57 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 20 OTHER PAYABLES AND ACCRUED LIABILITIES 2005 2004 RMB’000 RMB’000 Welfare payable 24,188 17,628 Advances from customers 36,898 44,894 Housing fund due to employees 13,599 11,308 Payables for advertising expenses 58,241 28,477 Deposits from sales agencies 25,275 17,358 Deposits from suppliers 10,422 4,152 Others 32,611 15,854 201,234 139,671 21 OTHER GAINS - NET 2005 2004 RMB’000 RMB’000 Financial assets at fair value through profit or loss: - fair value gains (realised) - 2,151 Gains of held-to-maturity investment (realised) 783 722 Interest income 21,762 13,051 Investment income 22,545 15,924 Loss on disposals of property, plant and equipment (1,425) (5,194) Others 2,330 (887) 23,450 9,843 58 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 22 EXPENSES BY NATURE 2005 2004 RMB’000 RMB’000 Depreciation and amortisation (Note 5 and 6) 36,985 40,119 (Write-back of provision)/Provision for impairment of receivables (Note 13 and 14) (1,772) 2,148 Employee benefit expense (Note 23) 195,470 155,752 Changes in inventories of finished goods and work in progress (100,113) (89,725) Raw materials and consumables used 695,210 526,949 Loss on write-off of inventories (VAT included) - 14,260 Advertising costs 224,882 144,336 Transportation 81,578 60,997 Travelling expenses 16,713 13,305 Research and development costs included in general and administrative expenses 2,127 2,843 Trademarks licence (Note 28(b)) 36,088 26,769 Operating lease rentals - Lease of machinery, facilities and trademark 4,390 2,160 - Lease of land use rights (Note 28(d)) 550 550 Guaranteed fee paid to joint-venture foreign investor (Note 30(c)) 3,764 4,277 Other expenses 71,177 47,551 Total cost of goods sold, marketing and distribution costs and administrative expenses 1,267,049 952,291 23 EMPLOYEE BENEFIT EXPENSE 2005 2004 RMB’000 RMB’000 Wages and salaries and bonus 162,087 127,274 Provision for staff welfare 22,046 15,576 Defined contribution pension scheme 11,337 12,902 195,470 155,752 59 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 24 TAXATION (a) Enterprise income tax (“EIT”) 2005 2004 RMB’000 RMB’000 Current income tax expense 130,042 112,667 Deferred taxes (Note 19) (1,526) (1,459) 128,516 111,208 The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the applicable tax rate to profits of the consolidated companies as follows: 2005 2004 RMB’000 RMB’000 Profit before tax 442,802 294,859 Tax at the statutory tax rate of 33% 146,125 97,303 Tax effect of expenses that are no deductible/(income that are not taxable) in determining taxable profit: - Profit of a subsidiary entitled to tax deduction / exemption (a) (17,609) (9,950) - Expenses not deductible for taxation purpose - 23,855 Tax charge 128,516 111,208 (a) Changyu-Castel is a foreign investment production enterprise incorporated in Yantai Development Zone and is subject to enterprise income tax of 15%. Changyu-Castel is exempt from local income tax. As approved by the tax authority in 2004, Changyu-Castel is entitled to a two year exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. As 2003 was approved as the first profit-making year, Changyu-Castel was entitled to tax exemption in 2003 and 2004. The tax rate in 2005 is 7.5%. The weighted average applicable tax rate was 29% (2004: 38%). The main reason for the decrease was certain undeductible losses incurred in 2004. (b) VAT The Group is subject to VAT, which is a tax charged on top of the selling price at a general rate of 17%. An input credit is available whereby VAT previously paid on purchases of semi-finished products, raw materials, etc., can be used to offset the VAT on sales to determine the net VAT payable. 60 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 24 TAXATION (CONTINUED) (c) Sales taxes The Group is subject to consumption tax (“CT”) on its products. CT is levied on the gross turnover of products at rates ranging from 10% to 15%. In addition to the above, the Group is subject to the following types of sales taxes: - City development tax, a tax levied at 7% of CT and net VAT payable, - Education supplementary tax, a tax levied at 4% of CT and net VAT payable. 25 EARNINGS PER SHARE The calculation of basic earnings per share is based on the net profit for the year attributable to shareholders of the Company of approximately RMB313,270,000 (2004: approximately RMB183,258,000), divided by the weighted average number of ordinary shares outstanding during the year of 405,600,000 shares (2004: 405,600,000 shares). Diluted earnings per share equal to basic earnings per share as there are no potential dilutive shares outstanding. 26 DIVIDENDS PER SHARE In accordance with the relevant regulations of the PRC and the articles of association of the Company, the Company declares dividends based on the lower of the retained earnings as reported in the PRC statutory accounts and financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with PRC GAAP, the retained earnings as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements. The cash dividends paid in 2005 and 2004 were RMB202,800,000 (RMB0.5 per share) and RMB31,200,000 (RMB0.1 per share) respectively. A cash dividend in respect of 2005 of RMB0.7 (2004: RMB0.5) per share, amounting to a total cash dividend of RMB283,920,000 (2004: RMB202,800,000), was to be proposed. In addition, by appropriation of the Company’s capital reserve, the Company declared a bonus share dividend of 0.3 share (2004: Nil) per share, totalling bonus shares of 121,680,000 shares (2004: Nil). The profit appropriations need to be approved by the Annual General Meeting. These financial statements do not reflect this dividend payable. 61 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 27 CASH GENERATED FROM OPERATIONS 2005 2004 RMB’000 RMB’000 Profit for the year 314,286 183,651 Adjustments for: - Taxation 128,516 111,208 - Depreciation and amortisation 36,985 40,119 - (Write-back of provision)/Provision for impairment of receivables (1,772) 2,148 - Loss on disposals of property, plant and equipment 1,425 5,194 - Fair value gains (including profit on sale) on financial assets at fair value through profit or loss - (2,151) - Gains on held-to-maturity investment (783) (722) - Interest income (21,762) (13,051) Changes in working capital: - Inventories (110,524) (78,595) - Trade receivables (5,246) 44,206 - Prepayments and other receivables (14,840) (9,734) - Due from Changyu Group Company 45,816 (10,779) - Bank deposits with maturity over 3 months (234,903) 136,536 - Trade payables 30,701 1,824 - Salaries payable (8,816) 25,421 - Other payables and accrued liabilities 61,563 25,136 - Taxes other than income tax payable (21,151) (6,296) Cash generated from operations 199,495 454,115 In the consolidated cash flow statement, proceeds from disposals of property, plant and equipment comprise: 2005 2004 RMB’000 RMB’000 Net book value 2,114 21,060 Loss on disposals of property, plant and equipment (1,425) (5,194) Proceeds from disposals of property, plant and equipment 689 15,866 62 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 28 RELATED PARTY TRANSACTIONS The Group is controlled by Changyu Group Company, which owns 53.8% of the Company’s shares. The directors of the Company considered Changyu Group Company to be the ultimate parent company. Changyu Group Company was originally a state-controlled company, belonging to Yantai State-owned Assets Management Administration. The percentage of equity interest held by Yantai State-owned Assets Management Administration and Yantai Yuhua Investment and Development Company Limited were 55% and 45% respectively. In February 2005, Yantai State-owned Assets Regulatory Commission (originally named as Yantai State-owned Assets Management Administration) transferred its 33% equity interest of Changyu Group Company to two foreign investors. The legal approval and registration of the transfer was completed on 30 September 2005. After the equity transfers, Yuhua Investment and Development Company Limited became the majority shareholder of Changyu Group Company. In addition, Changyu Group Company became a sino-foreign joint venture company. For the year ended 31 December 2005, the Group had the following significant related party transactions: (a) Services agreement Pursuant to a service agreement dated 18 May 1997, starting from 18 September 1997 (date of the incorporation), Changyu Group Company has provided facilities and services such as kindergarten and canteen to the Company. An annual service fee of RMB500,000 is payable by the Company to Changyu Group Company from the date of incorporation, until the end of the fourth accounting year (i.e. 2000). As from the fifth accounting year, the service fee may be adjusted every three years by not more than 10% of the previous annual service fee. The agreement is effective until 31 December 2007. For the year ended 31 December 2005, the Company paid service fee of RMB500,000 (2004: RMB500,000) to Changyu Group Company. (b) Trademarks licence Pursuant to a trademark’s licencing agreement dated 18 May 1997, starting from 18 September 1997, the Company may use certain trademarks of Changyu Group Company, which have been registered with the PRC Trademark Office. An annual fee at 2% of the Group’s annual sales is payable to Changyu Group Company. The licence is effective until the expiry of the registration of the trademarks. For the year ended 31 December 2005, the Group paid trademarks fee of approximately RMB36,088,000 (2004: approximately RMB26,769,000) to Changyu Group Company. 63 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 28 RELATED PARTY TRANSACTIONS (CONTINUED) (c) Patents implementation licence Pursuant to a patents implementation licence dated 18 May 1997, starting from 18 September 1997, the Company may use the patents of Changyu Group Company. The annual patents usage fee payable by the Company to Changyu Group Company is RMB50,000. The contract was expired on 20 December 2005. As of 31 December 2005, the renewal of the contract is in progress. For the year ended 31 December 2005, the patents usage fee payable to Changyu Group Company amounted to RMB50,000 (2004: RMB50,000). (d) Agreement for the lease of land use rights Pursuant to an agreement dated 18 May 1997, the Company agreed to lease from Changyu Group Company certain pieces of land for the period from 18 September 1997 to 21 April 2047. The annual rental payable by the Company to Changyu Group Company is approximately RMB550,000. For the year ended 31 December 2005, the rental of land use rights payable to Changyu Group Company amounted to RMB550,000 (2004: RMB550,000). (e) Balance with Changyu Group Company As of 31 December 2005, the balance with related party was amount due from Changyu Group Company. It was interest free, unsecured and with no specified repayment date. (f) Transactions with other state-owned enterprises Given that the PRC government still owns a significant portion of the productive assets in the PRC despite the continuous reform of the government structure, part of the Group’s business activities had been conducted with enterprises directly or indirectly owned or controlled by the PRC government (“state-owned enterprises”), including Changyu Group Company, its subsidiaries, associated companies and jointly controlled entities in the ordinary course of business. In accordance with the revised IAS 24, Related Party Disclosures (“IAS 24”), state-owned enterprises and their subsidiaries, other than entities under Changyu Group Company, directly or indirectly controlled by the PRC government are also defined as related parties of the Company. As disclosed in Note 28 above, Changyu Group Company was originally a state-owned company incorporated in the PRC and was controlled by the PRC government. After the completion of the equity transfer on 30 September 2005, Changyu Group Company is not controlled by the PRC government. Accordingly, before 30 September 2005, as a subsidiary of Changyu Group Company, the Group was controlled by the PRC government. In this connection, the transactions between the Group and other state-owned enterprises before 30 September 2005 are disclosed as related party transactions. 64 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 28 RELATED PARTY TRANSACTIONS (CONTINUED) (f) Transactions with other state-owned enterprises (continued) The following is a summary of the significant transactions entered into by the Company on normal commercial terms with other state-owned enterprises for the nine months ended 30 September 2005: Nine months ended The year ended 31 30 September 2005 December 2004 RMB’000 RMB’000 Income Sales to other state-owned enterprises 42,243 41,754 Interest income from state-owned 18,971 13,051 banks Expenditure Purchase from other state-owned enterprises 16,023 49,160 Leasing fee to other state-owned enterprises - 2,160 Year-end balance arising from sales/purchase of goods/services and other transactions: 2005 2004 RMB’000 RMB’000 Bank deposits in state-owned banks - 1,061,787 Trade and other receivables from other state-owned enterprises - 8,725 Trade and other payabless from other state-owned enterprises - 323 (g) Key management compensation 2005 2004 RMB’000 RMB’000 Salaries and other short-term employee benefits 4,830 1,840 65 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 29 CONTINGENT LIABILITIES As of 31 December 2005, the Group had no material contingent liabilities. 30 COMMITMENTS (a) Capital commitments As of 31 December 2005, the Group had investment commitment in a subsidiary, Kylin Packages, amounting to approximately RMB3,104,000. (b) Operating leases Total future minimum lease payments under non-cancellable operating leases are as follows: 2005 2004 RMB’000 RMB’000 Lease of land use rights - not later than one year 947 947 - later than one year and not later than five 3,790 3,790 - later than five years 29,815 30,762 34,552 35,499 Lease of machinery, facilities and trademark - not later than one year 4,125 4,125 - later than one year and not later than five 2,407 6,532 6,532 10,657 (c) According to an operation contract signed by the Company, Langfang Castel and the foreign investor, in exchange for the exclusive control power and profit sharing right on Langfang Castel, the Company is required to pay an annual guaranteed fee to the foreign investor during the period from 1 January 2002 to 31 December 2006. The annual guaranteed fee for the year ending 31 December 2006 is 18% of the foreign investor’s paid in capital of USD1,530,000 (equivalent to approximately RMB12,648,000) in Langfang Castel. According to an operation contract signed by the Company, Changyu-Castel and the foreign investor, in exchange for the exclusive control power and profit sharing right on Changyu-Castel, the Company is required to pay an annual guaranteed fee to the foreign investor during the period from 1 January 2003 to 1 January 2008. The annual guaranteed fee for the years ending 31 December 2006 and 2007 is 16% and 20%, respectively, of the foreign investor’s paid in capital of USD1,500,000 (equivalent to approximately RMB12,415,000) in Changyu-Castel. 66 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR YEAR ENDED 31 DECEMBER 2005 31 EVENTS AFTER THE BALANCE SHEET DATE (a) Pursuant to the Share Reform Notices issued by the Company in February 2006, Changyu Group Company transferred its 13,977,600 shares in the Company to the A Share shareholders of the Company in March 2006. After the share transfer, the number of shares and the shareholding percentage held by Changyu Group Company has been reduced from 218,400,000 and 53.8% to 204,422,400 and 50.4%, respectively. (b) At the meeting of the board of the directors on 22 March 2006, a cash dividend in respect of 2005 of RMB0.7 (2004: RMB0.5) per share, amounting to a total cash dividend of RMB283,920,000 (2004: RMB202,800,000) was to be proposed. In addition, by appropriation of the Company’s capital reserve, the Company declared a bonus share dividend of 0.3 (2004: Nil) share per share, totalling bonus shares of 121,680,000 shares (2004: Nil). The profit appropriations need to be approved by the Annual General Meeting. These financial statements do not reflect this dividend payable. 67 IMPACTS OF IFRS ADJUSTMENTS ON NET PROFIT AND NET ASSETS Net profit for the year Net assets as of ended 31 December 31 December 2005 2004 2005 2004 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the Group’s statutory accounts 313,386 204,519 1,887,483 1,776,897 Impact of adjustments, net - adjustment on administrative expenses using accrual basis - (20,857) - - - revaluation surplus on property, plant and equipment - - 7,313 7,313 - depreciation of revaluation surplus on property, plant and equipment (626) (626) (1,878) (1,252) - fair value gain on financial assets at fair value through profit or loss - (844) - - - deferred taxes 1,526 1,459 12,275 10,749 As restated in accordance with IFRS 314,286 183,651 1,905,193 1,793,707 XI. Reference Documents (1)The original of annual report autographed by the chairman. (2)The financial statements autographed and signed by the chairman, chief accountant and accountants in charge. (3)The original of the auditing report signed by the certified public accountants firm and autographed by certified public accountants and the description of special audits on misappropriation of funds by the controlling stockholder of this company and other related parties. (4) The originals of all documents and announcements that the company made public during the report period in the newspapers designated by China Securities Regulatory Commission. Board of Directors of Yantai Changyu Pioneer Wine Co., Ltd. March 25, 2006 68