鲁泰Ａ(000726)鲁泰Ｂ2005年年度报告（英文版）

LU THAI TEXTILE CO., LTD. ANNUAL REPORT (Adjustment based on International Accounting Standards) ==2005== Shandong · Zibo March 23, 2006 1 SECTION I. IMPORTANT NOTES AND CONTENTS IMPORTANT NOTES Board of Directors, Supervisory Committee, directors, supervisors and senior executives of Lu Thai Textile Co., Ltd. (hereinafter referred to as the Company) hereby confirm that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. This annual report is written in both Chinese and English. Should there be any difference in interpretation of the two versions, the Chinese version shall prevail. Mr. Xu Zhinan and Mr. Chen Ruimou, Director of the Company, and Mr. Wang Yonggui, Independent Director of the Company, were absent from the Board meeting; Director Mr. Xu Zhinan and Director Mr. Chen Ruimou entrusted Mr. Liu Shizhen, Chairman of the Board of the Company, to vote on his behalf respectively, and Independent Director Wang Yonggui entrusted Independent Director Mr. Zhou Zhiji to vote on his behalf. China Rightson Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Limited Company respectively issued the domestic and international standard unqualified Auditors’ Report for the Company. Chairman of the Board of the Company Mr. Liu Shizhen, Chief Financial Officer Mr. Liu Zibin and Financial Principal Ms. Zhang Hongmei hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. 2 CONTENTS SECTION I. IMPORTANT NOTES AND CONTENTS----------------------------------------------2 SECTION II. COMPANY PROFILE---------------------------------------------------------------------4 SECTION III. SUMMARY FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT-----5 SECTION IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS---------------------------------------------------------------------------------7 SECTION V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES---------------------------------------------------------------------10 SECTION VI. CORPORATE GOVERNANCE ------------------------------------------------------14 SECTION VII. BRIEF TO SHAREHOLDERS’ GENERAL MEETING -----------------------16 SECTION VIII. REPORT OF BOARD OF DIRECTORS------------------------------------------18 SECTION IX. REPORT OF SUPERVISORY COMMITTEE-------------------------------------26 SECTION X. SIGNIFICANT EVENTS-----------------------------------------------------------------27 SECTION XI. FINANCIAL REPORT-------------------------------------------------------------------29 (Ⅰ) AUDITORS’ REPORT------------------------------------------------------------------------29 (Ⅱ) FINANCIAL STATEMENT------------------------------------------------------------------30 (Ⅲ) NOTES TO FINANCIAL STATEMENT------------------------------------------------35 SECTION XII. DOCUMENTS AVAILABLE FOR REFERENCE-----------------------------56 3 SECTION II. COMPANY PROFILE Ⅰ. Legal Name of the Company: In Chinese: 鲁泰纺织股份有限公司 In English: LU THAI TEXTILE CO., LTD. Ⅱ. Legal Representative: Liu Shizhen Ⅲ. Contact Methods of Secretary of the Board of Directors and Securities Affairs Representative: Secretary of the Board of Securities Affairs Representative Directors Name Qin Guiling Zheng Weiyin Contact No. 81, Songling East Road, Zichuan No. 81, Songling East Road, Zichuan address District, Zibo District, Zibo Telephone (86)533-5285166; 5418361 (86)533-5285166; 5418361 Fax (86)533-5418833; 5282188 (86)533-5418833; 5282188 E-mail qinguiling@lttc.com.cn wyzheng@lttc.com.cn Ⅳ. Registered Address: No. 11, Mingbo Road, High-tech Industry Development Zone, Zibo, Shandong Post Code: 255086 Office Address: No. 81, Songling East Road, Zichuan District, Zibo No. 11, Mingbo Road, High-tech Industry Development Zone, Zibo, Shandong Post Code: 255100 E-mail: lttc@public.zbptt.sd.cn Internet Website: www.lttc.com.cn Ⅴ. Newspapers Designated for Disclosing Information of the Company: Securities Times, Shanghai Securities News and Ta Kung Pao Internet Website Designated by China Securities Regulatory Commission for Publishing the Annual Report: www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Ⅵ. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: LUTHAI A, LUTHAI B Stock Code: 000726, 200726 Ⅶ. Other Relevant Information of the Company Registration date after change: Aug. 7, 2003 Place: Zibo Municipal Administration Bureau for Industry and Commerce Registered number of enterprise legal person’s business license: QGLZZ Zi No.: 000066 Registered number of taxation: 370302613281175 Particulars about certified public accountants engaged by the Company: Domestic: China Rightson Certified Public Accountants Address: 8/F, Tower A, International Corporation Mansion, 35 Finance Street, Xicheng District, Beijing Overseas: PricewaterhouseCoopers Zhong Tian CPAs Limited Company Address: 12/F, Shui On Plaza, 333 Huai Hai Road (M), Shanghai, and PRC 4 SECTION III. SUMMARY FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT I. Accounting data as of the year 2005 Unit: RMB’000 Total profit 387,004 Net profit 314,531 Profit from main operations 684,186 Other operating profit 53,302 Operating profit 472,417 Investment income -9 Financial expense -85,405 Net cash flow arising from operating activities 420,215 Net increase/decrease in cash and cash equivalents -100,288 Explanation for difference in net profit and net assets under IAS and CAS Unit: RMB’000 Adjustment Net profit as of Net assets as at the year 2005 Dec. 31, 2005 As prepared under CAS 311,450 1,737,164 Increase of fixed assets translations was not been accepted - -3,230 due to USD’s statement of the year 1996 was converted into RMB’s statement Accounts receivable over two years was reckoned into 1,789 - capital reserve under CAS, while was reckoned into profit and loss under IAS Writing off reserve for equity investment confirmed in 531 -8,393 capital reserve under CAS Writing off amortization of goodwill under CAS 1,585 1,982 Writing off long-term investment as of 2004 of Lu Ming -22 - confirmed according to equity method Parent company’s homemade equipment was confirmed as 994 -4,417 deferred income under IAS Lufeng Textile and Dye Co., Ltd.’s interests were capitalized -2,511 -2,511 under CAS, while the said interests were written off under IAS Depreciation of Lufeng Textile and Dye Co., Ltd.’s 115 115 capitalization of interest allotted in 2005 under CAS, while the said interests were written off under IAS Less: Gains and losses of minority shareholders -599 -599 Data under IAS 314,530 1,721,309 II. Major accounting data and financial indexes over the past three years Unit: RMB’000 Indexes/Items 2005 2004 2003 Income from main operations 2,233,104 1,890,862 1,270,512 Net profit 314,531 285,725 195,156 Total assets 4,403,649 3,977,156 2,584,956 5 Shareholders’ equity (excluding minority interests) 1,721,309 1,565,675 1,446,327 Earnings per share (RMB/share) 0.74 0.66 0.46 Net assets per share (RMB/share) 4.07 3.71 3.42 Net cash flow per share arising from operating 0.99 0.66 0.19 activities (RMB) Return on equity (%) 18.27% 17.74% 13.49% III. Supplemental statement of financial indexes Earnings per share Return on equity (%) (RMB/share) Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 39.75% 39.63% 1.62 1.62 Operating profit 27.45% 27.36% 1.12 1.12 Net profit 18.27% 19.14% 0.74 0.74 IV. Particulars about changes in shareholders’ equity during the report period Unit: RMB’000 Retained Total Share Stock Capital Item profit shareholders’ capital premium reserve equity Amount at the 422,432 695,390 160,073 287,780 1,565,675 period-begin Increase in the report 49,207 106,427 155,634 period Decrease in the report period Amount at the period-end 422,432 695,390 209,280 394,207 1,721,309 6 SECTION IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT THE SHAREHOLDERS I. Statement of changes in shares Unit: shares Increase / decrease this time (+, -) Shares capital Before the After the Ratione Bonus transferred Additional change Others Sub-total change d shares shares from public issuance reserve I. Nontradable shares 1. Sponsors’ shares 118,232,400 118,232,400 Including: Shares held by the State Share held by domestic 59,116,200 59,116,200 legal person Share held by foreign 59,116,200 59,116,200 legal person Others 2. Raised legal person’s shares 3. Inner employees shares 4. Preference shares or others Total nontradable shares 118,232,400 118,232,400 II. Tradable shares 1. RMB ordinary shares 141,960,000 141,960,000 2. Domestically listed 162,240,000 162,240,000 foreign shares 3. Overseas listed foreign shares 4. Others Total tradable shares 304,200,000 304,200,000 III. Total shares 422,432,400 422,432,400 II. Issuance and listing of the share 1. Issuance of shares in the recent three years The Company additionally issued 50 million RMB ordinary shares by adding capital in Dec. 2000 at the issuing price of RMB 17.80 per share. The said shares were listed at Shenzhen Stock Exchange for trade on Dec. 25, 2000. In three years after additional issuance of A shares, as approved by Shenzhen Stock Exchange, inner employees shares of the Company amounting to 40.56 million shares were listed in Shenzhen Stock Exchange for trade on Dec. 26, 2003, of which, 404,382 shares held by senior executives were frozen. 2. Change in total share and structure in the report period During the report period, total share and structure remained unchanged, III. About shareholders at the end of the report period 7 1. Particulars about shareholders and shares held by the top ten shareholders Total number of shareholders 26,460 shareholders in total, including 7,299 ones of B-share Particulars about shares held by the top ten shareholders Increase/ Total number Number of Share Nature of Proportion Name of shareholders Decrease in of shares held nontradable pledged or shareholders (%) report period (share) shares held frozen ZIBO LUCHENG TEXTILE Other 0 14.00% 59,116,200 59,116,200 0 INVESTMENT CO., LTD. TAILUN TEXTILE CO., LTD. Foreign 0 14.00% 59,116,200 59,116,200 0 shareholder DBS VICKERS (HONG KONG) LTD Foreign +7,449,809 3.10% 13,132,498 0 0 A/C CLIENTS shareholder HTHK-VALUE PARTNERS Foreign -360,300 1.65% 6,993,222 0 0 INTELLIGENT FD-CHINA B SHS shareholder FD HAITONG – BANK OF CHINA – Other +6,745,721 1.59% 6,745,721 0 0 FORTIS BANK HAIFUTONG INCOME GROWTH Other -961,545 1.42% 6,000,000 0 0 SECURITIES INVESTMENT FUND CITIC CLASSIC ALLOCATION Other +2,142,073 1.30% 5,500,000 0 0 SECURITIES INVESTMENT FUND BBH BOS S/A FIDELITY FD - Foreign +2,600,000 1.23% 5,200,000 0 0 CHINA FOCUS FD shareholder HTHK/CMG FSGUFP-CMG FIRST Foreign +1,637,828 1.18% 5,020,262 0 0 STATE CHINA GROWTH FD shareholder TOYO SECURITIES ASIA Foreign +395,837 1.10% 4,657,847 0 0 LIMITED-A/C CLIENT. shareholder (1) Among the top ten shareholders, the top two shareholders are sponsor shareholders of the Company, and there existed no associated relationship between them. The rest Explanation on associated shareholders are shareholders of tradable shares. (2) The change of shares held by the relationship among the top ten 3rd shareholder to the 10th shareholder was due to purchase and selling of A-share or shareholders or consistent action B-share. (3) The Company was unknown whether there is any associated relationship or acting-in-concert among other shareholders except for sponsor shareholders. 2. Brief introduction to the controlling shareholder Zibo Lucheng Textile Investment Co., Ltd. is the first largest shareholder of the Company as well as the actual controller of the Company. Legal representative: Liu Zibin Registered capital: RMB 63.26 million Business scope: Zibo Lucheng Textile Investment Co., Ltd. (hereinafter referred to as Lucheng Investment) was engaged in investment textile, electric power and pharmacy; knitwear and the relevant import and export business; retail of lubricating oil, gas oil and diesel oil; Chinese meal and wholesale and retail of general merchandise and etc.. Lucheng Investment is the first largest shareholder of the Company as well as the actual controlling shareholder of the Company. The original name of Lucheng Investment is Zibo Lucheng Textile Co., Ltd., which was founded on Sep. 25, 1998 based on Zibo No. 7th Cotton Textile Plant, sponsor of the Company. It is a Limited Company that its shares held by natural persons. On Oct. 13, 2004, Zibo Lucheng Textile Co., Ltd. changed its registration for industry and commerce as Zibo Lucheng Textile Investment Co., Ltd. presently. Ended Apr. 21, 2005, its registered capital increased to RMB 63.26 million. Of them, Mr. Liu Shizhen held 21% equity of Lucheng Investment, and is the first largest shareholder of Lucheng Investment as well as the actual controller of Lucheng Investment. Basic information of Liu Shizhen: Chinese nationality, he has not enjoy the residence power in the other country or area; he took the post of Chairman of the Board and General Manager of the Company since 1990. As at the end of the report period, Lucheng Investment held 59.1162 million sponsors’ shares of the Company, taking 14% of total share capital of the 8 Company, and the said shares have not been listed for trade. At the end of the report period, the said shares have not been frozen and pledged. The controlling relationship of the Company is as follows: Liu Shizhen ↓ 21% Zibo Lucheng Textile Investment Co., Ltd. ↓ 14% Lu Thai Textile Co., Ltd. 3. Particulars about other corporate shareholder holding over 10% (including 10%) of the Company’s shares Tailun (Thailand) Textile Co., Ltd. (hereinafter referred to as “Tailun Textile”) Legal representative: Xu Zhinan Registered capital: 0.6 billion baht Business scope: Yarn spinning Date of foundation: Jan. 29, 1985 Registration place: No. 20, Wannahejiluo, Bangkok, Thailand Note: Tailun (Thailand) Textile Co., Ltd. is foreign sponsor of the Company as well as the coordinate largest shareholder. At end of the year 2005, the Tailun Textile held 59.1162 million shares of the Company, taking 14% of total share capital of the Company. The said shares have not been listed for trade, pledged or frozen. 4. Particulars about change in shares held by the top ten shareholders of tradable share Particulars about shares held by the top ten shareholders of tradable share Name of shareholders Numbers of tradable share held Type of shares DBS VICKERS (HONG KONG) LTD 13,132,498 B-share A/C CLIENTS HTHK-VALUE PARTNERS 6,993,222 B-share INTELLIGENT FD-CHINA B SHS FD HAITONG – BANK OF CHINA – 6,745,721 A-share FORTIS BANK HAIFUTONG INCOME GROWTH 6,000,000 A-share SECURITIES INVESTMENT FUND CITIC CLASSIC ALLOCATION 5,500,000 A-share SECURITIES INVESTMENT FUND BBH BOS S/A FIDELITY FD - 5,200,000 B-share CHINA FOCUS FD HTHK/CMG FSGUFP-CMG FIRST 5,020,262 B-share STATE CHINA GROWTH FD TOYO SECURITIES ASIA 4,657,847 B-share LIMITED-A/C CLIENT. ZHU SHENG DI 4,600,000 B-share PACIFIC DRAGON FUND L.L.C 3,813,571 B-share Explanation on associated The Company was unknown whether there is any associated relationship among the top ten relationship or acting-in-concert among the top ten shareholders or consistent action shareholders of tradable share. 5. By the end of the report period, the Company did not enter procedure of share merger reform, thus, non-tradable shares did not be transferred into tradable shares with conditions of restricted sale. 9 SECTION V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES I. Basic information Shares Shares held Increase/decrease Name Title Sex Age Office term held at the at the in the report year-begin year-end period Chairman of the May 2004- 171,974 171,974 0 Liu Shizhen Male 66 Board/General Manager May 2007 Vice Chairman of the May 2004- 0 0 0 Xu Zhinan Male 76 Board May 2007 Director and concurrently May 2004- 0 0 0 Liu Zibin Male 41 Deputy General Manager May 2007 Tengyuan May 2004- 0 0 0 Director Male 66 Yingli May 2007 May 2004- 0 0 0 Chen Ruimou Director Male 62 May 2007 Director and concurrently May 2004- 20,280 20,280 0 Wang Fangshui Male 45 Chief Engineer May 2007 May 2004- 23,930 23,930 0 Sun Zhigang Director Male 44 May 2007 Director and concurrently May 2004- 24,336 24,336 0 Qin Guiling Female 40 Secretary of the Board May 2007 May 2004- 0 Wang Yonggui Independent director Male 37 May 2007 May 2004- 0 Hong Xiaobin Independent director Male 33 May 2007 May 2004- 0 You Shisong Independent director Male 69 May 2007 May 2004- 0 0 0 Wu Yuhua Independent director Male 62 May 2007 May 2004- 0 0 0 Zhou Zhiji Independent director Male 43 May 2007 Supervisor and 26,769 26,769 0 May 2004- Li Tongmin concurrently Manager of Male 50 May 2007 Production Dept. Supervisor and 40,560 40,560 0 May 2004- Zhao Kegui concurrently Manager of Male 60 May 2007 Base Construct Dept. Supervisor and 56,784 56,784 0 May 2004- Zhu Lingwen concurrently Manager of Male 52 May 2007 Layout Dept. II. Particulars about main working experience of directors, supervisors and senior executives, and their holding post and concurrent post in other companies except for Shareholding Company 1. Mr. Liu Shizhen: Chairman of the Board and concurrently General Manager of the Company. He was born in 1940, education of polytechnic schools. From Mar. 1990 to Oct. 1993, he occupied posts of Chairman of the Board and General Manager of Luthai Textile Co., Ltd.; from Oct. 1993 to now, he acted as Chairman of the Board and General Manager of Luthai Textile Co., Ltd., and concurrently took the following positions: Director of Lucheng Company, General Manager of Beijing Luthai, Chairman of the Board of Qingdao Luthai, Chairman of the Board of Lufeng Textile and Dye, Chairman of the Board of Limin Company, Chairman of the Board of Changming Power, Chairman of the Board of Luqun Textile, Chairman of the Board of Beijing Innovative, Chairman of the Board and General Manager of Luthai Huanzhong, Director of Dongying Luxin, Chairman of the Board of Stanluian, Chairman of the Board of Xinjiang Luthai and Chairman of the Board of Taimei Tie 10 Company. 2. Mr. Xu Zhinan: Vice Chairman of the Board of the Company. He was born in 1930, Thailand Nationality. From 1998 to 2004, He occupied posts of Director and Deputy General Manager of the Company. He now acts as Director and Vice Chairman of the Board of the Company, and Chairman of the Board and General Manager of Tailun (Thailand) Textile Co., Ltd., the shareholding company of the Company. 3. Mr. Liu Zibin: Director and concurrently Deputy General Manager of the Company. He was born in 1965, graduated from Cheung Kong Graduate School of Business with EMBA. From Feb. 1999 to Oct. 2004, he occupied the post of General Manager of Zibo Lucheng Textile Co., Ltd.; from Jan. 2000 to now, he acted as Chairman of the Board of Zibo Lucheng Textile Investment Co., Ltd. and concurrently Director of Luqun Textile. 4. Mr. Tengyuan Yingli: Director of the Company. He was born in 1940, Japanese Nationality. From 1998 to now, he occupied posts of Director and senior consultant of Luthai Company, and concurrently Director of Lufeng Textile and Dye and Director of Luqun Textile. 5. Mr. Chen Ruimou: Director of the Company. He was born in 1944, bachelor degree. From 1998 to now, he occupied the post of Director of the Company. 6. Mr. Wang Fangshui: Director and Chief Engineer of the Company. He was born in 1961, associate degree. From 1998 to now, he occupied posts of Director and Chief Engineer of the Company, and concurrently Director and General Manager of Lufeng Textile and Dye, Director of Xinjiang Luthai and Director of Luqun Textile. 7. Mr. Sun Zhigang: Director of the Company. He was born in 1962, graduated from Cheung Kong Graduate School of Business with EMBA. From Jul. 1999 to now, he took the post of Director of Beijing Luthai Shirt Co., Ltd.; from Jul. 2000 to now, he occupied the post of Director of Beijing Innovative Garment Co., Ltd.; from May 2001 to now, he acted as Director of Luthai Textile Co., Ltd. and concurrently Director of Luqun Textile. 8. Ms. Qin Guiling: Director and Secretary of the Board of the Company. She was born in 1966, associate degree. From 1998 to now, she took posts of Director and Secretary of the Board of the Company, and concurrently Director of Luthai Huanzhong, Director of Changming Power, Director of Beijing Luthai, Supervisor of Xinjiang Luthai and Director of Luqun Textile. 9. Mr. Wang Yonggui: Independent Director of the Company. He was born in 1970, Doctor of Economics. From Dec. 1999 to Jan. 2001, he took the post of Deputy Controller of Shandong Huaxing Certified Public Accountants; from Jan. 2001 to Jun. 2004, he acts as Chairman of the Board of Shandong Deqin Bidding Evaluation Company; from Jun. 2004 to now, he held the post of Controller of Shandong Tianpingxin Affairs. 10. Mr. Hong Xiaobin: Independent Director of the Company. He was born in 1973, Master Degree. From Jun. 1998 to Jul. 2001, he took the post of Business Manager of ZTE Corporation; from Jul. 2001 to Sep. 2001, he occupied the post of Business Manager of Liming Network Systems Co., Ltd.; from Sep. 2001 to Dec. 2003, he held the post of researcher of GUOTAI JUNAN Securities Company; from Jan. 2004 to now, he acted as General Manager of Financing & Consultant Dept. of Evenbright Financing Research Co., Ltd. 11. Mr. You Shisong: Independent Director of the Company. He was born in 1937, associate degree. From Sep. 1989 to Apr. 1993, he took the post of Deputy Secretary of Scientific Research Dept. of ERPAO; from Jan. 1985 to now, he occupied the post of Deputy Secretary General of Military Planning Association. 11 12. Mr. Wu Yuhua: Independent Director of the Company. He was born in 1944, Doctor degree. From 1968 to 1978, He was a cadre of Heilongjiang Xinqing Forestry Bureau; from 1981 to now, he took posts of professor and Doctor tutor of Management Department of Tianjin University. 13. Mr. Zhou Zhiji: Independent Director of the Company. He was born in 1963, bachelor degree. From Feb. 1999 to Jul. 2000, he took the post of Director Accountant of Shandong Zhengyuan Certified Public Accountants; from Aug. 2000 to now, he occupied posts of Director and General Manager of Shandong Yingshida Consultation Management Company. 14. Mr. Li Tongmin: Supervisor and concurrently Manager of Production Dept. of the Company. He was born in 1956, education of polytechnic schools. From Jan. 1990 to Oct. 1993, he took the post of factory controller of Luthai Textile Co., Ltd.; from Oct. 1993 to now, he concurrently held the post of Manager of Production Dept. of Luthai Textile Co., Ltd.; he now acts as Chairman of Supervisory Committee of the Company. 15. Mr. Mr. Zhao Kegui: Supervisor and concurrently Manager of Base Construct Dept. of the Company. He was born in 1946. bachelor degree. From 1993 to 1999, he took the post of Manager of Planning Dept. of Luthai Textile Co., Ltd.; from Jan. 2000 to Oct. 2004, he occupied the post of Manager of Business Company of Luthai Textile Co., Ltd.; from Apr. 2001 to now, he concurrently took the post of General Manager of Dongying Luxin Company. 16. Mr. Zhu Lingwen: Supervisor and concurrently Manager of Layout Dept. of the Company. He was born in 1954, associate degree. From Oct. 1993 to Jan. 2002, he took the post of Manager of International Business Dept. of Luthai Textile Co., Ltd.; from 1996 to now, he concurrently held the post of Manager of Qingdao Luthai International Trade Company. III. Particulars about the annual remuneration received by directors, supervisors and senior executives 1. For directors and supervisors and concurrently the post of senior executive, the Company determined their remuneration and bonus based on their office title, contribution and Plan on Invigoration and Obligation for Senior Executive of the Company, and checked by the Compensation Committee of Board of Directors and approved by the Board of Directors for implementation. 2. About remuneration received by directors, supervisors and senior executives in office at present from the Company in the report period Remuneration in Remuneration in Name Title the report period Name Title the report period (RMB’0000/year) (RMB’0000/year) Chairman of the Independent Liu Shizhen Board/General 73.71 Wang Yonggui 3.60 director Manager Vice Chairman of the Independent Xu Zhinan 6.83 Hong Xiaobin 3.60 Board director Director and Independent Liu Zibin concurrently Deputy 34.28 You Shisong 3.60 director General Manager Tengyuan Independent Director 213.08 Wu Yuhua 3.60 Yingli director Independent Chen Ruimou Director 6.83 Zhou Zhiji 3.60 director Director and Supervisor and Wang Fangshui concurrently Chief 35.69 Li Tongmin concurrently 34.53 Engineer Manager of 12 Production Dept. Supervisor and concurrently Sun Zhigang Director 18.71 Zhao Kegui 34.68 Manager of Base Construct Dept. Director and Supervisor and concurrently concurrently Qin Guiling 30.89 Zhu Lingwen 31.69 Secretary of the Manager of Layout Board Dept. IV. Particulars about changes in directors, supervisors and senior executives In the report period, Mr. Su Huasheng, director and concurrently chief accountant of the Company, submitted an application to resign due to retirement, which was examined and approved at the 12th meeting of the 4th Board of Directors. Mr. Liu Zibin, director of the Company, was engaged as Chief Financial Officer of the Company, and Ms. Zhang Hongmei was engaged as Financial Principal of the Company. Other directors, supervisors and senior executives of the Company remained unchanged. V. About employees By the end of the report period, the Company had totally 11260 employees at their posts. Of them, 9065 production personnel, 518 sales personnel, 1305 technicians, 62 financial personnel and 290 administration personnel. 2580 persons graduated from 3-years regular college or over. At present, the Company has 54 retirees, which joined the Social Insurance. 13 SECTION VI. CORPORATE GOVERNANCE I. Corporate governance The Company continued to perfect the corporate administrative structure, set up modern enterprise system and standardized the Company’s operation strictly according to Company Law, Securities Law and normative documents related to administration of listed company. The Company enacted such normative documents as the Articles of Association of the Company, Rules of Procedure of Shareholders’ General Meeting and Rules of Procedure of the Board of Directors, and established the Management System of Guarantee, the Management System of External Investment, the Management System of Related Transactions, the Management System of Raised Proceeds, the Work System of Independent Directors and the Management System of Investor Relationship, and constituted detailed work rules of nomination committee, auditing committee, compensation committee and strategy committee of the Board, which made the corporate administrative structure be in much systemization and standardization. In the report period, the Company revised the Articles of Association of the Company, Rules of Procedure of Shareholders’ General Meeting, Rules of Procedure of the Board of Directors and Work System of Independent Directors in accordance with the relevant regulations of the Several Regulations on Strengthening Rights Protection of Social Public Shareholders and Stock Listing Rules of Shenzhen Stock Exchange (2004 Revision) promulgated by CSRC, which ensured the unification with the relevant laws and regulations. The Company considered that its actual administrative situation was in accordance with the basic requirements of normative documents related to administration of listed companies promulgated by CSRC without any difference. II. Duties performance of independent directors 1. Particulars about independent directors’ attending Board meetings: Name Times for Times of Times of Times of Times of attending Board attending by authorized communication absence meeting this year himself (herself) voting voting Wu Yuhua 7 3 0 4 0 You Shisong 7 3 0 4 0 Zhou Zhiji 7 4 1 2 0 Hong Xiaobin 7 3 1 3 0 Wang Yonggui 7 2 0 5 0 In the report period, 5 independent directors attended the Board meetings on time and expressed their opinions on a series of issues such as production and operation, technical renovation and external investments and related transactions etc. from viewpoints of law, financing and administration of the Company, which enhanced the science and objectiveness of decision-making of the Board and materially safeguarded legal interests of the vast shareholders and the Company. 2. Independent directors’ objection on relevant issues of the Company: In the report period, 5 independent directors of the Company did not put forward objection on proposals of the Board and other proposals of the Company this year. III. The Company’s independence from its controlling shareholders in the aspects of business, personnel, assets, organization and finance 1. In the aspect of business: the Company is completely independent from its 14 controlling shareholder in business and has complete and independent production, supply and sales system and independent operating capability. 2. In the aspect of personnel: the Company is completely independent in aspects of human resources such as labor, personnel and wage and has independent and complete capability. Director and concurrently Deputy General Manager of the Company, Mr. Liu Zibin concurrently took the position of Chairman of Lu Cheng Investment, which did not harm the interests of the listed company and its shareholders. 3. In the aspect of assets: the Company has complete and independent corporate property right, has independent and integrated production system, accessory production system and fitting facilities and has independent ownership of industrial property, trademark and non-patent technology etc.. 4. In the aspect of organization: the Company’s organization is independent and perfect, and there is no such situation that the Company shares the same office with its controlling shareholder. 5. In the aspect of financing: the Company has independent financial department, standardized financial calculating system and financial management system and internal control system and independent bank accounts. IV. Establishment and implementation of assessment, stimulation mechanism and relevant encouragement system to senior executives in the report period In the report period, according to Encouragement and Binding Plan of Senior Executives of Lu Thai Textile Co., Ltd., the compensation committee of the Board conducted assessment to its operating achievements for the year 2004 and planned encouragement plan to its senior executives, whose implementation was subject to consideration and approval of the 9th Meeting of the 4th Board held on Feb. 2, 2005. 15 SECTION VII. BRIEF TO SHAREHOLDERS’ GENERAL MEETING In the report period, the Company totally held shareholders’ general meetings twice, namely the 1st Extraordinary Shareholders’ General Meeting 2005 and Annual Shareholders’ General Meeting 2004, which were all witnessed by Shandong Deheng Law Firm, which issued Legal Opinion on the 1st Extraordinary Shareholders’ General Meeting 2005 of Lu Thai Textile Co., Ltd. and Legal Opinion on Annual Shareholders’ General Meeting 2004 of Lu Thai Textile Co., Ltd. respectively. Brief of each meeting was as follows: I. The 1st Extraordinary Shareholders’ General Meeting 2005 1. Notification, convening and holding of the Meeting The said shareholders’ general meeting was suggested and convened by the Board, and the public notice of notification on holding the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao on Dec. 18, 2004. The Company published the suggestive public notice and public notice of re-notification on holding the meeting in Securities Times, Shanghai Securities News and Ta Kung Pao dated Jan. 6, 2005 and Jan. 14, 2005 respectively. The Meeting was held at the conference room of Banyang Hotel on Jan. 20, 2005. Totally 7 shareholders and shareholder’s representatives attended the Meeting, representing 143,120,833 shares with voting right, which took 33.88% of total share capital of the Company. Of which, 5 domestic shareholders attended the Meeting, representing 59,439,868 shares, and 2 foreign shareholders attended the Meeting, representing 83,680,965 shares. 120 tradable shareholders were participated in the online voting, representing 30,928,710 shares with voting right, which took 7.3216% of total share capital of the Company as well as 10.1672% of total tradable shares of the Company, including 114 shareholders holding tradable A shares, representing 30,683,510 shares with voting right, and 6 shareholder holding tradable B shares, representing 245,200 shares with voting right. 2. Resolutions of the Meeting The Meeting examined and passed Proposal on deleting the clause 2 of article 8 “special modification clause lowering” in Plan on Issuing Convertible Bond. The public notice was published in Securities Times, Shanghai Securities News and Ta Kung Pao on Jan. 21, 2005. II. Shareholders’ General Meeting 2004 1. Notification and convening The Board of Directors of the Company had proposed and convened this Shareholders’ General Meeting, and the public notices on the convening of this meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on May 19, 2005. This Shareholders’ General Meeting was held at Banyang Hotel on Jun. 22, 2005. Present at the meeting were 12 shareholders or representatives of shareholders, representing 146,620,553 shares, i.e. 34.70 percent of the Company’s total share capital. Among the present shareholders, 8 were social public shareholders, representing 28,388,153 shares, while 3 were foreign-funded shareholders, representing 8,715,045. The convening of this meeting had been in conformity with relevant regulations in the Company Law and the Articles of Association. 2. Resolutions Following reports and proposals had been examined and approved at the meeting: the 16 Work Report of the Board of Directors 2004, the Work Report of the Supervisory Committee, the Annual Report 2004, the Final Report 2004, the profit distribution plan for the year 2004, the proposals on modifying the Articles of Association, the Rules of Procedure of the Shareholders’ General Meeting, the Rules of Procedure of the Board of Directors, etc, the proposal on the explanation by the Board on the use of the proceeds raised last time, and the proposal on engaging the auditing agencies for the year 2005. Public notices on the resolutions of this Shareholders’ General Meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on Jun. 23, 2005. 17 SECTION VIII. REPORT OF THE BOARD I. Operation of the Company in the report period (I) Overall operation In the report period, the income from main businesses of the Company totaled RMB 2,233,104,000, up by 18.10 percent year-on-year, the foreign exchange made through export amounted to USD 210,486,000, up by 27.16 percent year-on-year, the profit from main businesses was RMB 684,186,000, up by 27.77 percent year-on-year, while the net profit totaled RMB 314,531,000, up by 13.23 percent year-on-year. In the report period, the main businesses, the main profit sources and compositions had not changed. In the report period, the Company had started the 50-million-meter colored woven cloth project and the project of 5-million-shirt production lines project, which originally had been planned to be constructed with the proceeds raised through convertible bonds. The construction of these projects would increase the Company’s financial expenses in a short term, but it would also upgrade the products, technology and market competitiveness of the Company onto a brand new stage, and further strengthen the Company’s influence and competitiveness in the international shirt-use colored woven cloth area. Right now, the progress of these projects went smoothly. One 1.5-million production line of the shirt project had been launched into production in October 2005, while 10-million capacity of the colored woven cloth project would be launched into production in the second half of 2006 and the cloth project would be launched into production successively at the end of 2007 or in the middle of 2008. In the report period, our country had conducted reform to the RMB exchange rate mechanism. As a company focusing on export, the revaluation of RMB would directly lead to the Company’s high production costs and influence the operation feats. However, the dye and chemical materials, components of the machinery equipments and some ginned cotton all depended upon import, which could offset against part of the negative influences exerted upon the operation achievements. Part of the liabilities of the Company was foreign exchange loans, and that also could offset part of the influences caused by RMB revaluation to some extent. Apart from these, the products of the Company had some bargaining power, and the prices of some products could be raised to reduce the influence of the RMB revaluation. But overall, RMB revaluation would be a trend for a long term, and to a company depending on export like the Company, its influence would also be a long-term factor. In the report period, the Company also made some breakthroughs in the scientific research aspect, with 13 new products developed and 134 technological transformations. The Company also declared 10 patented technologies, of which 4 had been granted the patents for invention. The mass production of some outside materials, especially the 200s/2 fine count, LT•AM high-quality iron-free colored woven outside materials, XLA resilient materials, pure cotton colored woven rinsing materials, cotton velvet series, COOLMAX water-absorbing drip-dry materials, and photo-catalyst antibiosis materials, etc, had signaled the Company’s leading position in the area of shirt-use colored woven cloth and that the Company’s technological capacity had ascend to the internationally advanced level. In the report period, the Company had established the Donghua University Luthai R&D Center together with Donghua University. The Company planned to invest an initial amount totaling RMB 5 million, for the research and development of some scientific subjects, including “the technological transfer of the separate discharge and recycling of clear wastewater and turbid wastewater generated from textile printing dyeing”, “the popularization of new environment-friendly Richcel fabric”, 18 “technological transformation and popularization of the liquid ammonia processing in the textile industry”, and the “development of the poly-component new fabric textile materials”, etc, so as to provide the Company with strong technological reserves. The Company had engaged Professor Ji Guobiao, who is one of the first academicians of the China Academy of Engineering and expert in the chemical fabric engineering technology, as the Company’s Technological Advisor. Professor Ji Guobiao would provide technological advices and instruction for the further technological research and product development of the Company, which would effectively promote the Company’s technological progress and further upgrade the technological content and international competitiveness of the Company’s products. (II) Main businesses and their operation 1. Business scope: The Company is a textile enterprise that has integrated spinning, blanching and dyeing, weaving, after-finishing and clothes making as one comprehensive production. The leading products are the shirt-use colored woven cloth and shirts. Over 80 percent of the products produced by the parent company are for export, and their markets covering more than thirty countries and districts, including Japan, South Korea, America, Britain, and Italy, etc. It is the largest production base of colored woven cloth in Asia. 2. Operation classified according to products Unit: RMB’000 Operating income Operating cost Operating gross profit Product 2005 2004 2005 2004 2005 2004 Cotton yarn 41,276 31,166 36,786 37,060 4,491 -5,895 Shirt colored woven cloth 1,592,649 1,403,913 1,099,107 1,000,350 493,542 403,563 Shirt 457,992 272,671 302,138 178,853 155,854 93,819 Ginned cotton 37,161 139,895 28,836 103,436 8,325 36,459 Chinese patent medicines 17,159 18,532 13,309 14,203 3,850 4,329 Power and steam 64,199 23,308 56,839 22,765 7,360 543 Others 22,668 1,377 13,429 1,280 9,239 97 Total 2,233,104 1,890,862 1,550,443 1,357,947 682,660 532,915 3. Market distribution of products Unit: RMB’000 Area 2005 Proportion (percent) 2004 Proportion (percent) Japan and South Korea 362,343 16.23 306,242 16.20 Hong Kong 333,533 14.94 266,273 14.08 Southeast Asia 449,741 20.14 551,033 29.14 Europe and America 485,168 21.73 191,260 10.11 Others 67,788 3.04 28,727 1.52 Homeland 534,531 23.94 547,327 28.95 Total 2,233,104 100.00 1,890,862 100.00 4. Major suppliers and customers In the report period, the amount of materials purchased by the Company from the top five suppliers totaled RMB 466,359,600, taking up 41.36 percent of the total purchase amount of the whole year. The sales amount to the top five customers totaled RMB 816,850,300, taking up 36.58 percent of the total sales amount of the report period. (III) Assets breakdown of the Company Unit: RMB’000 Amount in Proportion Proportion Amount in the same Items the report taking up the taking up the period of the last year period total assets total assets Accounts receivable 109,774 2.49 percent 61,013 1.53 percent Inventories 809,444 18.33 percent 597,991 14.99 percent 19 Long-term equity 14,512 0.33 percent 20,916 0.52 percent investment Fixed assets 2,644,373 59.89 percent 2,076,547 52.06 percent Under-construction 193,428 4.38 percent 381,249 9.56 percent projects Short-term loans 1,107,016 25.07 percent 1,111,008 27.85 percent Long-term loans 483,965 10.96 percent 586,177 14.70 percent (1) Inventories had increased by 3.34 percentage points, mainly caused by the increase of raw materials, unfinished products and commissioned processing products at the end of the period. (2) Fixed assets had increased by 7.83 percentage points, mainly caused by the transfer of under-construction projects. (3) Under-construction projects had decreased by 5.18 percent, mainly because they had been transferred into fixed assets. (IV) Operating expenses, management expenses and financial expenses in the report period Unit: RMB’000 Amount in the Amount in the same Increase/decrease Items report period period of the last year (percent) Operating expenses 62,865 63,453 -0.93 percent Management expenses 188,098 128,009 46.94 percent Financial expenses 89,997 37,955 137.12 percent (1) The management expenses of the report period had increased by 46.94 percent year-on-year, mainly because of the increase of the salaries and bonuses for management personnel, the increase of the bonuses for senior executives’ achievements, and the increase from some of the subsidiaries during the consolidation. (2) Financial expenses had increased by 137.12 percent year-on-year, mainly because the loans used this report period were higher than the same period of the last year, resulting in the increase of interest expenses. (IV) Analyses on the relevant data in the cash flow statement Unit: RMB’000 Amount in the Amount in the same Items Increase/decrease (percent) report period period of the last year Net cash flows arising 420,215 279,092 Increased by 50.57 percent out of operating activities Net cash flows arising -538,007 -997,693 Increased by 46.07 percent from investing activities Net cash flows arising 17,504 808,993 Decreased by 97.87 percent out of financing activities (1) In the report period, the net cash flows arising from operating activities had increased by 50.57 percent year-on-year, mainly because of the increase of sales income. (2) In the report period, the net cash flows arising from investing activities had increased by 46.07 percent year-on-year, mainly caused by the decrease of the amount paid for the purchase or construction of fixed assets. (3) In the report period, the net cash flows arising out of financing activities had decreased by 97.87 percent, mainly because of the decrease of the cash received from loans. (V) Discussion and analysis on the important information concerning the operation of the Company In the report period, the utilization rate of the equipments and installations reached 20 100 percent, with part of the products commissioned for third party processing. The orders of the main products like the colored woven cloth and shirts as well as the product sales remained normal, and no products had overstocked. Main technological personnel were stable, and there wasn’t any case of main technological personnel loss. (VI) Operation and achievement of the controlling companies and shareholding companies Unit: ’0000 Proportion Business Product or Company name Registered capital Total assets Net profit of equity nature service held Beijing Luthai Shirt Co., Production Shirt RMB 560 RMB 1,019.23 RMB 51.92 60 percent Ltd enterprise Qingdao Bonded Zone Trade, Luthai International Trade RMB 160 RMB 86.08 RMB -1.15 75 percent consultation Trade Co., Ltd Beijing Sichuang Production Clothes, USD 200 RMB 2,927.52 RMB 481.58 65 percent Adornments Co., Ltd and sales adornments Dongying Luxin Textile Spinning Yarn RMB 10,000 RMB 13,787.66 RMB 411.94 65 percent Co., Ltd Xinjiang Luthai Harvest Production Ginned cotton RMB 7,011 RMB 40,177.32 RMB 4678.74 52.43 percent Cotton Co., Ltd and sales Luthai (Hong Kong) Import and Market HKD 600 HKD 761.37 RMB 321.31 100 percent Co., Ltd export trade service Chinese Zibo Luthai Huanzhong Production patent RMB 8,000 RMB 12,325.15 RMB -1042.66 75 percent Pharmaceutical Co., Ltd and sales medicines Lufeng Weaving & Production Piece-dyed RMB 16,616 RMB 28,359.69 RMB -345.44 75 percent Dyeing Co., Ltd and sales cloth Zibo Limin Water Sewage Sewage RMB 1,910 RMB 2,355.15 RMB -74.16 99.62 percent Purification Co., Ltd treatment refining Zibo Luqun Textile Co., Production Spinning, RMB 16,822 RMB 24,803.99 RMB 995.57 90 percent Ltd and sales twining Zichuan Changming Production Power, steam RMB 564 RMB 19,954.80 RMB -300.63 56.91 percent Thermal Power Co., Ltd and sales Zibo Stanluian Production Cosmetics RMB 200 RMB 247.23 RMB 3.55 10.5 percent Cosmetics Co., Ltd and sales Notes: (1) In the report period, the equity of Xinjiang Luthai held by the Company had increased from 51 percent to 52.43 percent, because the Shareholding Society of Xinjiang Luthai had transferred part of its equity in Xinjiang Luthai to the Company. The registered capital of the controlling subsidiary Lufeng Weaving & Dyeing Co., Ltd had increased from RMB 100 million to RMB 166.16 million, because of the investment increase by the both investors. (2) In the report period, there were losses in Luthai Huanzhong, mainly because its production quantity had not reached the designed capacity, which had resulted in the high production costs; there were losses in Lufeng Weaving & Dyeing Co., Ltd, because this company had only been launched into production in March of the report period, and its capacity could not be fully used at the beginning of its production, resulting in its high production costs and the losses in the whole year; the losses in Changming Thermal Power Co., Ltd were mainly caused by high coal prices in the report period; the losses made by Limin Water Purification Co., Ltd had mainly been caused by the high sewage treatment costs because of the higher discharge standards, while the sewage treatment charged collected had been lower than the treatment costs. II. Future development of the Company (I) Development trend of the industry The Company engages in the cotton spinning and weaving industry and its main 21 businesses are the production and sales of shirt-use colored woven cloth and shirts, with the sales of colored woven cloth taking up over 80 percent of the total sales amount. Right now, the shirt-use colored woven cloth falls into three categories, i.e. the top, the high-end, and the middle and lower end, which have formed a triangle. The top grade colored woven cloth is mainly produced by the few manufacturers in Italy, France, Germany, and Japan, etc, with the capacity not exceeding 50 million meters per year and targeting at the fashion and top brand shirt market. The high-end colored woven cloth is characterized as high-density and high counts, and delicate after-finishing. It is inferior to the top colored woven cloth in pattern design, popular fashion forecast, but it requires high manufacture technology and product quality, which does not differ much from the former. Right now, its global capacity is about 0.7 billion meters, and the Company takes up approximately 12 percent. High-end colored woven cloth is mainly used in the production of middle and high grade brand shirts and has large market demand. The capacity of the colored woven cloth in our country is about 2.8 billion meters, with 90 percent being the middle and lower end products, excluding the household-style capacity. As the people’s living standards improve day by day, the shirt-use colored woven cloth would surely undergo an industrial upgrade process, i.e. the capacity of middle and lower end colored woven cloth would be eliminated and the capacity of colored woven cloth would go to the high-end products, and the consumption structure of the colored woven cloth would shift from the original triangle (middle and lower end products taking up the largest proportion) into a diamond form (high-end products in the middle increasing obviously in proportion). The spinning and weaving industry in our country has great competitive advantages in technology, personnel, resources and industrial accumulation, etc. Therefore, this kind of industrial structure adjustment would surely provide great room for the development of the colored woven industry in our country. (II) Opportunities and challenges during future development With the significant position and development trend of the textile industry of China in the global textile industry, as well as the series of advantages of the Company, including the advantage of an industrial chain integrating the cotton planting and processing, spinning, blanching and dyeing, weaving, after-finishing and clothes making, the advantage of having the largest production scale in the world, the advantage of new products development and research, the advantage of long-term technological accumulation, the advantage of good market credit and long-term stable customer sources, and the advantage of a stable technological and administrative team, etc, the sustainable development of the Company is surely guaranteed and would be further promoted. According to the analyses on the data of 2004 from the Chinese custom, cotton colored woven cloth is the only kind that has showed increase both in amount and in quantity, especially the shirt-use colored woven cloth. The capacity of the middle and high end colored woven cloth increases rather fast right now, and that has mainly been caused by the shrinking of the capacity in developed countries (regions) and the large demand in the international market for middle and high end products. Therefore, competition in domestic market for middle and high end colored woven cloth would probably accelerate in tensity in the short run. (III) Capital needs, sources and use plan The Company plans to invest RMB 1.05 billion for the construction of the 50-million-meter colored woven cloth project and the 5-million shirt project. The Shareholders’ General Meeting had approved to issue 1.05 billion convertible bonds in 2004, but due to various reasons the issuing work has not been carried out till now. To grip the good market opportunities, the aforesaid two projects had been launched 22 into construction in 2005 according to the original plan, and the money mainly came from bank loans. (IV) Risks to the realization of development strategies and the operating targets, and countermeasures As the quota on Chinese textile products opened in January 2005, the textile products exported to the original quota regions expanded by large margins, and thus the incessant trade friction of the Chinese textile products in the global textile market and the special protection against and restriction on the Chinese textile products imposed by Europe and America ensued. Since the Chinese government had failed to reach any agreement on the textile trade issue with America till very late, the textile trade with America almost stagnated in the lower half of 2005. However, at the end of 2005, China and America reached an agreement on the quota problem of the restricted textile products, and the Company was able to get its needs of selling products to the European and American markets satisfied under the new quota allocation principles. In the report period, our country had conducted reform to the RMB exchange mechanism. RMB had appreciated to some extent in the report period, and as a long-term trend, the influence of RMB revaluation would also be a long-term factor to a export-oriented company like the Company. The Company could put some efforts in increasing foreign exchange loans, increasing import quantity and raising product prices, etc, but it could not guarantee that no influences would be exerted upon the Company’s operating achievements. III. Investments in the report period (I) Continued use of raised proceeds in the report period There was no continued use of the proceeds raised the last time. (II) Investments with non-raised proceeds in the report period 1. In the report period, the 3rd liquid ammonia finishing production line with an investment of RMB 38.05 million was launched into production in July 2005. 2. In the report period, the Company started the project of 50-million-meter colored woven cloth and the project of 5-million shirts (originally planned to invest with proceeds raised through issuing convertible bonds). The accumulated investment into the project of 50-million-meter colored woven cloth had totaled RMB 116 million, i.e. 12.21 percent of the total investment planned. It is planned that this project would be successively launched into production in the 3rd quarter of 2006, and successively at the end of 2007 or in the middle of 2008, when the capacity of colored woven cloth of the Company would be raised by 60 percent; The accumulated investment into the project of 5-million shirts had totaled RMB 23.01 million, i.e. 23.07 percent of the total planned investment. One of the shirt production lines, with a capacity of 1.5 million shirts per year, had been launched into operation in October 2005. Other capacities would also be launched into operation successively in the lower half of 2006. 3. In the report period, Zibo Luquan Textile Co., Ltd, a controlling subsidiary of the Company, had invested RMB 135 million for the construction of the expanded 60000-spindle spinning project. And this project had been fully launched into production in October 2005. IV. Both China Rightson Certified Public Accountants and PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd had furnished the Company with unqualified Auditors’ Reports prepared in accordance with the domestic and the international accounting standards respectively. V. Routine work of the Board of Directors (I) Meetings held in the report period and contents 23 In the report period, the Board held 7 meetings in total, with details as follows: 1. The 9th meeting of the 4th Board of Directors was held on Feb. 2, 2005, at which eleven proposals including the Annual Report 2004 had been examined and approved. Public notices concerning the resolutions of this meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on Feb. 4, 2005. 2. The 10th meeting of the 4th Board of Directors was held on Apr. 13, 2005, at which the 1st Quarterly Report 2005 had been examined and approved. This Board meeting had been put on record at the Company Management Department of Shenzhen Stock Exchange. 3. The 11th meeting of the 4th Board of Directors was held on May 18, 2005, at which two proposals including the one on the convening of the annual Shareholders’ General Meeting had been examined and approved. Public notices concerning the resolutions of this meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on May 19, 2005. 4. The 12th meeting of the 4th Board of Directors was held on Jun. 6, 2005, at which two proposals had been examined and approved, including the one on engaging Liu Zibin as the Chief Financial Officer of the Company. Public notices concerning the resolutions of this meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on Jun.7, 2005. 5. The 13th meeting of the 4th Board of Directors was held on Jun. 22, 2005. The meeting had given approval to the Company’s applying to the Zibo Branch of Agricultural Bank of China for a project loan of RMB 0.6 billion, and applying to the Zibo Branch of China Construction Bank for a foreign exchange loan with value equivalent to RMB 0.6 billion. This Board meeting had been put on record at the Company Management Department of Shenzhen Stock Exchange. 6. The 14th meeting of the 4th Board of Directors was held on Aug. 5, 2005, at which two proposals had been examined and approved, including the Semi-Annual Report. Public notices concerning the resolutions of this meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on Aug. 9, 2005. 7. The 15th meeting of the 4th Board of Directors was held on Oct. 18, 2005, at which three proposals had been examined and approved, including the 3rd Quarterly Report. Public notices concerning the resolutions of this meeting were published in Securities Times, Shanghai Securities News and Ta Kung Pao on Oct. 20, 2005. (II) Implementation of the resolutions made by the Shareholders’ General Meeting In the report period, the Board of Company had used their rights and performed their responsibilities endowed by the Shareholders’ General Meeting strictly in accordance with requirements of the Company Law and the Articles of Association. It had carefully put each resolution made at the Shareholders’ General Meeting into practice, carried out the profit distribution plan for the year 2004, modified relevant clauses on the issuing plan in the materials of convertible bonds application according to the requirements of the Shareholders’ General Meeting, and declared in times. VI. Preplan of profit distribution and capitalization of public reserves As audited by China Rightson Certified Public Accountants, the net profit made in 2005 by the Company totaled RMB 331,277,071.74. According to the Company Law and the Articles of Association, 10 percent of the net profit would be withdrawn as statutory public reserves, i.e. RMB 33,127,707.17, while 5 percent as the statutory public welfare fund, totaling RMB 16,563,853.59. Plus the retained profit of the previous year of RMB 97,596,122.75, the profit available to be distributed to shareholders totaled RMB 379,181,633.73. The profit distribution preplan for the year 2005 as proposed at the 16th meeting of the 4th Board of Directors is as follows: 24 Based upon the share capital totaling 422,432,400 shares at the end of 2005, a cash dividend of RMB 3.00 (pretax) would be granted for each 10 shares to all shareholders. The dividends for B share would be converted into HKD before being distributed (tax exempted according to GSF (1993) No. 45) according to the middle price of the benchmark exchange rate of the People’s Bank of China on the next day after the convening of the Shareholders’ General Meeting 2005. The real dividends totaled RMB 126,729,720.00 according to the plan, and the remaining profit would be carried down to the later year. The aforesaid preplan still need the examination and approval of the Shareholders’ General Meeting 2005. VII. Other events to be disclosed The Company had no other events that needed to be disclosed. The newspapers for information disclosure designated by the Company are Securities Times, Shanghai Securities News and Ta Kung Pao. 25 SECTION IX. REPORT OF SUPERVISORY COMMITTEE I. The work of the Supervisory Committee in the report period In the report period, the Company held meeting of the supervisory committee once, and attended 7 Board meetings of the Company with non-voting delegate. The 5th meeting of the 4th Supervisory Committee of the Company was held on Feb. 2, 2005, at which examined and approved the work report 2004 of the Supervisory Committee, Annual Report 2004 and Explanation of the Board on Using of the Previous Raised Proceeds. II. Independent Opinions presented by the Supervisory Committee 1. Particulars about operation according to law In the report period, the Supervisory Committee of the Company examined wholly and patiently the procedure of decision-making of the Company, implementation of internal control system and duties of directors and managers and believed that the internal control system of the Company was perfect and the procedure of decision-making was normative and found no actions of breaking laws, regulations and Articles of Association or harmful of the interest of the Company. 2. Inspection of the Company’s financing The Supervisory Committee seriously checked the Auditors’ Reports produced by China Rightson Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Limited Company under CAS and IAS respectively, and thought conformably the financial reports have truthfully and accurately reflected the Company’s financial status and operation results. 3. The Company’s previous raised proceeds are capital that the Company implemented additional issuance of A shares in 2000. In the report period, the Supervisory Committee seriously checked the explanation report of the Board on the usage of previous raised proceeds. They believed the usage of previous raised proceeds basically accorded with the projected committed. The adjusted usage for special project fulfilled the relevant procedures of Board and Shareholders’ General Meeting, which was standard and lawful. The Supervisory Committee believed the usage benefit of capital was good. 4. Whether the transaction price of the Company purchasing and selling assets is reasonable or not The Company had no events of assets purchase and sales in the report period. 5. Whether the related transactions are fair or not, whether do harm to the interests of listed company or not In opinion of the Supervisory Committee, the related transactions of the Company occurred in the report period were in compliance with the relevant regulations and principle of “Fair, Just and Open”, and did not harm the interests of listed company. 26 SECTION X. SIGNIFICANT EVENTS I. In the report period, the company had no significant lawsuits and arbitrages. II. In the report period, the Company had no such events as purchasing and selling assets. III. Significant related party transactions occurred in the report period 1. Related party transactions related with daily operation activities For details, please refer to Notes to Auditors’ Report “24. Related party transactions” enclosed in the Annual Report. 2. In the report period, there existed no such related transactions as assets and equity transfer in the Company. 3. In the report period, the Company had no such related transaction as external investment jointly with related parties. 4. Particulars about credit and debt business and guarantees between the Company and related parties In the report period, Zibo Luqun Textile Co., Ltd., a controlling subsidiary of the Company, borrowed funds of RMB 40.68 million from Zibo Lucheng Textile Investment Co., Ltd., the largest shareholder of the Company. In the report period, the Company only provided credit guarantee of loan for controlling subsidiaries with total guarantee amount of RMB 423,587,800. 5. Other significant related transaction In the report period, the Company rented the land of 92.09 mu, house of 6484.71 sq.m. and one gas station from Zibo Lucheng Textiles Investment Co., Ltd.. This year, the Company paid rent amounting to RMB 2,332,572.24. In the report period, Zibo Luqun Textile Company, a controlling subsidiary of the Company, leased the equipments from Zibo Lucheng Textile Investment Co., Ltd.. In this year, Zibo Luqun Textile Company paid rent amounting to RMB 3,478,281.84. IV. Important contracts and their implementation 1. Particulars about custody, contracting or leasing any other company’s assets occurred in the report period In the report period, the Company rented the land of 92.09 mu, house of 6484.71 sq.m. and one gas station from Zibo Lucheng Textiles Investment Co., Ltd.. This year, the Company paid rent amounting to RMB 2,332,572.24. In the report period, Zibo Luqun Textile Company, a controlling subsidiary of the Company, leased the equipments from Zibo Lucheng Textile Investment Co., Ltd.. In this year, Zibo Luqun Textile Company paid rent amounting to RMB 3,478,281.84. 2.Significant Guarantee In the report period, the Company only provided credit guarantee of loan for controlling subsidiaries. By the end of report period, the guarantee amount totaled to RMB 423,587,800, taking 24.38% of the Company’s net assets. The Company did not provide the guarantee for shareholders, actual controller and other related parties, and neither did the Company provide the debt guarantee directly or indirectly for the guaranteed parties whose liability/asset ratio is larger than 70%. 3. Entrusting other managing cash assets in the report period and in the future In the report period and before the report period, the Company had never entrusted any other party to manage the Company’s cash assets. 27 4. Other significant contracts: Ended Dec. 31, 2005, the significant contracts on purchase the Company signed but not implemented are as follows: Name of project Amount (RMB 0’000) Purchasing loom and garment making equipment 8,414 Acquiring lands, houses and buildings 1,100 Expansion project of “one power generation set supplied by two 3,975 boilers” of Xinsheng Power V. Particulars about implementation of promises made by the Company or shareholders holding over 5% of total shares In the report year, the profit distribution plan 2004 promised by the Company was implemented completely in July 2005. In the report period, there were no commitments of Zibo Lucheng Textile Investment Co., Ltd. and Tailun Textile Co., Ltd., holding over 5% shares of the Company. VI. Engagement and dismission of Certified Public Accountants by the Company In the report period, the Company engaged China Rightson Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Limited Company as the Company’s financial auditor, while the Company dismissed Shandong Zhengyuan Hexin Certified Public Accountants, and China Rightson Certified Public Accountants occupied the domestic auditor of the Company instead of it. In the report year, the Company paid the auditing expense amounting to RMB 650,000 and RMB 1,200,000 respectively to domestic and overseas auditors. PricewaterhouseCoopers Zhong Tian CPAs Limited Company has provided auditing service for the Company in nine successive years. VII. In the report period, the Company, the Board of Directors or its directors had neither been checked, given administrative punishment or given circular notices of criticism by China Securities Regulatory Commission nor been condemned publicly by the Stock Exchange. In the report period, CSRC and its suit did not inspect and check the Company. VIII. In the report period, the Company has no significant events listed in Article 62 of Securities Law and Article 17 of Implementation Measures on Information Disclosure of the Companies Publicly Issuing Shares In the report period, the Company has no significant events listed in the above regulations. IX. About progress on Share Merger Reform of the Company The Company has not entered into the process of share merger reform yet. However, it is estimated that the finishing of the share merger reform would be no later than Dec. 31, 2006. 28 SECTION XI. FINANCIAL REPORT LUTHAI TEXTILE COMPANY LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005 Report of the Auditors 2006/SH-061/KZGJ/JSHL To the Shareholders of Luthai Textile Company Limited: We have audited the accompanying consolidated balance sheet of Luthai Textile Company Limited (the “Company”) and its subsidiaries (together, 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 31 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 CPAs Limited Company 21 March 2006 29 LUTHAI TEXTILE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands unless otherwise stated) Year ended 31 December Notes 2005 2004 Sales 2 2,233,104 1,89 Cost of goods sold (1,548,918) (1,355,375) Gross profit 684,186 5 Other income 53,302 28,004 Selling and marketing costs (62,771) (63,453) Administrative expenses (202,300) (142,189) Operating profit 3 472,417 35 Finance costs – net 4 (85,405) (34,617) Share of results before tax of unconsolidated subsidiaries 12 (9) 40 Profit before income tax 387,003 323,272 Income tax expense 6 (50,346) (37,547) Profit for the year 336,657 285,725 Attributable to: Shareholders of the Company 314,531 277,772 Minority interest 22,126 7,953 336,657 285,725 Earnings per share for profit attributable to the shareholders of the Company during the year (basic and diluted) 7 RMB 0.74 RMB 0.66 The notes on pages 35 to 55 form an integral part of these consolidated financial statements. 30 LUTHAI TEXTILE COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2005 (All amounts in RMB thousands unless otherwise stated) 31 December Notes 2005 2004 ASSETS Non-current assets Property, plant and equipment 9 2,797,701 2,421,823 Land use rights 10 134,116 140,546 Intangible assets 11 33,556 36,006 Investments in unconsolidated subsidiaries 12 424 5,280 Available-for-sale investment 13 215 215 2,966,012 2,603,870 Current assets Inventories 14 809,444 597,991 Receivables and prepayments 15 413,059 423,937 Cash and cash equivalents 16 192,861 293,149 Restricted deposits 17 22,273 58,209 1,437,637 1,373,286 Total assets 4,403,649 3,977,156 The notes on pages 35 to 55 form an integral part of these consolidated financial statements. 31 LUTHAI TEXTILE COMPANY LIMITED CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2005 (All amounts in RMB thousands unless otherwise stated) 31 December Notes 2005 2004 EQUITY Capital and reserves attributable to shareholders of the Company Ordinary shares 21 422,432 422,432 Share premium 21 695,390 695,390 Reserves 22 209,280 160,073 Retained earnings 394,207 287,780 1,721,309 1,565,675 Minority interests 196,578 163,205 Total equity 1,917,887 1,728,880 LIABILITIES Non-current liabilities Borrowings 19 483,965 586,177 Deferred Income 20 4,417 5,411 Other liabilities 13,189 14,659 501,571 606,247 Current liabilities Trade and other payables 18 619,074 513,608 Current income tax liabilities 2,422 874 Borrowings 19 1,362,695 1,127,547 1,984,191 1,642,029 Total liabilities 2,485,762 2,248,276 Total equity and liabilities 4,403,649 3,977,156 The notes on pages 35 to 55 form an integral part of these consolidated financial statements. 32 LUTHAI TEXTILE COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands unless otherwise stated) Notes Attributable to shareholders Minority Total of the Company interest equity Retained Share Share earnings capital premium Reserves Balance at 1 January 2004 422,432 695,390 116,600 211,905 96,180 1,542,507 Dividend relating to 2003 - - (158,412) (2,272) (160,684) Profit for the year - - 277,772 7,953 285,725 Transfer to reserves 22 - 43,485 (43,485) - - Addition of investment in subsidiaries - - 61,344 61,344 Currency translation difference - - (12) - (12) Balance at 31 December 2004 422,432 695,390 160,073 287,780 163,205 1,728,880 Balance at 1 January 2005 422,432 695,390 160,073 287,780 163,205 1,728,880 Dividend relating to 2004 - - - (158,412) (4,213) (162,625) Profit for the year - - - 314,531 22,126 336,657 Transfer to reserves 22 - - 49,692 (49,692) - - Addition of investment in subsidiaries - - - - 15,460 15,460 Currency translation difference - - (485) - - (485) Balance at 31 December 2005 422,432 695,390 209,28 394,207 196,578 1,917,887 The notes on pages 35 to 55 form an integral part of these consolidated financial statements. 33 LUTHAI TEXTILE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands unless otherwise stated) Year ended 31 December Notes 2005 2004 Cash flows from operating activities Cash generated from operations 23 567,185 361,250 Interest paid (98,172) (47,914) Income tax paid (48,798) (34,244) Net cash generated from operating activities 420,215 279,092 Cash flow from investing activities Acquisition of subsidiary, net of cash acquired - (9,678) Purchase of property, plant and equipment (540,433) (973,613) Purchase of land use rights (534) (10,221) Purchase of intangible assets (3,501) (10,350) Proceeds from sale of property, plant and equipment 4,071 718 Proceeds from sale of investment 160 2,186 Interest received 3,338 3,265 Cash paid relating to purchase of minority interests (1,108) - Net cash used in investing activities (538,007) (997,693) Cash flow from financing activities Proceeds from borrowings 1,088,585 1,974,249 Repayments of borrowings (922,832) (1,030,212) Dividend paid to Company’s shareholders (158,412) (158,412) Dividend paid to minority shareholders (6,377) (2,272) Proceeds from minority shareholders 16,540 25,640 Net cash generated from financing activities 17,504 808,993 Net increase / (decrease) in cash and cash equivalents (100,288) 90,392 Cash and cash equivalents at beginning of the year 293,149 202,757 Cash and cash equivalents at end of the year 16 192,861 293,149 The notes on pages 35 to 55 form an integral part of these consolidated financial statements. 34 LUTHAI TEXTILE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands unless otherwise stated) General information Luthai Textile Company Limited (the “Company”) is a joint stock limited company established in Shandong Province of the People’s Republic of China (“PRC”). The principal activities of the Company and its subsidiaries (the “Group”) are the manufacture and sale of various textiles and garment products, including cotton, cotton yarn, dyed yarn, fabric and shirts. The Group mainly operates in the mainland of PRC. The address of the Company’s registered office is as follows: South Side, Nan Ying North Road Zibo High and New Technology Development Zone Zibo City, Shandong Province The People’s Public of China The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: A. Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention. 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 Company’s accounting policies. Interpretations and amendments to published standards effective in 2005: 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 2005. Management assessed their relevance with respect to the Group’s operations and concluded that the following new standards, amendments and interpretations were relevant but had no material effect on the Group: IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings per Share IAS 36 Impairment of Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations 35 B. Consolidation (a) 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. A listing of the Company’s principal subsidiaries is set out in Note 25. (b) 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. C. Foreign currency translation (a) 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 Renminbi (“RMB”), which is the Company’s functional and presentation currency. (b) 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. (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; 36 (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. D. Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. 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. Depreciation is calculated on the straight-line method to write off the cost of the each asset to its residual value, estimated at 10 per cent of cost, over its estimated useful life as follows: Buildings 20 years Plants and machinery 10-13 years Electronic equipment and motor vehicles 5 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. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. Construction in progress represents fixed assets under construction or installation. Cost comprises the original cost of property, plant and equipment, installation costs, construction costs and other direct costs. Borrowing costs are recognised as an expense in the period in which they are incurred. E. Land use rights Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which the Group’s factories and buildings are situated. Amortisation of land use rights is calculated on a straight-line basis over the period of the land use rights varying from 10 to 50 years. The land use rights will be renewed upon expiration of their present use period. F. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Separately recognised goodwill is tested annually for impairment and carried at cost 37 less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (b) Other intangible assets Expenditure on acquired intangible assets is capitalised and amortised using the straight-line method over their useful lives as stated in the contract or their estimated beneficial period as follows: Electricity use rights 10-15 years Water use rights 10 years Computer software 10 years Trademark and patent 1-10 years 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 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. (a) 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. (b) 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. (c) Held-to-maturity financial assets Held-to-maturity financial assets 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. 38 (d) 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. 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 income’ in the period in which they arise. I. Leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. J. Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined by 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), but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and estimated selling expenses. K. Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is 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 carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. The amount of the provision is recognised in the income statement. L. Cash and cash equivalents Cash and cash equivalents includes cash in hand and deposits held at call with banks. M. Share capital (a) Ordinary shares with discretionary dividends are classified as equity. (b) External costs directly attributable to the issuance of new shares are shown as a deduction in equity from the proceeds. N. Dividend distribution 39 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. O. Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. P. 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 financial statements. However, the deferred income tax, if it is not accounted for, 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 assets is realised or the deferred income tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 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. Q. Defined contributions to pension scheme The Group participates in a government pension scheme. The annual contribution amount is provided based on the amount determined by the local government agency. Under this scheme, retirement benefits of existing and retired employees are assured by the National United Retirement Fund and the Group has no further obligations beyond the annual contributions. It is the directors’ intention to continue making such payments in the future. R. Revenue recognition (a) Sales of goods Sales are recognised upon delivery of products and customer acceptance when significant risks and rewards of ownership of the goods are transferred to the customer. Sales are shown net of value added tax and discounts, and after eliminating sales within the Group. (b) Sales of services Other revenues earned by the Group are recognised on the following bases: Interest income – on an accrual basis, unless collectibility is in doubt. Dividend income – when the right to receive payment is established. Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. S. Government grants Grants from the government are recognised at their fair when there is a reasonable 40 assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight-line basis over the expected lives of the related assets. T. Financial risk management (a) Financial risk factors The Group’s activities expose it to a variety of financial risks, including the effects of changes in Government Bonds Exchange quoted prices, foreign currency exchange rates and interest rates. 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. (a) Financial risk factors (continued) (i) Foreign currency exchange risk The Group’s sales, trade receivables are exposed to foreign exchange risk arising from various currency exposures primarily with respect to US Dollars and the Group’s purchases and trade payables are exposed to foreign currency exchange risk primarily with respect to Euro, Japanese Yen and Swiss Franc. The Group hedges the foreign currency exposure of its significant contract commitments to purchase certain production parts and raw materials. The forward contracts used in its programme mature in 12 months or less, consistent with the related purchase commitments. (ii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. As at 31 December 2005, 35% of the Group’s borrowings were at fixed interest rates as stipulated by the People’s Bank of China. Floating rates are generally lower than fixed rates. (iii) Credit risk The carrying amounts of cash and cash equivalents, receivables and prepayments, and trading investments represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Cash and trading investments transactions are limited to reputable financial institutions. (iv) 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. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping committed credit lines available. (b) Fair value estimation Fair value of publicly traded securities is based on quoted market prices at the balance sheet date. In assessing the fair value of non-traded financial instruments, the Group uses a variety of methods, such as quoted market prices or estimated discounted value of future cash flows, and makes assumptions that are based on market conditions existing at each balance sheet date. The face values for financial assets, less any estimated credit adjustments, and 41 financial liabilities with a maturity period of less than one year are assumed to approximate their fair values. For disclosure purposes, the fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. U. Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. 1 Segment information The Group is principally engaged in the manufacture and sale of various textiles and garment products. The Group mainly operates in the mainland of PRC. There is no segment information need to be disclosed for the year 2005 and 2004. 2 Sales Sales mainly represent invoiced sales of textile products to third parties and related companies (Note 24), net of value added tax and discounts, and comprise the following: 2005 2004 Sales outside mainland PRC - Asia Hong Kong SAR 352,901 269,282 Japan 265,028 216,426 Rest of Asia 598,409 517,400 1,216,338 1,003,108 - Europe 380,827 263,975 - South America 53,471 27,447 - Others 83,238 29,257 Sales within mainland PRC 499,230 567,075 2,233,104 1,890,862 3 Operating profit The following items have been included in arriving at operating profit: 2005 2004 Depreciation on property, plant and equipment (Note 9) 203,768 131,757 Impairment of property, plant and equipment (included in “Administrative expenses”) (Note 9) 554 1,734 Loss on disposal of property, plant and equipment 911 2,950 Amortisation of land use rights (Note 10) 6,964 6,363 Amortisation of intangible assets (included in “Administrative expenses”) (Note 11) 5,950 5,382 Reversal of provision for investments impairment (included in “Administrative expenses”) (160) (1,340) Operating lease rentals payable – property 4,220 5,301 Operating lease rentals payable – machinery 3,478 - Staff costs (Note 5) 317,784 208,614 Cost of inventories included in cost of goods sold 1,548,918 1,355,375 Provision/(reversal of) for doubtful debts provision 4,686 (153) Provision/(reversal of) for inventory provision (Note 14) 186 (2,861) 42 4 Finance costs – net 2005 2004 Interest expenses 98,172 47,914 Interest income (3,338) (3,265) Net foreign exchange gains (9,429) (10,032) 85,405 34,617 5 Staff costs 2005 2004 Wages and salaries 260,644 156,454 Defined contribution plan 33,108 20,336 Housing fund 5,052 3,797 Welfare 18,980 28,027 317,784 208,614 Average number of persons employed by the Group during the year: Full time 12,533 8,366 Part time 2,178 2,999 14,711 11,365 6 Income tax expense 2005 2004 Current tax 50,346 37,547 As at 31 December 2005, the Group has no significant deferred tax assets and liabilities. In accordance with the relevant statutory tax rules in the coastal open zone where the Company is located, the Company is subject to a statutory tax rate of 24 per cent. Beginning from 1995, the Company has been granted a concessionary tax rate of 12 per cent subject to its output value of export products exceeding 70 per cent of output value of the products of the enterprise. The Local Ministry of Foreign Trade and Economic Cooperation has verified that output value of export products for the year ended 31 December 2005 had exceeded 70 per cent of output value of products of the enterprise. Accordingly, the income tax has been provided at 12 per cent. The reconciliation of profit before tax and income tax expense is as follows: 2005 2004 Profit before tax of the Group 387,003 323,272 Tax calculated at a tax rate of 12% (2004: 12%) 46,440 38,793 Effect of different tax rates of subsidiaries (1,401) (507) Income not subject to tax - (1,009) Effect of expenses not deductible for tax purposes 6,301 1,264 Amortisation of Income Tax credit for qualified purchase of domestically manufactured equipment (994) (994) Income tax expense 50,346 37,547 7 Earnings per share Basic and diluted earnings per share have been calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. As there are no potentially dilutive securities, there is no difference between basic and diluted earnings per share. 43 2005 2004 Profit attributable to shareholders of the Company 314,531 277,772 Weighted average number of ordinary shares in issue (thousands) 422,432 422,432 Earnings per share (RMB per share) 0.74 0.66 8 Dividends On 21 March 2006, the Board of Directors proposed a dividend of RMB 0.3 per share, totalling RMB 126,729,600 for the year ended 31 December 2005. The proposed dividend distribution is subject to shareholders’ approval in the next Annual General Meeting. These financial statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2006. The dividend declared and paid in respect of 2004 and 2003 were, RMB 158,412,000 and RMB 158,412,000, respectively. 9 Property, plant and equipment Electronic equipment & Construction Plants & motor vehicles in progress Buildings Total machinery Balance at 1 January 2004 307,982 914,696 22,600 157,753 1,403,031 Additions 33,030 203,669 13,483 792,640 1,042,822 Acquisition of subsidiary 33,662 92,893 3,331 219 130,105 Transfer of construction in progress 217,366 330,990 6,468 (554,824) - Transfer out due to the loss of control of a subsidiary (763) (15,579) (634) - (16,976) Disposals (1,821) (1,750) (97) - (3,668) Impairment charge (Note 3) - (1,741) 7 - (1,734) Depreciation charge (Note 3) (22,621) (100,465) (8,671) - (131,757) Balance at 31 December 2004 566,835 1,422,713 36,487 395,788 2,421,823 At 31 December 2004 Cost 654,983 1,907,725 73,654 395,788 3,032,150 Accumulated depreciation and impairment provision (88,148) (485,012) (37,167) - (610,327) Net book amount 566,835 1,422,713 36,487 395,788 2,421,823 Electronic equipment & Construction Plants & motor vehicles in progress Buildings Total machinery Balance at 1 January 2005 566,835 1,422,713 36,487 395,788 2,421,823 Additions 62 4,652 12,710 567,758 585,182 Transfer of construction in progress 215,074 539,788 3,712 (758,574) - 44 Disposals (295) (3,676) (1,011) - (4,982) Impairment charge (Note 3) - (554) - - (554) Depreciation charge (Note 3) (36,067) (155,510) (12,191) - (203,768) Balance at 31 December 2005 745,609 1,807,413 39,707 204,972 2,797,701 At 31 December 2005 Cost 869,408 2,446,402 85,977 204,972 3,606,759 Accumulated depreciation and impairment provision (123,799) (638,989) (46,270) - (809,058) Net book amount 745,609 1,807,413 39,707 204,972 2,797,701 As at 31 December 2005, bank borrowings amounting to RMB 60,000,000 (2004: RMB 135,000,000) are secured on equipments for the value of 142,810,000 (2004: RMB 144,170,000). As at 31 December 2004, bank borrowings amounting to RMB 4,500,000 were secured on buildings for the value of RMB 7,053,000. 10 Land use rights 2005 2004 Balance at 1 January 140,546 96,786 Additions 534 42,660 Acquisition of subsidiary - 7,463 Amortisation charge (Note 3) (6,964) (6,363) Balance at 31 December 134,116 140,546 At 31 December Cost 174,596 174,062 Accumulated amortisation (40,480) (33,516) Net book amount 134,116 140,546 Bank borrowings amounting to RMB 92,350,000 (2004: RMB 40,000,000) are secured on land use rights for the value of RMB 39,831,000 (2004: RMB 41,272,000). 11 Intangible assets Goodwill Electricity Water use Computer Trademark Total and patent use rights rights software Balance at 1 January 2004 - 2,693 6,822 111 - 9,626 Additions - - - - 10,350 10,350 Acquisition of subsidiary 15,855 4,645 912 - - 21,412 Amortisation charge (Note 3) - (1,010) (1,210) (12) (3,150) (5,382) Balance at 31 December 2004 15,855 6,328 6,524 99 7,200 36,006 At 31 December 2004 15,855 19,187 16,335 124 10,350 61,851 Cost - (12,859) (9,811) (25) (3,150) (25,845) Accumulated amortisation 15,855 6,328 6,524 99 7,200 36,006 Net book amount Balance at 1 January 2005 15,855 6,328 6,524 99 7,200 36,006 Additions - - - - 3,500 3,500 Amortisation charge (Note 3) - (1,191) (1,565) (13) (3,181) (5,950) 45 Balance at 31 December 2005 15,855 5,137 4,959 86 7,519 33,556 At 31 December 2005 15,855 19,187 16,335 124 11,500 63,002 Cost - (14,050) (11,376) (38) (3,981) (29,446) Accumulated amortisation 15,855 5,137 4,959 86 7,519 33,556 Net book amount Impairment tests for goodwill Goodwill is allocated to the Group’s cash-generating unit (CGU) which has been identified as acquiree, Zibo Zichuan Changming Thermoelectricity Co., Ltd (“Changming”). The recoverable amount of the CGU is determined based on value-in-use calculations. The calculations use cash flow projections based on financial budget approved by management for the year 2006. Cash flows beyond this one-year period are extrapolated using the estimated growth rates stated below. Key assumptions used for value-in-use calculation: Gross margin 9% Growth rate 0% Discount rate 5.85% These assumptions have been used for the analysis of CGU. Management determined budgeted gross margin based on past performance and its expectations. The growth rates used are determined on the special business of CGU which is impacted by government regulation. The discount rates used are pre-tax rate which are equal to the borrowing interest rate promulgate by People’s Bank of China for the same maturity of five years. 12 Investments in unconsolidated subsidiaries 2005 2004 Balance at 1 January 5,280 431 Acquisition of a subsidiary - 4,809 Share of result before tax (9) 40 Disposal of a non-consolidated subsidiary (4,847) - Balance at 31 December 424 5,280 Investment in unconsolidated subsidiaries represents the Group’s unquoted equity investments in Qingdao Luthai International Trading Co., Ltd. (“Qingdao Luthai”). The Group’s unquoted equity investment in Zibo Luming Thermoelectricity Co., Ltd (“Luming”) has been disposed in 2005. (Note 25) As the financial statements of Qingdao Luthai was not material to the Group, it had been accounted for by the equity method of accounting in the consolidated financial statements of the Group. Directors are of the opinion that the underlying fair value of this investment is not less than the carrying value as at 31 December 2005. 13 Available-for-sale investment 2005 2004 Balance at 1 January and 31 December 215 215 Available-for-sale investment represents the Company’s 10.5% unquoted equity investment in Zibo Stanluian Cosmetics Co., Ltd. which was incorporated in PRC. The investment is carried at cost, as its fair value cannot be reliably determined without incurring excessive costs. The Directors are of the opinion that the 46 underlying fair value of these investment is not less than their carrying value as at 31 December 2005 and the investment is classified as non-current assets as it is not expected to be realized within twelve months of the balance sheet date. There were no disposals or impairment provisions on available-for-sale financial investment in 2005 or 2004. 14 Inventories 31 December 2005 2004 Raw materials (at cost) 367,869 294,137 Work in progress (at cost) 103,557 88,085 Finished goods (at cost) 316,020 210,375 Finished goods (at net realisable value) 21,998 5,394 809,444 597,991 Bank borrowings amounting to RMB 10,000,000 (2004: RMB 130,000,000) are secured on raw materials for the value of 29,997,092 (2004: RMB 46,886,000). In 2005, the Group has recognised an inventory provision of RMB 186,000. In 2004 the Group reversed RMB 2,861,000 being part of an inventory write down made in 2003 that was subsequently not required. 15 Receivables and prepayments 31 December 2005 2004 Trade receivables 115,552 64,224 Provision for doubtful debts (5,780) (3,211) 109,772 61,013 Other receivables 94,277 61,662 Provision for doubtful debts (12,102) (9,985) 82,175 51,677 Notes receivable (a) 114,581 132,867 VAT tax refund receivable 3,978 4,251 Prepayments (b) 86,567 168,774 Employee housing loans 15,986 5,355 413,059 423,937 (a) Notes receivable represent irrevocable letters of credit denominated in foreign currencies, and bills of exchange denominated in RMB receivable from customers, with maturity dates within one year and six months of balance sheet date, respectively. (b) Prepayments represent advance paid to suppliers for the purchase of raw materials and equipments. 16 Cash and cash equivalents 31 December 2005 2004 Cash at bank and in hand 192,361 287,511 Short term bank deposits 500 5,638 192,861 293,149 The interest rates on short term bank deposits is 1.71% per annum (2004: 0.1% to 6%). 17 Restricted deposits Restricted deposits are bank deposits for the issue of letter of credit and commercial bills with maturity dates within six months of balance sheet date. For the purpose of 47 the cash flow statement, the restricted deposits are excluded from cash and cash equivalents. 18 Trade and other payables 31 December 2005 2004 Notes payable (a) 118,586 106,440 Trade payables 275,337 234,882 Advances from customers 29,067 31,793 Payroll and welfare payables 91,944 34,759 Dividend payables 449 3,004 Taxes other than income taxes payable (21,133) 8,492 Accrued expenses 11,215 6,912 Other payables 113,609 87,326 500,488 407,168 619,074 513,608 (a) Notes payable represent commercial bills denominated in RMB payable to suppliers, with maturity dates within six months of balance sheet date. 19 Borrowings 31 December 2005 2004 Current Bank borrowings – secured (a) 337,147 199,500 Bank borrowings – unsecured 1,017,013 911,508 Inter-company commercial bills discounted to banks 8,535 16,539 1,362,695 1,127,547 Non-current Bank borrowings – secured (a) 188,791 110,000 Bank borrowings – unsecured 295,174 476,177 483,965 586,177 Total borrowings 1,846,660 1,713,724 (a) As at 31 December 2005, bank borrowings amounting to RMB 363,588,000 (2004: RMB 4,500,000) of the Group’s consolidated subsidiaries are secured by the Company. Other bank borrowings are secured over the equipments, land use rights and inventories of the Group as disclosed in Note 9, Note 10 and Note 14. The weighted average effective interest rates of the borrowings at the balance sheet dates are as follows: 2005 2004 Bank borrowings 5.33% 4.53% Inter-company commercial bills discounted to banks 2.93% 3.72% The carrying amounts and fair value of certain non-current borrowings are as follows: Carrying amounts Fair values 2005 2004 2005 2004 Non-current bank borrowings 503,965 586,177 502,624 582,825 The fair values are based on discounted cash flows at the current market interest rate available to the Group for similar financial instruments. The carrying amounts of short-term borrowings approximate their fair value. Maturity of non-current borrowing is as follows: 48 31 December 2005 2004 Between 1 and 2 years 437,965 44,677 Between 2 and 5 years 66,000 541,500 503,965 586,177 20 Deferred income 2005 2004 Balance at 1 January 5,411 - Tax credit arising from purchase of domestically manufactured machinery and equipment - 6,405 Amortisation charge (994) (994 Balance at 31 December 4,417 5,411 Deferred income represents investment tax credit granted to the Company on purchases of certain qualified equipments. It is recognized as income over the periods and in the proportions in which depreciation on those assets is charged. 21 Shares and share premium 31 December 2005 2004 Number of shares (in thousands) 422,432 422,432 Registered, issued and fully paid ordinary shares of RMB 1.00 each (a) Non-tradable - Domestic legal person shares 59,116 59,116 - Foreign legal person shares 59,116 59,116 (b) Tradable - A shares 141,960 141,960 - B shares 162,240 162,240 422,432 422,432 Share premium 695,390 695,390 Total 1,117,822 1,117,822 22 Reserves Statutory Public Discretionary Currency common welfare common translation reserve fund reserve reserve Total Balance at 1 January 2004 75,700 37,530 3,342 28 116,600 Appropriation during the year 28,990 14,495 - - 43,485 Currency translation difference - - - (12) (12) Balance at 31 December 2004 104,690 52,025 3,342 16 160,073 Balance at 1 January 2005 104,690 52,025 3,342 16 160,073 Appropriation during the year 33,128 16,564 - - 49,692 Currency translation difference - - - (485) (485) Balance at 31 December 2005 137,818 68,589 3,342 (469) 209,280 The PRC laws and regulations require PRC enterprises to provide for statutory 49 common reserve fund and statutory public welfare fund which are appropriated from net profit as reported in the statutory financial statements prepared under the PRC accounting regulations prior to any dividend appropriation. All statutory common reserve fund and statutory public welfare fund are created for specific purposes. The Company is required to allocate at least 10 per cent of its net profit to the statutory common reserve fund until this fund reaches 50 per cent of the registered capital. The statutory common reserve fund can only be used, upon approval by the relevant authorities, to offset accumulated losses or to increase capital. However, the remaining unconverted statutory common reserve fund should be maintained at a minimum of 25 per cent of registered capital. An appropriation of 10 per cent of net profit has been allocated to the statutory common reserve fund for the year ended 31 December 2005 (2004: 10 per cent). An appropriation of 5 per cent of net profit has been made to the statutory public welfare fund for the year ended 31 December 2005 (2004: 5 per cent). This fund should be used for the collective welfare of the employees. According to the PRC listing rules and relevant regulations, distributions of profit should be made based on the lower of the retained earnings as stated in the statutory financial statements and the retained earnings as stated in the financial statements prepared in accordance with IFRS. On this basis, the retained earnings of the Company as of 31 December 2005 were RMB 428,873,000 (2004: RMB 292,814,000) In accordance with the Company’s Articles of Association, an appropriation to a discretionary common reserve fund can be made after the statutory appropriations, subject to shareholders’ approval at the Annual General Meeting. At the Annual General Meeting to be held in April 2006, no discretionary common reserve fund is to be proposed (2004: nil). 23 Cash generated from operations 50 2005 2004 Profit for the year 336,657 285,725 Adjustments for: Income Tax (Note 6) 50,346 37,547 Depreciation (Note 9) 203,768 131,757 Amortisation of land use rights (Note 10) 6,964 6,363 Amortisation of intangible assets (Note 11) 5,950 5,382 Impairment charge of property, plant and equipment (Note 9) 554 1,734 Loss on disposal of property, plant and equipment (Note 3) 911 2,950 Provision/(Reversal) of inventory provision (Note 3) 186 (2,861) Reversal of provision for investment impairment (Note 3) (160) (1,340) Share of results before tax in unconsolidated subsidiaries (Note 12) 9 (40) Provision/(Reversal) of doubtful debts provision (Note 3) 4,686 (153) Interest expenses (Note 4) 98,172 47,914 Interest income (Note 4) (3,338) (3,265) 704,705 511,713 Changes in working capital Inventories (211,639) (129,793) Receivables and prepayments (44,904) 4,317 Restricted deposits (Note 17) 35,936 (58,209) Trade and other payables 83,087 33,222 Cash generated from operations 567,185 361,250 2005 2004 In the cash flow statement, proceeds from sale of property, plant and equipment comprise: Net book amount (Note 9) 4,982 3,668 Loss on sale of property, plant and equipment (Note 3) (911) (2,950) Proceeds from sale of property, plant and equipment 4,071 718 24 Related party transactions The Company is controlled by Lucheng that incorporated in PRC. Lucheng owns 14% of the Company’s shares, whose largest shareholder is Mr. Liu Shizhen, the Chairman of the Board of Directors and the General Manager of the Company. In addition to the related party information shown elsewhere in the financial statements, the following significant transactions between the Group and related parties took place during the financial year at terms agreed between the parties as set out below: Related party Relationship Dongying City Tianxin Woven Co., Ltd. (“Tianxin”) Minority shareholder of Dongying Luxin Woven Co., Ltd. (“Dongying Luxin”), a subsidiary of the Company (Note 25) 51 TAL Apparel Ltd. (“TAL”) Minority shareholder of Lufeng Co., Ltd. (“Lufeng”), a subsidiary of the Company (Note 25) (a) Transactions and year-end balances between the Group and Lucheng (i) Sales of goods 2005 2004 Slow-moving and scraped fabric and fragmentary cloths 357 238 Cotton yarn 91 - Cotton - 18,008 448 18,246 The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (ii) Purchases 2005 2004 Fabric and fragmentary cloths 472 304 Cotton yarn - 23,651 Cotton 5,438 25,176 Buildings and equipment - 145,874 Processing fee 347 - 6,257 195,005 The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (a) Transactions and year-end balances between the Group and Lucheng (iii) Lease agreements In January 2004, the Company renewed a lease agreement with Lucheng for a piece of land and certain buildings on this land. Lucheng has guaranteed a lease term of 15 years, which is renewable annually, with monthly lease payments of RMB 121,854 and RMB 43,541 for the land and certain buildings respectively. The areas of the land and building leased are 61,424.03 m2 and 6,484.07 m2 respectively. The Company has constructed its Luthai Industrial Park on this land in the year 2001. On 12 August 2001, the Company signed a lease agreement with Lucheng for a gasoline station. The lease term is 5 years with monthly lease payment of Rmb 28,986 for the land and gasoline storage facilities constructed on it. In January 2005, Zibo Luqun Textile Co., Ltd (“Luqun”), a subsidiary of the company (Note 25) signed a lease agreement with Lucheng for 27 equipments, valuing RMB 20,067,299. The two parties agreed to renew the lease contract annually, with monthly lease payments to Lucheng of RMB 289,857. Overdue payment would be charged interest at bank loan rate. The directors believe that these leases were carried out on commercial terms and conditions and at market prices. Lease payments in year 2005 amounted to RMB 5,811,000 ( 2004 : RMB 2,333,000). (iv) Year-end balances arising from sales/purchases 31 December 2005 2004 Trade receivables - 20,350 Other receivables 5 - Notes payables 1,913 - Trade payables 40,685 36,377 Other payables 4,285 - (b) Transactions and year-end balances between Dongying Luxin and Tianxin (i) Sales of goods 2005 2004 52 Cotton yarns related products 2,060 3,191 The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (ii) Purchases of goods and services Basis 2005 2004 Cotton yarns related raw materials Market price 3,286 2,726 Cotton yarns related semi-finished goods Market price - 192 Tools and auxiliary materials Cost - 102 Utilities Cost plus 10% 8,175 9,523 11,461 12,543 (b) Transactions and year-end balances between Dongying Luxin and Tianxin (continued) (iii) Purchase of general services On 24 February 2001, Dongying Luxin signed an agreement with Tianxin related to the rental of buildings and daily services from Tianxin. The directors believe that this agreement was carried out on commercial terms and conditions and on market prices. Relevant payments in year 2005 approximated RMB 1,887,000 (2004: RMB 1,887,000). (iv) Year-end balances arising from purchases 31 December 2005 2004 Prepayments 1,086 13,982 (c) Transactions between Lufeng and TAL (i) Sales of goods 2005 2004 Fabric 17,209 - The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (ii) Year-end balances arising from sales of goods 31 December 2005 2004 Notes receivables 8,740 - (d) Directors and supervisory committee members’ remuneration In 2005, the total remuneration of the directors and the supervisory committee members amounted to RMB 5,256,000 (2004: RMB 5,037,000). All the remuneration of the directors and the supervisory committee members is short-term benefits. 25 Principal subsidiary undertakings Particulars of the Company’s subsidiaries are as follows: Consolidated subsidiaries % Interest held Country of and proportion of Name incorporation voting rights Principal activities 2005 2004 Dongying Luxin (Note 24) PRC 65% 65% Manufacture and sales of cotton yarns related products Beijing Innovative Garment Co., Ltd. PRC 65% 65% Manufacture and sales of shirts 53 Beijing Luthai Shirt Co., Ltd. PRC 60% 60% Manufacture and sales of textiles and garment products Luthai (Hong Kong) Textile Co., Ltd Hong Kong 100% 100% Trading, import and SAR, PRC export of textile products Xinjiang Luthai Harvest Cotton Co., PRC 52.43% 51% Manufacture and Ltd. sales of cotton and cotton yarns Shandong Luthai Huanzhong PRC 75% 75% Manufacture and Pharmacy Co., Ltd. sales of Chinese traditional medicine Changming (Note 11) PRC 56.91% 56.91% Manufacture and sales of electricity and Xanthan Gum Liming Water Purification Co.,Ltd PRC 99.62% 99.62% Process waste water Luqun (Note 24) PRC 90% 90% Manufacture and sales of yarns Lufeng (Note 24) PRC 75% 75% Manufacture and sales of dyeing textile products Unconsolidated subsidiaries % Interest held Country of and proportion of Name incorporation voting rights Principal activities 2005 2004 Qingdao Luthai (Note 12) PRC 75% 75% General trading Luming (Note 12) PRC - 75% General trading 26 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements is as follows: 31 December 2005 2004 Property, plant and equipment 233,388 93,110 (b) Operating lease commitments – where the Group is a lessee The future aggregate minimum lease payments under non-cancellable operating leases are as follows: 31 December 2005 2004 Not later than 1 year 7,743 5,548 Later than 1 year and not later than 5 years 8,725 12,402 Later than 5 years 15,878 10,585 32,346 28,535 27 Approval of financial statements The financial statements were authorised for issue by the Board of Directors on 21 March 2006. 54 28 Events after the balance sheet date In accordance with the "Regulation of Issuance of Short Term Debenture", on 9 January 2006, the People 's Bank of China issued Yin Fa [2006] No. 2 Document "Notice of Issuance of Short Term Debenture by Luthai Textile Company Limited" to allow Luthai Textile Company Limited to issue short term debenture up to RMB 600,000,000 by end of January 2007. The Company does not have any other significant events to be disclosed. 29 Reclassification of comparative figures Certain comparative figures have been reclassified to conform to the current year presentation. 55 SECTION XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting statements carried with personal signatures and seals of legal representative, Chief Financial Officer and Financial Principal. 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed publicly on Securities Times, Shanghai Securities News and Ta Kung Pao. Board of Directors of Lu Thai Textile Co., Ltd. Mar. 23, 2006 56