万科Ａ(000002)万科Ｂ2005年年度报告（英文）

2005 Annual Report Important Notice: The Board, the Supervisory Committee, Directors, members of the Supervisory Committee and senior management of the Company individually and collectively accept full responsibility for the truthfulness, accuracy and completeness of the information contained in this report and confirmed that to the best of their knowledge and belief, there are no other facts that the omission of which would make any statement in this report misleading. Director Song Lin and Director Wang Yin were not able to attend the board meeting in person due to their business engagements. These directors have authorised Director Jiang Wei to represent them and vote on their behalf at the board meeting. The Company’s Chairman, Wang Shi, Director and General Manager, Yu Liang, and Supervisor of Finance, Wang Wenjin, declare that: the financial reports contained in the annual report are confirmed to be authentic and complete. To Shareholders…………………………………………………………… ………..… 2 Corporate Information…………………………………………………… ……… … 11 Accounts and Financial Highlights……………………………………… ……… … 12 Change in Share Capital and Shareholders...…………………………….…………..13 Management and Employees.………………………………………………..……….. 19 Structure of Corporate Governance……………...…………………………………….28 General Meetings...………………………………………………………………………31 Directors’ Report…………………………………………………………………..……. .32 Report of Supervisory Committee.……………………………………………..…….…63 Significant Events..………………………………………………………………….…… 66 A Chronology of 2005……………………………………………………………… .. …67 Financial Report….……………………………………………………………… …… 69 1 A. To Shareholders The year 2005 marked not only the 21st anniversary of China Vanke, but was also the first year of the new ten-year medium to long-term plan of the Company. It is always a memorable moment when one reaches their adolescent. This is the beginning of a new phase of life as an adult. At this point in their lives, young adults need to directly tackle more complex situations, to set and achieve more elaborated goals, and to re-define their roles in the society, to make more appropriate judgment on the future, and to have a new perspective on their commitment. The same phenomenon also applies to an enterprise, this is particularly true in China, where the rise of modern business happened just more than two decades ago. There are only a handful of emerging companies with over 20 years of history and are able to sustain a growth in profitability. To these companies, each of the following years will be a new phrase in the realisation of progress and vision. To China Vanke, 2005 was an extraordinary and memorable year. In the course of stormy turbulence, we were able to see a glimpse of sunlight. During the past year, investors had demonstrated their tremendous support and faith to China Vanke amidst the turmoil. In return, the Company was please to be able to share with the investors the reward of a year’s hard work. China Vanke continued to maintain its growth momentum. During the year under review, it realised a revenue and net profit of RMB9,921 million and RMB 1,365 million respectively, representing increases of 36.7 per cent and 56.1 per cent respectively when compared with those of the previous year. Return on net asset rose to an all-time high of 16.3 per cent, indicating the Company made a significant advance in its operating results. During the year, China Vanke had further considered certain issues that would have material impact on its future and had come up with new perspectives, which the Company would be delighted to discuss and share its findings with the shareholders. It is in the interest of the property industry to maintain stable development rather than exponential increase in prices Since 2004, housing prices and property bubbles have led to fierce debates, highlighting the controversy of these issues. These disputes not only vividly illustrated the public misunderstanding of the actual operation of the property industry, but also brought to light the need for the industry itself, in particular the developers, to seriously review their positions. In the course of the debate, developers had been challenged with scepticism at an unprecedented degree. Among the sceptics were homebuyers and investors. Public opinion, including the perspective of property buyers, had portrayed developers as the principal beneficiary of the property price hike. The developers were suspected of pushing up property prices for their own interests by various means such as hoarding land resources and properties for sale, making sham transactions and manipulating prices through collusion. From the investors’ point of view, the main concerns were the potential burst of property bubbles and a general price decline after a period of a rapid upsurge in 2 property prices, which might lead to a significant decline in the developers’ operating results. The concerns raised by property buyers and investors are obviously two sides of a coin and contradictory: if the property prices keep soaring, there would be no ground for the second concern; if the property prices plummet tremendously after a short- term upsurge, there would be no logical justification for the first concern. However, a deep-down logical analysis showed that the two concerns have something in common: that is the belief that the faster the property prices rise, the greater the developers benefit, while the slowdown in the growth of property prices will have adverse impact on the developers. It would be extremely dangerous if the developers also have a similar line of reasoning and to only take advantage of a price hike or to add fuel to push price upsurge, or to dodge or reframe from reacting to a possible slowdown in property price growth momentum. Such lack of insight will only exacerbate the public’s misunderstanding of the industry and the developers. As such, when discussing property prices, we need to first of all clarify that the exponential increase in property prices should be a warning signal instead of an encouraging message to the property industry and developers, particularly those who aims at long-term development. On the contrary, a restraint in catapulting property prices upsurge is a blessing rather than a curse to the industry and developers with a vision. To the property industry, the exponential upsurge in property prices will lead to three issues. First, it will give rise to an abnormal short-term “boom” in the property industry, which will result in a situation that “any kind of housing unit can be sold and any developer can make a profit”. This situation is detrimental to the property industry. An extremely favourable environment can give rise to short-term plunders with extraordinary results; but cannot cultivate enterprises with solid fundamentals that can sustain long-term development. No industry can progress without the adoption of “survival of the fittest” mechanism, and no good company can excel without competition and risk. A trade without any favourable element in its operation environment would be considered a sunset industry while an industry indulged with enormous positive factors would spoil its player and deprive the industry from a healthy development. Secondly, exponential increase in property prices will lead to an in-tandem growth in land value. As proven by the global property industry, overpriced land value and the resulting higher capital investment on land will diminish the return on capital of property developers and will thus hinder their rapid growth. Land is the only non-replaceable resource in China’s property industry production chain, with a low price elasticity. It also accounts for the largest share of the composite cost of property development. Coupled with the fact that China’s property industry is highly competitive with no entry barrier, any increase in the property prices will immediately ignite developers’ struggle for land resources. As capital commitment will increase as a result of soaring land price, the property development cycle will be extended and will thus reduce the returns on capital. 3 Thirdly, exponential increase in property prices will result in market fluctuations, affecting real estate companies’ accuracy in business forecasts. Barring the impact of external force, a track indicating price movement trend in the market can be doted the long run. The track is determined by the interaction of the real demand and real supply. In the short run, prices would inevitably fluctuate along the basis of this trend, but it is unlikely to see price deviation from the trend track in the long run. Real estate companies investment decisions are based upon expectations. That is to say, products are produced to satisfy market demand in the future. Excessive fluctuation in market price will lead to uncertainty in the industry and affect the accuracy of market expectations on the future. Nobody can benefit from the exponential increase in property prices, not even the developers. An excessively active market is certainly not beneficial to the property industry; only a market with stable development is truly favourable to the industry. The industry benefits from control measures to achieve healthy and rational development In light of the continued increase in property prices, the austerity measures regulating the property market were gradually intensified during 2005. Indeed, 2005 could be regarded as “the year of austerity measures” for the property industry. While many saw such measures as unfavourable to the property industry, China Vanke had a different point of view. Being a company specialising in property development for years, China Vanke is well aware of the uniqueness of this industry. Given that residential property is a daily necessity and fluctuations in property prices affects tens of thousands of households, a fair housing supply becomes a prerequisite for social stability. China’s property industry is relatively young, with marketisation yet to be fully accomplished. The industry needs to undergo a process to reach its maturity. Under this circumstance, it is inevitable for the State to take austerity measures to regulate the market at specific period of time. State intervention is conducive to the growth of the industry as long as the sector maintain its strive for marketisation. It is an indisputable common sense that austerity measures would cool down an overheating industry. However, the key point is that if exponential increase in property prices is having an adverse impact on the industry in the long run, a moderate approach to cool down the overheating market could help the industry return to a rational development track and mitigate the risk of cyclical fluctuation. The reason why the property industry has been a focus of macroeconomic austerity measures is because this industry has a lasting impact on the macro-economy. For this very reason, the objective of the austerity measures is certainly not to create drastic volatility in the industry. As a matter of fact, the ultimate goal of these measures taken by the central government is to maintain a balance in demand and supply, a steady development of the market, stable property prices and an orderly market. In May 2005, the General Office of the State Council circulated the “Opinions on execution of measures to stabilize residential property housing prices” (the “Opinions”), which were jointly promulgated by seven ministries and central 4 government agencies, as the general guiding principles for directing and regulating the property market. With the detailed rules on the implementation of measures being unveiled one after another, suspense around the prospects of the property industry had been gradually lifted. China Vanke immediately conducted a thorough study of the Opinions soon after their promulgation. In our view, the introduction of the Opinions helped eliminate the confusion and concern of society, the industry, the market and the investors over the uncertain outlook of the property industry. The fairness and marketisation principles, which are covered in the Opinions, will help keep the industry on track of a rational, harmonious and healthy long-term development. The Opinions once again confirm the status of the property industry as the pillar of the national economy. They set the goals of austerity measures as “the general stability of residential property prices” and “the healthy development of the property industry”. Apart from setting a clear standard for “common housing” as being small- sized, low-priced units requiring a smaller land lot for development, the Opinions also propose the introduction of a market mechanism to land development to increase land supply for the construction of common housing. This shows that the Opinions have taken into account the principles of fairness and marketisation. As such, with the introduction and gradual implementation of the Opinions, speculative activities will be reined in, property prices will gradually become more rational, and low-income families’ basic accommodation needs will be better satisfied. The property industry will be provided with a stable, harmonic environment for development. Certain developers, particularly those of lesser strength and adaptability, will inevitably suffer. However, there is no reason for us to judge the outcome of these measures basing on the experience from the previous round of austerity measures, which resulted in a reshuffle in the industry, driving out a large number of enterprises, and only a handful of quality enterprises were able to withstand the challenges and became even bigger. Compared to the last round of austerity measures, the recently introduced measures are more refined, they demonstrates the government has become more tactful in regulating the industry. The real demand driven by today’s strong market, economic development and urbanisation far exceeds that of 10 years ago. As such, the shock bought along by the current round of austerity measures is far less severe than the previous round. However, the current round of austerity measures will help the industry resume the mechanism of “the survival of the fittest” and therefore it is inevitable for the industry to accelerate its consolidation progress. All these will provide quality enterprises with more opportunities for development. Revolutionise existing business model by embracing industry reforms Once being the most powerful species in the natural world, dinosaurs eventually extinct due to their inability to adapt to the climatic changes. In the natural world, it is adaptability to the environment and not the size or strength that determines whether a species can survive in the long run. To many enterprises, their failure stemmed from their inability to adapt to the rapid changes in the operating environment, rather than a lack of dedication. China Vanke has become a distinguished company in the property industry after two decades of unrelenting efforts. So far so forth, we are now beginning a new chapter of our third ten-year plan. At the new starting point, we should be prepared to start 5 from scratch. In the era of globalisation, we should not be satisfied with just a small achievement made in a market we merely start to explore. In the new decade, our goal is to make China Vanke a world-class, premium property developer. Only by looking ahead and by comparing ourselves with world-class, outstanding companies can we understand the underlying rationale of achieving a sustainable development. China Vanke should review its own issues with a global vision and to set our standards along those of the market leaders. China Vanke should have a clear understanding that its biggest challenge come from internally not externally. Our prosperity in the future depends on whether we could excel ourselves. Undoubtedly, the prospects of the property industry are promising. Yet, it is also the largest resource-consuming industry. There is a relatively low resource per capita in China, but the country is experiencing the fastest pace in urbanisation in world history. To realise sustainable development, it is imperative to carry out economical and intensive use of land and resources, and such an approach has gradually become the direction of government policy. Generalization in operation cannot last for long. The industry needs to hare a fundamental reform. From a market perspective, the issue of rising population, small-sized family, and aging population will have profound impact on the products and market conditions of the property industry. Moreover, with international giants’ attempt to tap into the China market, competition between China’s property developers and the world’s leading player is just a matter of time. We have to seize the golden opportunities arising from the next 10 years and to consolidate our leadership amid competition. We have to realise our objectives and live up to our promises and to undertake social responsibilities. For all of these reasons, China Vanke has to subvert its existing mentality and, by doing so, leads the industry to carrying out radical changes and creates with industry players and partners who share common values a future where we can co-exist in harmony. Taking into account the above considerations, China Vanke put forth the corporate motto of “Revolutionisation, Leadership, Co-existence” for the year 2005. The coming 10-year period is a rather vague time span. Right now, our utmost concern is the development trend of the industry in the coming three to five years. The key to capture the changes brought along by the trend is to grab trigger point for changes. The period from 2005 to 2006 was a critical point of the industry. The storm that the austerity measures brought forth merely unveils the tip of an iceberg. More important is the future outlook of the industry, after a complete revolutionisation: the emergence of an era of internationalisation, financialisation, and the entering of large State- owned enterprises under the supervision of the State [into the property market]; a buyer’s market, a free capital market, integration of social resources by division of labour and cooperation of specialists. With such a phenomenon becomes more apparent, the future operating environment will be substantially different from that of the past and the present. As such, China Vanke needs to establish a new platform to support its healthy development in the coming three to five years and to secure a more favourable position in the industry. 6 China Vanke has already begun a new round of reforms, which is decisive for our success. We have established clear goals for this round of reforms, and will endeavor to achieve them. The first of our principal goal is to establish a customer-oriented business model. We need to have strong understanding of our customers and more accurate segmentation strategy to identify target customers. By understanding the needs of our customers at various stages of their lives, we can purposely enrich the value of our brand name, acquire project resources and provide products and services, and to maintain life-long loyalty from our customer by securing firmer customer faith and support. Our second principal goal is to shift our mode of operation to resources integration- oriented. We need to refine our product mix to achieve better economies of scale and to shift to an operating model that has higher efficiency. Being an enterprise with the strongest profitability and a mature collaborative mentality, the Company will become a preferred partner of resources owners. Moreover, the Company will remain extremely flexible in collaboration. Our third principal goal is to establish a new organisational structure. To support the our continued rapid development in the future, we need to establish a new organisational structure comprising “a strategies formulation and management headquarters, regional centres with specialised functions, and front-line offices that carry out plans and strategies in a flexible manner. Such a structure is aimed at achieving the combination of a visionary and flexible, decentralised and disciplined management. Our fourth principal goal is to enhance our workforce and establish a good workplace atmosphere. To meet the future demand for rapid growth, internationalisation, financialisation and more extensive collaboration, we must strengthen our employees training programmes and recruit more talented people as well as increase our ability to retain the managerial talent. We must also have in place mechanisms that review our working environment and our staff’s dedication, in order to create a workplace atmosphere conducive to the development of the potential of each individual staff. Our fifth principal is to establish a risk management system that matches up to our rapid business development. This system would cover the following three aspects: First, strengthen research on changes in external environment and our ability to make timely response. Second, follow the principle of “Cash is King”, and augment the cash flow management system. Third, enhance efforts to promote staff’s work conduct standard, and fine-tune internal control system. Our sixth principal goal is to assume the role as a corporate citizen leading the advancement in the industry. We need to exert a wider influence over the industry to facilitate the industry’s advancement to a regulated, fair, efficient and sustainable development. We will first be the role model and advocate player in the industry to make contribution to social development, so that the industry could win trust and respect from the public and thereby gain more room for development. In order to achieve these goals, the headquarters and primary subsidiaries of China Vanke will formulate a three-year strategic development plan. The plan will take into account all the aspects that could affect the future development, a shift from the traditional model that focus on financial indicators. Establish corporate citizenship; maintain a harmonic relationship with society 7 “Property developer” had been a focus of the public opinion in 2005, and had been portrayed with a less favourable image. This reflected people in general felt that the property industry was not trustworthy. In light of this mentality, property enterprises should have a wholehearted review of situation, rather than grumble. Property development is a young industry. In the course of its development towards maturity, the industry has witnessed various kinds of irregulated phenomena. The public had been left with a bad impression and distrust of the property industry by such phenomena. Once an opinion was formed, it would be generalised to cover all the enterprises in the industry, including those enterprises exercising discipline. The industry is becoming more mature with less irregulated activities. However, property enterprises should be aware of the fact that it would take a long time to change the public perception. It is therefore necessary to take a more practical action by increasing self-discipline, establishing order in industry and promoting social responsibilities, with an aim to establish a positive social image and achieve harmonic coexistence in the society. At present, property developers should realise that exponential increase in property prices is definitely not favourable to the industry. The industry can enjoy stable development and have a regulated environment, only if property prices can be swiftly stabilised. From a long-term perspective, the property developers should be aware of the fact that securing public understanding and trust is a necessary prerequisite for survival and development. They should follow the government’s guidance to increase self- discipline, establish industry order, resist various kinds of irregulated activities, and strive to enhance industry transparency and encourage a free and fair flow of information, with an aim to shape public opinion according rational judgement. Property developers should also undertake more social responsibilities, protect interests of all related parties and make contribution to social development, so as to gain respect and trust from the society. It is an ongoing objective of China Vanke to become an industry leader. A leader does not only lead in performance and capability, but also undertakes greater social responsibilities and has the mission to lead the industry to healthy development. On the one hand, we have to pay attention to the influence of our self reform on the industry transformation. On the other hand, we have to be aware of the fact that the advance of the industry and the harmony between the industry and society is interrelated to the environment and opportunities for the Company’s future development. As such, we should dedicate ourselves to promoting the responsibilities of corporate citizenship within the industry, with an aim to gain trust from society and greater opportunities for development through contribution. We therefore should further fine- tune the overall planning for China Vanke’s corporate citizenship and gradually enhance our role in community charities. We will continue to promote rational thinking on the solution to the housing problem of low-to-medium income families. We plan to introduce a suitable housing prototype for low-income households in China’s urban areas and will try our best to implement it as well as promote it to the entire society. We will also keep on promoting the idea of harmony between the residential property industry and the natural environment, in order to sustain the enhancement of quality 8 living. Our research and development team will seek to have breakthrough in environmental protection and resources-saving technologies, and to achieve energy saving, economical use of land, and stay in the forefront of the industry in meeting environmental protection standards, during our project development. We will continue to contribute to the promotion of regulated construction and enhancement of regulation within the industry. Such efforts also create opportunities for our own development. As a company insisting on disciplined operation, we would stand out from others and gain greater opportunities for development only if the industry in general maintains a high discipline. We will seek effective interaction with the general public, directing them to rational thinking and two-way dialogue, with an aim to enhance public understanding of the industry. By doing so, we hope we could also gain public understanding and support. It is our goal to become an excellent company as well as a good corporate citizen, particularly in light of the prevailing negative public opinion about the property industry. Although China Vanke has been named “The Most Respected Enterprise in the PRC” and “The Best Corporate Citizen” for several consecutive years, we could not step back and assume we have nothing to do with the relationship between the property industry and society. As such, China Vanke will lead the industry in carrying out reforms and undertake the responsibilities of a corporate citizen in the coming years. For the above reasons, China Vanke’s corporate motto for the year 2006 will be “A Reform Pioneer and A Corporate Citizen”. China Vanke has been continuing to revolutionise its operation model for the past 21 years, but a new round of reform has just begun. During the past 21 years, China Vanke has been maintaining a track record of continued profitability and growth, but a new stage of development of the Company has just begun. China Vanke is deeply grateful to all shareholders for their support in the past years. China Vanke will continue to dedicate to realizing shareholders’ value and to prove to shareholders that it is their investment of choice in the years ahead. B. Corporate Information 1. Company Name (Chinese): 万科企业股份有限公司 Company Name (English): China Vanke Co., Ltd. (Vanke) 2. Legal Person Representative: Wang Shi 3. Secretary of the Company’s Board of Directors: Shirley L. Xiao E-mail Address: IR@vanke.com Securities Affairs Representative: Liang Jie E-mail Address: IR@vanke.com 4. Contact Address: Vanke Architecture Research Centre, No 63, Meilin Road, Futian District, Shenzhen, the People’s Republic of China 5. Telephone Number: 0755-25606666 Fax Number: 0755-25531696 6. Registered Company Address and Office Address: Vanke Architecture Research Centre, No 63, Meilin Road, Futian District, Shenzhen, the People’s Republic of China Postal Code: 518049 7. Home Page of the Company: http://www.vanke.com E-mail Address: IR@vanke.com 8. Media for Disclosure of Information: “China Securities Journal”, “Securities 9 Times”, “Shanghai Securities News” and an English newspaper in Hong Kong Website for Annual Report Posting: www.cninfo.com.cn 9. Place for Annual Report Collection: The Office of the Company’s Board of Directors 10. Stock Exchange on which the Company’s shares are listed: Shenzhen Stock Exchange 11. Company’s Share Abbreviation and Stock Codes on the Stock Exchange: G Vanke A, 000002 Vanke B, 200002 12. First registration date of the Company: 30 May 1984. location: Shenzhen Latest registration date: 27 December 2004, location: Shenzhen 13. Corporate legal person registration no.: 4403011019092 14. Taxation registration code: Local taxation registration code: 440304192181490 State taxation registration code: 440301192181490 15. The name and address of the Certified Public Accountants engaged by the Company: Name: KPMG Peat Marwick Huazhen Certified Public Accountants Address: 8th Floor, Block East 2, East Plaza, 1 East Chang’an Street, Beijing Name: KPMG Certified Public Accountants Address: 8th Floor, Prince Bldg., 10 Charter Road, Central, Hong Kong C. Accounts and Financial Highlights 1. Three-year financial information summary (Unit: RMB) 2005 2004 2003 Revenue 9,920,738,936 7,257,182,725 5,973,268,303 Operating profit 1,961,959,890 1,249,116,468 815,198,517 Share of losses less profits of associates and jointly controlled entities (2,075,482) (3,840,986) (4,069,917) Profit before tax 1,940,636,552 1,249,852,248 811,128,600 Taxation (524,987,007) (340,844,929) (266,360,947) Profit after tax 1,415,649,545 909,007,319 544,767,653 Minority interst (50,959,692) (34,647,464) (23,619,957) Net profit for the year 1,364,689,853 874,359,855 521,147,696 Basic earnings per share 0.39 0.26 0.17 Diluted earnings per share 0.37 0.25 0.15 Dividend 0.15 0.15 0.05 2. Impact of IFRS Adjustments on Net Profit (Unit: RMB) Items Net profit for 2005 As determined pursuant to PRC accounting standards 1,350,362,817 Adjustments to align with IFRS: Recognition and amortisation of negative goodwill (778,683) Recognition and amortisation of goodwill 8,441,783 Deferred tax assets 17,768,942 Revaluation of properties 225,940 Capitalised borrowing costs released to cost of sales (11,330,946) 10 As restated in conformity with IFRS 1,364,689,853 3. Change in shareholders’ equity during the year under review (Unit: RMB) Convertible Foreign Share Statutory Retained Item Share capital bonds exchange Total premium reserve profits reserve reserve Start of the year 2,273,627,871 1,446,570,637 82,842,331 2,052,153,824 420,216,571 10,629,373 6,286,040,607 Increase during the year 1,449,059,799 793,032,184 810,217,690 1,364,689,854 4,675,211 4,421,674,738 Decrease during the year 1,136,990,237 46,004,311 - 1,151,314,759 - 2,334,309,307 End of the year 3,722,687,670 1,102,612,584 36,838,020 2,862,371,514 633,591,666 15,304,584 8,373,406,038 D. Change in Share Capital and Shareholders 1. Structure of Share Capital 1)Change in share capital structure of the Company (Unit: share, as at 31 December 2005) Balance, beginning of the (+, -) Balance, end of the year year Quantity Proportion Converted Quantity Proporti Transferred Share types from Others on from capital convertible (note 3 reserve bonds & 4) (note 2) (note 1) a、Restricted Shares 1、State-owned and State-owned Legal 239,011,404 10.51% +119,505,702 -13 358,517,093 9.63% Person Shares 2、Domestic Legal 92,503,380 4.07% +46,251,690 -180 138,754,890 3.73% Person Shares 3、Domestic Individual 1,710,385 0.08% +855,193 -150,000 2,415,578 0.06% Shares 4、Shares held by - - - - - - - foreign investors Total Number of 333,225,169 14.66% - +166,612,585 -150,193 499,687,561 13.42% Restricted Shares b 、 Unrestricted Shares 1,575,137,2 1、A Shares 69.28% +312,069,562 +787,744,948 +150,193 2,675,101,997 71.86% 94 2、B Shares 365,265,408 16.07% - +182,632,704 - 547,898,112 14.72% Total Number of 1,940,402,702 85.34% +312,069,562 +970,377,652 +150,193 3,223,000,109 86.58% Unrestricted Shares 11 c、Total Number of 2,273,627,871 100.00% +312,069,562 +1,136,990,237 - 3,722,687,670 100.00% Shares Note: The changes in the Company’s share capital were as follows: (1) During the year under review, the Company proceeded with the transfer of capital surplus reserve to share capital on the basis of five shares issued for every 10 existing shares held by shareholders. Based on the Company’s total share capital of 2,273,980,474 shares (of which 352,603 shares were shares issued as a result of the conversion of “Vanke Convertible Bonds 2”) as at the close of the market on 28 June, the transfer of capital surplus reserve to share capital resulted in an increase of 1,136,990,237 shares. (2) With effect from 24 March 2005, “Vanke Convertible Bonds 2” can be converted into the Company’s A shares. As a result of the conversion of 11,085,298 “Vanke Convertible Bonds 2”, the amount of the Company’s A shares had been increased by 312,069,562 shares as at 31 December 2005, of which 352,603 new shares were shares converted before 28 June 2005 and were entitled to the transfer of five shares from capital surplus reserve for every 10 existing shares held. During the year under review, the number of accumulated new shares was 312,245,863 shares in total as a result of the conversion of “Vanke Convertible Bonds 2”. (3) During the year under review, Feng Jia no longer acted as the Company’s director and the 150,000 A shares he held (including 50,000 shares generated from the transfer of capital surplus reserve to share capital) was released from lock-up. As such, the number of Restricted Shares of the Company decreased accordingly while the number of Unrestricted Shares increased accordingly. (4) Due to the adjustment of statistic rules in Shenzhen Office of China Securities Depository & Clearing Corporation Limited during the year under review, the 193 accumulated odd lots that generated from the Restricted Shares were altogether categorized into Unrestricted Shares. The number of Restricted Shares and Unrestricted Shares as at the end of the year under review reflected such change. (5) Since the end of the year under review and up to 16 March 2006, the number of shares of the Company increased by 196,273,306 shares as a result of the conversion of 6,967,710 “Vanke Convertible Bonds 2”. Therefore, the Company’s 12 total share capital was3,918,960,976shares as at 16 March 2006. 2. Issue and listing of share 1)Issue of share and derivative securities in the past three years On 24 September 2004, the Company issued 19.9 million convertible bonds to the public at a face value of RMB100 each. The term of the convertible bonds was five years. The amount of proceeds raised from the issue of the Company’s convertible bonds was RMB1.99 billion. Trading of the Company’s convertible bonds on the Shenzhen Stock Exchange commenced on 8 October 2004. Abbreviation and code of the convertible bonds are “Vanke Convertible Bonds 2” and “126002”, respectively. The initial conversion price of “Vanke Convertible Bonds 2” was RMB5.48 per share. After the Company implemented on 29 June the dividend distribution proposal of RMB1.5 (including tax) for every 10 existing shares held and the transfer of five shares from the capital surplus reserve to share capital for every 10 existing shares for the year 2004, the conversion price was adjusted to RMB3.55 per share accordingly. Since the conversion of the Company’s “Vanke Convertible Bonds 2” into the Company’s A shares began on 24 March 2005 up to the end of the year under review, a total of 11,085,298 convertible bonds had been converted, and the number of A shares of the Company increased by 312,069,562 shares. During the period from 4 January 2006 to 21 February 2006, the closing price of the Company’s A share was higher than 130 per cent (that is RMB4.615 per share) of the conversion price (RMB3.55 per share) for a total of 20 trading days in 28 consecutive trading days. In accordance with the related regulations and as stipulated in the “Convertible Bonds’ Offering Circular”, if the closing price of the Company’s A share during the conversion period of “Vanke Convertible Bonds 2” is higher than 130 per cent of the conversion price for the period for an accumulated 20 trading days in 30 consecutive trading days, the Company is entitled to redeem all or part of the convertible bonds which have not been converted, at a price equivalent to the face value plus interest for the period. The Company has announced all the outstanding “Vanke Convertible Bonds 2” will be redeemed in full on 7 April 2006. There were 1,846,992 outstanding “Vanke Convertible Bonds 2” as at 16 March 2006. 2)Please refer to the note of “Change in share capital structure of the Company” for the change in the number and structure of the Company’s total share capital as a result of the transfer of capital surplus reserve to share capital and conversion of convertible bonds during the year under review. 3)There was no internal staff share as at the end of the year under review. 2、Description of Shareholders (as at 31 December 2005) Total number of 161,730 (152,355 A Share holders and 9,375 B Share holders) shareholders Shareholding of the top 10 shareholders was as follows: 13 Number of Total Number of Type of Percentage pledged Shareholders number of Restricted shareholders held or frozen share held Share held shares China Resources State-owned 351,340,871 0 11.81% 439,626,254 Company Limited shareholder Credit Lyonnais 0 0 Foreign Securities (ASIA) 2.06% 76,830,876 investor Limited Nanfang Risk- 0 0 avoidance and Value Others 1.63% 60,839,343 Increase Fund Liu Yuansheng Others 1.57% 58,276,317 51,471,571 0 TOYO SECURITIES Foreign ASIA LIMITED - A/C 1.50% 55,972,185 0 0 investor CLIENT Nanfang Steady Growth Securities Others 1.48% 55,000,000 0 0 Investment Fund Tianyuan Securities Others 1.39% 51,647,960 0 0 Investment Fund Shenyin & Wanguo – Foreign Citibank － UBS 1.29% 48,113,717 0 0 investor LIMITED Guotai Junan – China Construction Foreign 1.15% 42,665,933 0 0 investor Bank － HSBC Naito Securities Co., Foreign 1.03% 38,169,122 0 0 Ltd. investor Shareholding of the top 10 shareholders of Unrestricted shares was as follows: Shareholders Number of Unrestricted shares held Share types China Resources 88,285,383 A Share Company Limited Credit Lyonnais Securities (ASIA) 76,830,876 B Share Limited Nanfang Risk- avoidance and Value 60,839,343 A Share Increase Fund TOYO SECURITIES ASIA LIMITED - A/C 55,972,185 B Share CLIENT Nanfang Steady A Share Growth Securities 55,000,000 Investment Fund Tianyuan Securities A Share 51,647,960 Investment Fund Shenyin & Wanguo – A Share Citibank － UBS 48,113,717 LIMITED Guotai Junani – A Share China Construction 42,665,933 Bank － HSBC Naito Securities Co., 38,169,122 B Share Ltd. Kaiyuan Securities 37,254,817 A Share Investment Fund 14 Elaboration on the (1) The 76,830,876 B shares that held by CLSA LIMITED are beneficially connected owned by China Resources (Holdings) Co., Ltd. in Hong Kong relationship or (“CRHC”); CRHC is a wholly-owned subsidiary of China Resources universal action of Co., Ltd. (“CRC”); the aforementioned (2) Nanfang Risk-avoidance and Value Increase Fund, Nanfang Steady shareholders Growth Securities Investment Fund, Tianyuan Securities Investment Fund and Kaiyuan Securities Investment Fund are funds managed by China Southern Fund Management Company Limited. (3) The Largest Shareholder As at 16 March 2006, CRC and CRHC, a wholly-owned subsidiary of CRC (“CR” thereafter) is the largest shareholder of the Company, holding an aggregate of 602,318,397 shares, which represented 15.37 per cent of the total number of the Company’s shares as at 16 March 2006. CRC was promoted and established by China Resources National Corporation (“CRNC”) in June 2003, with Mr Chen Xinhua as its legal person representative. CRC’s major asset is its 100 per cent equity interest in CRHC and other assets in the PRC. Its core businesses include manufacturing and distribution of consumer goods, property and related industries, infrastructure facilities and public utilities. The registered address of CRC is China Resources Building, No. 8 Jianguomenwai North Street, Dongcheng District of Beijing. CRC has a registered capital of RMB16,467 million. CRNC holds 16,464,463,526 state-owned shares in CRC, representing 99.984211 per cent of CRC’s total share capital. The other four promoters, namely China National Cereals, Oils & Foodstuffs Corporation, China Minmetals Corporation, Sinochem Corporation and China Huaneng Group, each owns 650,000 state-owned shares in CRC, each representing 0.003947 per cent of CRC’s total share capital respectively. CRNC is a state-owned enterprise with a registered capital of RMB9,662 million, its major asset is its equity interest in CRC. It’s under the direct supervision the State- owned Assets Supervision and Administration Commission of the State Council. Mr Chen Xinhua is the legal person representative of CRNC. As at the end of the period under review, CRC held 439,626,254 shares of the Company’s A shares, and as at 16 March 2006, all of the 3,048,075 “Vanke Convertible Bonds 2” held by CRC had been converted into the Company’s A shares. The shareholding of CRC in the Company increased to 525,487,521 shares. Meanwhile, the 76,830,876 B shares held by Credit Lyonnais Securities (Asia) Limited are beneficially owned by CRHC. As such, [CRC?? 华润] possessed an aggregate of 602,318,397 shares of the Company as at 16 March 2006. The following chart shows the equity relationship between the largest shareholder and the Company as at 16 March 2006: 99.984212% 13.41% CRNC CRC The Company 100% 1.96% % CRHC 15 (3) Restricted Share of the Company’s Non-tradable Share Reform A、Listing date of the Restricted Shares of the Company’s Non-tradable Share Reform Number of additional Balance of the Balance of the tradable shares after number of Date number of Remarks disposal restriction Restricted Unrestricted Shares period Shares 5 December 2006 331,957,492 165,314,491 331,957,492 Note 1, 2 5 December 2007 165,314,491 0 497,271,983 Note2 B、The number of shares held by and disposal restriction of the top 10 Restricted Share Holders Number of Name of shareholders Number of Date of Listing additional Restricted Rank (with share disposal Restricted tradable Condition restriction) Shares held Shares 5 December 2006 186,026,380 1 CRC 351,340,871 Note 1，2 5 December 2007 165,314,491 2 Liu Yuansheng 51,471,571 5 December 2006 51,471,571 Note 1 Staff Union Committee Note 1 3 of China Vanke Co., 26,527,851 5 December 2006 26,527,851 Ltd. Shanxi Securities Note1 4 Company Limited 16,559,248 5 December 2006 16,559,248 (Note 3) Note 1 Shenzhen Investment 5 7,176,222 5 December 2006 7,176,222 Management Company Shenzhen Nuclear Note 1 6 Electricity Development 4,762,017 5 December 2006 4,762,017 Company Limited Ping An Insurance Note 1 7 (Group) Company of 4,762,017 5 December 2006 4,762,017 China, Limited Xinjiang Jinke Note 1 8 Electronic Information 4,293,067 5 December 2006 4,293,067 Development Company Shekou Social Note 1 9 4,277,399 5 December 2006 4,277,399 Insurance Company Shenzhen Note 1 10 Development Bank 3,849,651 5 December 2006 3,849,651 Company Limited 16 Note 1: All non-tradable shareholders of the Company have undertaken that their non-tradable shares would not be traded or transferred within 12 months from the day of their non-tradable shares become transferable; Note 2: CRC undertakes, after the previous undertaking expires, the original non- tradable shares would be sold on the SSE. The amount of shares to be sold would not exceed five per cent of the Company’s total share capital (the amount of shares to be sold is calculated based on the total share capital as at the trading day before the corresponding non-tradable shares became transferable) within 12 months and not exceed 10 per cent within 24 months. In addition, the selling price would not be lower than 120% of the exercise price of the put warrants to be issued under the Company’s equity division reform (the selling price will be adjusted in accordance with the adjustment to the exercise price of the put warrants within the statutory share disposal restriction period. Note 3: Shanxi Securities Company Limited has been restructured to become [Xibu Securities Company Limited]. However, there is no change in the relevant information in the Shenzhen Office of China Securities Depository & Clearing Corporation Limited. E. Management and Employees 1. Directors, members of the supervisory committee and senior management Brief introductions to Directors: Wang Shi, male, born in 1951. He joined the military force in 1968. Wang Shi changed his career in 1973 and worked in the Water and Electrical supply department of Zhengzhou Railway. Wang Shi graduated from Lanzhou Railway College in 1978 majoring in water supply studies. He had been working in Guangzhou Railway Bureau, Guangzhou Foreign Trade and Economic Cooperation Committee and Shenzhen Special Region Development Company. He organised “Shenzhen Exhibition Center of Modern Science and Education Equipment”, the predecessor of China Vanke, in 1984, and acted as General Manager. The company was reorganised into China Vanke Co. Ltd., a shareholding company, in 1988, at which time Mr Wang became Chairman and General Manager. Mr Wang no longer acted as the General Manager with effect from 1999. At present, he is the Chairman of the Company. Song Lin, male, born in 1963. He graduated from Tongji University with bachelor of science degree in engineering mechanics in 1985. Mr Song joined China Resources (Holdings) Co., Ltd. (“CRH”) in 1986. In 1998, Mr Song became the Director of CRH In 2000, he became the Executive Director and the General Manager of CRH, the Director and General Manager of China Resources Ent. Ltd., as well as the Chairman of China Resources Logic Limited, China Resources Power Holdings Co. Ltd. and China Resources Vanguard Co., Ltd. He has been a Director of CRC since 2003 and the Managing Director of CRC since 2005. He has been a Director of the Company since 2001. At present, Mr Song is the General Manager of CRH, 17 Managing Director of CRC, the Chairman of China Resources Ent. Ltd. and the Independent Non-executive Director of Geely Automobile Holdings Limited. He becomes the Chairman of China Resources Land Limited (“CRL”) since 2006. Yu Liang, male, born in 1965. He graduated from the Peking University with a bachelor degree in international economics studies in 1988. Mr Yu obtained a master degree from the Economics Studies Department of the Beijing University in 1997. He had previously worked for Shenzhen Waimao Group. He joined the Company in 1990. He became the General Manager of Shenzhen Vanke Financial Consultancy Company Limited In 1993 and the Deputy General Manager of the Company in 1996, and the Executive Deputy General Manager and in charge of finance of the Company in 1999. He became the General Manager since 2001 and the Director of the Company since 1994. At present, Mr Yu is the General Manager of the Company. Chen Zhiyu, male, born in 1954. He graduated from Chuangxing College and obtained a diploma in Accounting from The London Chamber of Commerce and Industry and a diploma in corporate management from the Hong Kong Management Association. Mr Chen is an affiliate member (AMIA) of The Association of International Accountants and has embarked on the career of accounting, financial and executive management for over ten years. He has acted as the Director of Jenston International (HK) Limited since 1983. At present, he is also the Managing Director of Beijing Renda International Information Technology Co., Limited and Shanghai Renda Yunzhen Information Technology Co., Limited. He has acted as the Director of the Company since 1997. Wang Yin, male, born in 1956. He graduated from Shandong University with a bachelor degree in economics studies. He also obtained a master degree in Business Administration from the University of San Francisco. Mr Wang had worked in the Foreign Economic and Trade Cooperation Department. He became the Deputy Officer of the China Resources National Corporation (“CRNC”) in 1984, Deputy General Manager of the Human Resources Department of China Resources (Holdings) Co., Ltd. (“CRH”) in 1988, and the General Manager of Max Share Limited, a subsidiary of CRH, in 1995. Mr Wang has been the Director and Assistant General Manager of CRH since 2000. He became Managing Director of CRL since 2001 and was the Chairman since 2004. Mr Wang no longer acted as the Chairman of CRL with effect from 2006. He has been a Director of the Company since 2002. Shirley L. Xiao, female, born in 1964. She graduated from Wuhan University, majoring in English Literature in 1984. She obtained a master degree in Business Administration from China Europe International Business School in 2000. She had worked in Central South University of Technology, China Technology Data Import & Export Co. and Mitsubishi Corporation Shenzhen Office. She joined China Vanke in 1994 as the Deputy Chief of the General Manager’s Office. She was the Chief of the General Manager’s Office in 1996 and the Chief of the Board’s office in 2004. She has also been the Secretary to the Board since 1995. She has been the Director of the Company since 2004. Jiang Wei, male, born in 1963. He graduated from Foreign Economy and Trade University and obtained a master degree in international business and finance. He joined China Resources (Holdings) Co., Ltd. (“CRH”) in 1988. He became a Director of China Resources Ent. Ltd. in 1995. He became a Director and General Manager of the Financial Department of CRH in 2000. Mr Jiang became a Director and Supervisor of Financial Department of CRH in 2002, the Supervisor of Financial Department of CRC in 2003 and a Director of CRC in 2005. He becomes the Supervisor of the Company since 2001 and a Director of the Company since 2005. At 18 present, Mr Jiang is the Chief Accountant and the Supervisor of Financial Department of CRH, a Director and the Supervisor of Financial Department of CRC and a Non-executive Director of China Resources Ent. Ltd., China Resources Power Holdings Co. Ltd., China Resources Cement Holdings Limited and China Asset (Holdings) Limited. He has been a Director of CRL since 2006. Brief introductions to Independent Directors Sun Jianyi, male, born in 1953. He graduated from Zhongnan University of Finance and Economics, majoring in finance studies. He is a senior economist. He worked at the Qiu Chang Road Office, Wuhan branch, the People’s Bank of China in 1971 and became vice division head of the credit division of Jiang An District, Wuhan Branch, the People’s Bank of China in 1978. In 1982, Mr Sun became the Division Head of 27 Road Office, Wuhan Branch, the People’s Bank of China as well as the Secretary of Communist Party Branch Committee. He became Deputy General Manager of Wuhan Branch, the People's Insurance Company of China, Limited and the committee member of the Communist Party Committee in 1985. He was appointed the General Manager of Management Department of Ping An Insurance Company of China in 1990, Assistant to General Manager in 1991, Deputy General Manager in 1992, the Executive Deputy General Manager in 1994 and an Executive Director of the same company in 1995. He has been an Executive Director and Executive Deputy General Manager of Ping An Insurance Company of China, Limited since 1997. He has been an Executive Director, Executive Deputy General Manager and Deputy Chief Executive Officer of Ping An Insurance (Group) Company of China, Limited since 2003. He also acted as a Director of Ping An Life Insurance Company of China, Limited, Ping An Property & Casualty Insurance Company of China, Limited, China Ping An Trust & Investment Co., Limited, Ping An Annuity Insurance Company of China, Limited and Ping An Bank Limited. He has been a Director of the Company since 1995. He became an Executive Director in 1997 and Deputy Chairman in 1998. He has been an Independent Director since 2001. Li Chi Wing, male, born in 1959. He graduated from the Hong Kong Polytechnic University, majoring in real estate management. Mr Li is a registered professional surveyor in Hong Kong, a registered professional housing manager in Hong Kong and a registered real estate valuer in the PRC. He worked in the agency department of Jones Lang LaSalle in 1985 and became the Director of the Industrial Department before leaving Jones Lang LaSalle in 1993. He has been Executive Director of DTZ Debenham Tie Leung and Managing Director of DTZ Debenham Tie Leung Property Management Company Limited since 1993 and 1996 respectively. He has been an Independent Director of the Company since 2002. David Li Ka Fai, male, born in 1955. He graduated from London Metropolitan University in the UK in 1978. He is a FCPA of Hong Kong Institute of Certified Public Accountants and a member of the Institute of Chartered Accountants in England & Wales, a fellow member of the Association of Chartered Certified Accountants. He was a member of Election Committee of the accountancy subsector for the first and second terms of Legislative Council and a member of Representative Election Committee (Hong Kong) of the Standing Committee of the Tenth National People’s Congress. Due to his dedication to the promotion of the accounting profession in Hong Kong, he had been awarded The Medal of Honour by the Government of the Hong Kong Special Administrative Region in July 2004. At present, he is the Deputy Managing Partner of Li, Tang, Chen & Co. Certified Public Accountants, Tutor of the School of Continuing and Professional Studies of The Chinese University of Hong Kong and Independent Non-executive Director and member of the audit committee of China-Hongkong Photo Products Holdings Ltd. He was an Independent Non- 19 executive Director of Wanji Pharmaceutical Holdings Ltd. from 2002 to 2005. He has been an Independent Director of the Company since 2005. Judy Tsui Lam Sin Lai, female, born in 1955. She had studied in University of British Columbia in Canada, London School of Economics and Political Science, and the Chinese University of Hong Kong. She has a PhD degree in accounting. Mrs Tsui is a fellow member of Hong Kong Institute of Certified Public Accountants, honorary fellow of CPA Australia and fellow member of the Hong Kong Institute of Directors. She is the first non-US member and the first Hong Kong academic to be appointed as the Vice President-international of the American Accounting Association. She was a council member of Hong Kong Institute of Certified Public Accountants, Deputy Chairman of the Corporate Governance Committee and Chairman of the PR Strategy Steering Committee etc. At present, she is the Dean of the Faculty of Business, Director of the Graduate School of Business and Chair Professor of Accounting at the Hong Kong Polytechnic University, Honorary Professor and Guest Professor at Sun Yat-sen University, Guest Professor at Renmin University of China and executive council member of Higher Business Education Society of China Higher Education Association. She has been an Independent Director of the Company since 2005. Brief introductions to Members of the Supervisory Committee Ding Fuyuan, male, born in 1950. He holds a tertiary qualification. He had worked in Guangdong Tour Department, South China Sea Oil Joint Service Corporation, South China Petroleum Shenzhen Development Service Corporation and Nanhai Huaxin Group. He joined China Vanke in 1990 and became the Deputy Chief of the General Manger’s Office in February 1991. In October 1991, He became the Manager of the Human Resources Department of the Company. He has been the Secretary of the Communist Party Committee of the Company since 1995. He became a member of the first Supervisory Committee of the Company in 1993 and has been the Convenor of the Supervisory Committee of the Company since 1995. Zhang Li, male, born in 1959. He graduated from Jiangxi University majoring in political economics in 1985. He had worked in Jiangxi No. 2 Chemical Fertilizer Factory, Jiangxi University and Jiangxi Labour Bureau. He joined China Vanke in November 1992. He used to be the Manager of Shanghai Vanke Property Management Company Limited in 1995, Deputy General Manager of Shanghai Vanke Real Estate Company Limited, Manager of the Company’s Corporate Planning Department in November 1998, Chairman and General Manager of Shenzhen Vanke Gift Manufacturing Co., Ltd in 1999. He resigned from China Vanke in 2000 and became the General Manager of Yuanda Real Estate Co., Ltd. In 2001, he joined China Vanke again as the General Manager of Beijing Vanke. He became the Property Director of the Company since July 2002 and the representative of the Staff Union in the Supervisory Committee of the Company in 2004. Fang Ming, male, born in 1958, was graduated with a bachelor degree in economics from Shandong University. Mr Fang also received an LLM degree from Nankai University and an SJD degree from the Chinese Academy of Social Sciences. He had worked as a Deputy Researcher at the Chinese Academy of Social Sciences. Mr Fang joined China Resources (Holdings) Company Limited in 1993. He had been the Senior Manager of the Research Department of China Resources (Holdings) Company Limited, the General Manager of the Capital Operation Department of China Resources National Corporation and the Assistant General Manager of the Corporate Development Department of China Resources (Holdings) Company Limited. Mr Fang is currently the Deputy General Manager of the Corporate 20 Development Department of China Resources (Holdings) Company Limited. He is also the Secretary to the Board of Directors of CRC. Brief introductions to Senior Management Yu Liang: for biography regarding Yu Liang, please refer to the “Brief introductions to Directors”. Liu Aiming, male, born in 1969. He was graduated from Tsinghua University with a master degree in architecture materials faculty. He had worked in China Overseas Construction (Shenzhen) Co., Ltd as the Director, Assistant General Manager as well as the Manager of the Property Department. He used to be the Managing Director of China Overseas Construction (Shenzhen) Co., Ltd in 2001 and the Deputy General Manager of Zhonghai Real Estates Co., Ltd. in 2002. He has joined China Vanke since 2002 as the Deputy General Manager. Ding Changfeng, male, born in 1970. He graduated from Peking University with bachelor degree in international politics in July 1991. He obtained a master degree in global economics from Peking University in 1998. He had worked Jiangsu Yancheng Party School. He joined China Vanke in 1992 and became Deputy Manager to the General Manager’s Office of the Company in August 1994. He was the Chief Editor of “Vanke Periodical” in 1995 and the Assistant General Manager of Northeastern Operation and Management Department of the Company in January 1996. He used to be the Deputy General Manager of Northeastern Department of the Company and the Deputy General Manager Shanghai Vanke Real Estate Co., Ltd. in 1997 and 1998 respectively. He became the Manager of the Company’s Corporate Planning Department in 1999, and the General Manager of Shanghai Vanke Real Estate Co., Ltd. in 2000. He has been the Deputy General Manager of the Company since 2001. Xie Dong, male, born in 1965. He was graduated from Nanjing Engineering Institution in 1987 with wireless electricity as his major. He received a master degree in business administration from Shanghai Jiao Tong University in 1997. He had worked in Shenzhen RGB Electronic Co., Ltd., the Headquarter of China Shenzhen TV Company. He joined China Vanke in 1992. He used to be Manager of the Vanke Personnel Management Department in 1996, the General Manager and Director of Vanke Human Resources Department in 2000 and 2001 respectively. He has been the Deputy General Manager of the Company since 2004. Zhang Jiwen, male, born in 1967. He graduated from the School of Architecture of Tsinghua University in 1994 with a master degree in engineering. He had worked in Guizhou Architecture and Design Institute, Shenzhen Jin Xiu Zhong Hua Development Co., Ltd., Shenzhen Window of the World Co., Ltd., Guangzhou Hua Heng Design Company and Ho & Partners Architects Engineers & Development Consultants Ltd. in Hong Kong. He joined Shanghai Vanke Real Estate Co., Ltd. in 2001 as the Deputy General Manager and became the Art Director of the Company in 2003. He has been the Deputy General Manager of the Company since 2004. Mo Jun, male, born in 1967. He graduated from the Faculty of Architecture of Tsinghua University in 1991 with a bachelor degree. He obtained an MBA degree from the China Europe International Business School in 2004. He joined China Vanke in 1991. He had been the Manager of Shenzhen Wanchuang Construction and Design Consultants Co., Ltd. in 1996, General Manager of Shenzhen Vanke Real Estate Co., Ltd. in 1999, the General Manager of Beijing Vanke in 2000, the Deputy General Manager of the Company in March 2000, and the Executive Deputy General Manager of the Company in 2001. He resigned from the Company and became the Executive Deputy General Manager of Beijing Rongke Zhidi Real Estate 21 Co., Ltd. in March 2003. He joined the Company again as the Deputy General Manager in October 2004. Xu Hongge, male, born in 1971. He graduated from Southeast University with a real estate major. He joined Vanke in 1994. He had been the Deputy Manager of Shenzhen Wanchuang Architecture and Design Consultancy Co. Ltd., the Executive Deputy General Manager of Shenzhen Vanke Real Estate Co., Ltd. and the General Manager of Shenzhen Vanke Real Estate Co., Ltd. He has been the Deputy General Manager of the Company since August 2005. Shirley L. Xiao: for biography regarding Shirley L. Xiao, please refer to the “Brief introductions to Directors”. Wang Wenjin, male, born in 1966. He graduated from Zhongnan University of Economics and Law with a master degree. He is a registered accountant in the PRC. He had worked for a plastic factory in Hefei and Anhui Optical Sophisticated Mechanic Research Centre of China Academy of Sciences. He joined China Vanke in 1993 and became the Deputy Manager of Vanke ’s Finance Department in 1998. He was the General Manager of Vanke ’s Finance Department in 1999 and has been the Supervisor of Finance since 2004. Change in Shareholding of Existing Directors, Members of Supervisory Committee and Senior Management (Unit: shares) Name Number of shares held Number of shares held at at start of 2005 the end of 2005 Wang Shi 418,677 628,016 Yu Liang 116,742 175,113 Ding Fuyuan 123,615 185,423 Sun Jianyi 192,288 288,432 Note: During the year under review, the shareholding of the senior management increased accordingly as a result of the transfer of capital surplus reserve to share capital. The Remuneration of Directors, Members of Supervisory Committee and Senior Management The Company continued to follow the principle of its remuneration policy, which is “to offer competitive salaries according to market principles to retain and attract high- calibre professionals”. The remuneration of each of the Company’s senior management was determined in accordance with the growth in the overall operating results of the Company. In 2005, the business of the Company realized rapid growth. The remuneration of the Company’s senior management had also been increased accordingly. Remuneration of the Company’s Directors, members of Supervisory Committee and senior management for the year amounted to RMB21.888 million, of which one person received between RMB3 million and RMB3.5 million; one person received between RMB2.5 million and RMB3 million; two persons received between RMB2 million and RMB2.5 million; four persons between RMB1.5 million and RMB2 million; 22 three persons between RMB1 million and RMB1.5 million; and one person between RMB1 million and RMB0.5 million. The three Directors with the highest remuneration received RMB7.15 million in total, while the three senior management with the highest remuneration received RMB8.18 million in total. Among the directors and supervisors who are not on the payroll of the Company, the four directors, Song Lin, Chen Zhiyu, Wang Yin and Jiang Wei, each received from the Company a director’s remuneration of RMB50,000(including tax) during their term of service; the two independent directors, Sun Jianyi and Li Chi Wing, each received from the Company a director’s remuneration of RMB100,000 (including tax) during their term of service; the two independent directors, David Li Ka Fai and Judy Tsui Lam Sin Lai, each received from the Company a director’s remuneration of RMB80,000 (including tax) during their term of service; Supervisor Fang Ming received from the Company a supervisor’s remuneration of RMB5,000 (including tax) during his term of service since December 2005. Song Lin, Wang Yin, Jiang Wei and Fang Ming received remunerations from CRH, a connected company of CRC. The aforesaid directors and supervisors have not received other types of remuneration or allowance from the Company. Change and Reasons for the Change in Directors, Members of the Supervisory Committee and Senior Management During the Year Under Review The resignation of Ning Gaoning as the Company’s director and deputy chairman was reported at the 14th Meeting of the 13th Board of the Company held on 4 March 2005. Jiang Wei resigned from the position of a member of the Supervisory Committee of the Company at the 5th Meeting of the 5th Supervisory Committee of the Company held on 18 March 2005. The Supervisory Committee had accepted his resignation. Wang Shi, Song Lin, Yu Liang, Chen Zhiyu, Wang Yin, Shirley L. Xiao and Jiang Wei were appointed as Directors of the Company, and Sun Jianyi, Li Chi Wing, David Li Ka Fai and Judy Tsui Lam Sin Lao were appointed as Independent Directors of the Company, while Hu Yonglei was by-elected a member of the Supervisory Committee at the 17th Annual General Meeting of the Company held on 29 April 2005. Eric Li Ka Cheung and Feng Jia would cease to be the Company’s independent directors. Wang Shi was elected the Chairman of the Company while Song Lin was elected the Deputy Chairman at the 1st Meeting of the 14th Board of the Company held on 29 April 2005. Hu Yonglei resigned from the position of a member of the Supervisory Committee of the Company at the 8th Meeting of the 5th Supervisory Committee of the Company held on 27 October 2005. The Supervisory Committee had accepted his resignation. Fang Ming was by-elected a member of the Supervisory Committee at the 1st Special General Meeting of 2005 of the Company held on 1 December 2005. Appointment of General Manger, Deputy General Manager, Supervisor of Finance and Secretary of the Board of Directors of the Company Shirley L. Xiao was re-appointed as the Secretary to the Board of the Company at the 1st Meeting of the 14th Board held on 29 April 2005. Xu Hongge was appointed as the Deputy General Manager of the Company at the 2nd Meeting of the 14th Board held on 28 July 2005. 23 2. Number and Breakdown of Staff As at 31 December 2005, there were 10,961 employees under the Company’s payroll, representing an increase of 13.9 per cent from that of the previous year. The average age of the employees was 28. Of all the employees, there were 1,924 staffs in property development sector, representing an increase of 14.8 per cent from the previous year, with an average age of 31 and an average of three years working for the Company. The education level of the staff in this sector is as follows: 0.3 per cent with doctoral degree, 10.6 per cent with master degree, 65.3 per cent with a real estate major, 19.7 per cent with tertiary education and 4.1 per cent with education below tertiary level. 76.2 per cent of the staff in this sector possessed university or above education level. The breakdown of staff in the property development sector by job nature is as follows: 360 marketing and sales staffs, accounting for 18.7 per cent, up by 12.9 per cent from the previous year; 961 professional technicians, accounting for 50.0 per cent, up by 19.4 per cent from the previous year; of the professional technicians, 504 were construction staffs, accounting for 26.2 per cent, 234 were designers, accounting for 12.2 per cent and 130 were cost management staffs, accounting for 6.8 per cent, 93 project development staffs, accounting for 4.8 per cent; 603 management staffs, including finance, audit, IT, legal, human resources, customer relations and data analysis and accounting for 31.3 per cent of the total staff in the property development department, up by 9.2 per cent from the previous year. 9,037 property management staffs, up by 13.7 per cent from the previous year, had an average age of 27 and an average of 1.4 years working for the Company. The education level of the staff in the property development department is as follows: 0.1 per cent with master degree, 6.0 per cent with a real estate major, 10.5 per cent with tertiary education and 83.1 per cent with education below tertiary level. 16.6 per cent of the staff in the property development department possessed tertiary or above education level. F. Structure of Corporate Governance 1. Elaboration on documents relating to regulation on corporate governance of listed companies (1) Strictly complied with the requirements set out in the laws and regulations of the “Company Law”, the “Securities Law”, the “Regulations on the Management of Listed Companies” and the “Guiding Opinion Concerning the Establishment of An Independent Director’s System in Listed Companies”, the Company continued to fine-tune the Company’s corporate governance structure and standardize its operation procedures. There was no deviation between the Company’s actual corporate governance structure with the regulation and requirement set out in the documents. (2) In accordance with provisions under “Certain Regulations on Strengthening of the Protection of Public Shareholders’ Interests” issued by China Securities Regulatory Commission (“CSRC”), “[Work Guideline on Online Voting of Shareholders’ Meeting of Listed Companies (On Trial)]”, “Listing Rules Governing the Securities Listed on Shenzhen Stock Exchange (revised in 2004)” and “[Notice Regarding Enforcement of Amendment to Articles of Association by Listed Companies]” issued by CSRC, the Company amended part of its “Articles of Association” after considering the Company’s actual situation. As such, the controlling shareholder’s interference on the Company’s activities would be further restricted and thereby the interests of public shareholders can be 24 safeguarded. (3) In accordance with the requirements of the CSRC and the related rules in the Company’s Articles of Association, the Company established a complete decision-making mechanism for the Board and set up Audit Committee, Investment and Decision-making Committee and Remuneration and Nomination Committee under the Board, and had worked out the corresponding implementation details for each professional committee, in order to enhance operational efficiency and strengthen the function of the Board. (4) In accordance with provisions under “Certain Regulations on Strengthening of the Protection of Public Shareholders’ Interest” issued by the CSRC, the Company safeguarded the interests of public shareholders. During the non-tradable share reform, the Company implemented voting by categories for all shareholders and shareholders of tradable shares, and safeguarded the interests of all shareholders, particularly that of the minority shareholders. (5) The Company had paid special attention to the communications with investors. The Company communicated with investors through organizing roadshows and conferences, participation in various seminars, meetings and investor company visit, and by using telephone, fax, internet, e-mail and SMS. In addition to complying the disclosure requirement, the Company maintained its initiative in information disclosure, protected investors’ right of receiving information on a fair basis and strived to enhance the Company’s transparency. During the period under review, the Company received the UK-based IR Magazine China Award in the “Best Corporate Governance” category in 2005 2. Performance of the Independent Directors Sun Jianyi, Li Chi Wing, David Li Ka Fai and Judy Tsui Lam Sin Lai, the four Independent Directors of the Company, actively participated in the management of the board in 2005. Having taken into account the interest of the Company’s shareholders, particularly that of the minority shareholders, and being an expertise in their own field, they gave independent and constructive advice in the course of discussion about the establishment of professional committees of the Board, the Company’s non-tradable share reform and the various resolutions considered at the board meetings, thereby having performed their duties as independent directors. During the year, all the independent directors did not have any discrepancy for the related matters. Attendance of Independent Directors to Board Meeting was as follows: Number of Number of Number of Name of Professional Professional Board Attended in Attendance Independent Absent Committee Committee Meetings to be person by proxy Directors Meeting to be Meeting attended attended attended Sun Jianyi 6 4 2 0 6 6 Li Chi Wing 6 6 0 0 6 6 David Li Ka Fai 3 3 0 0 3 3 Judy Tsui Lam 3 2 1 0 0 0 Sin Lai 3、The Independence of Business Operation, Employees, Assets, Organisation and Finance from the Company's Controlling Shareholder 25 The Company continued to insist its business operation, employees, assets, organisation and finance are completely independent from those of its single largest shareholder, CRC, and connected companies. This allows the Company to maintain independence with regard to business integrity and autonomy in operation. 4、The Establishment and Implementation of Appraisal and Incentive Systems for Senior Management The Company implemented a balanced scorecard as the performance management system. In each of the management year, performance review on senior management is conducted through the Group’s work report meeting. The major factors to be considered in reviewing the Group’s senior management include the Group’s overall performance, the value of the senior management’s positions to the Group and their achievement as required by their positions. With regard to all those in charge of frontline companies, the review is based on the performance of those frontline companies for which they are held accountable, the value of their positions and their achievement as required by their positions. Established in 2005, the Remuneration and Nomination Committee of the Company is responsible to study and supervise the establishment and implementation of appraisal and incentive systems for senior management. In accordance with the concept of a balanced scorecard, senior management’s performance is evaluated using the benchmark of achievements of business objectives in each operating year, which in turn are governed by the objectives of the Company’s medium to long-term development strategies. The review will cover different categories including the Company’s performance, finance, customers, internal logistics, staff training and development and the ability to maintain sustainable growth. The Company has established objective benchmark to measure performance in each category. In order to obtain objective statistics on staff and customers’ satisfaction, the Company had appointed an independent third party to conduct survey. At the end of each year, the Company’s General Manager will determine the remuneration of the senior management in accordance with the objective operating results of the Group and its various companies for that particular year, overall achievements against the benchmark set by the management, the assessment and evaluation, and the salary level in the industry. The performance of the Company’s General Manager will be reviewed by the Board. In 2005, to encourage the medium to high-level management to further enhance the Company’s profitability, the Company, has replaced its preferential housing purchase policy, which targeted at medium to high-level management and staff with significant contribution, with a special incentive policy for outstanding profitability. The new policy was approved by the14th Board of Directors. Return on equity (ROE) is the benchmark for performance evaluation under the special incentive policy for outstanding profitability. If the ROE exceeds 15 per cent in a particular year, 10 per cent of the portion of net profit exceeding 15 per cent of ROE will be appropriated as a bonus for the Company’s medium to high-level management and employees with significant contribution. While implementing of this incentive policy, the Board had abolished the preferential housing purchase policy for the Company’s medium to high-level management and employees with significant contribution. G. General Meetings and Shareholder's Meeting 1、 The 17th Annual General Meeting The 17th Annual General Meeting (“AGM”) was held at the Vanke Architecture Research Centre, 63 Meilin Road of Shenzhen, on 29 April 2005. The notice of AGM was published in China Securities Journal, Securities Times, Shanghai Securities 26 Journal and The Standard of Hong Kong on 30 March 2005. The last day for verifying the qualification of shareholders was 8 April 2005. A total of 89 proxies and/or shareholders, representing 867,666,021 shares in the Company or 38.16 per cent of the Company’s total share capital, attended the AGM. The following resolutions were approved at the meeting: (1) the Report of the Board of Directors for the year 2004, (2) the 2004 Annual Report and Audited Financial Report, (3) the proposals on dividend distribution and the transfer of capital surplus reserve to share capital for the year 2004, (4) the re-appointment of KPMG Huazhen Certified Public Accountants and KPMG Certified Public Accountants as the Company’s auditors for the year 2005, with auditors’ remuneration of RMB1 million and HK$1.5 million respectively, (5) the Work Report of the Supervisory Committee for the year 2004, (6) the resolution regarding the remuneration policy of directors, independent directors and members of the Supervisory Committee, (7) the resolution regarding the purchase of liability insurance for directors, members of Supervisory Committee and senior management, (8) the election of Wang Shi, Song Lin, Yu Liang, Chen Zhiyu, Wang Yin, Shirley L. Xiao and Jiang Wei as the Company's Directors and the election of Sun Jianyi, Li Chi Wing, David Li Ka Fai and Judy Tsui Lam Sin Lai as the Company's Independent Directors based on accumulated polling results, (9) the by- election of Hu Yonglei as a member of the Supervisory Committee and (10) the resolution regarding amendments of the Company “Articles of Association”. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 30 April 2005. 2、 Shareholder’s Meeting on Non-tradable Share Reform The Shareholder’s Meeting on reform of the Company’s non-tradable shares (“the Meeting”) was held at the Vanke Architecture Research Centre, 63 Meilin Road of Shenzhen, on 15 November 2005. The voting methods adopted in the Meeting included on-site voting, the Board to vote on behalf of shareholders with authorization and online voting. The notice of the Meeting was published in China Securities Journal, Securities Times and Shanghai Securities Journal on 10 October 2005. Shareholders holding the Company’s A shares and whose names appear on the register of members at the Shenzhen Stock Exchange at the close of the market on 4 November 2005 have the rights to attend the Meeting. A total of 6,279 A share holders and/or proxies attended the Meeting and voted in person or by online voting, representing 1,788,624,474 shares of the Company, which accounted for 56.38 per cent of the Company’s total A shares. Among which, there were 6,274 tradable A share holders and/ or proxies, representing 1,354,757,320 shares of the Company, which accounted for 50.64 per cent of the Company’s tradable A shares and 42.70 per cent of the Company’s total A shares. The Company’s non-tradable share reform proposal was considered and approved at the Meeting, in which 95.95 per cent of all A share holders vote in favour of the proposal and 94.66 per cent of tradable A share holders in favour of the proposal. The relevant resolutions were published in China Securities Journal, Securities Times and Shanghai Securities Journal on 16 November 2005. 27 3、 The 1st Special General Meeting of 2005 The 1st Special General Meeting of 2005 (SGM”) was held at the Vanke Architecture Research Centre, 63 Meilin Road of Shenzhen, on 1 December 2005. The notice of SGM was published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 31 October 2005. The last day for verifying the qualification of shareholders was 24 November 2005. A total of 64 proxies and/or shareholders, representing 1,136,988,980 shares in the Company or 30.56 per cent of the Company’s total share capital, attended the SGM. The following resolutions were approved at the meeting: (1) the resolution regarding the application for the issue of short-term financing bills and (2) the by-election of Fang Ming as a member of the Supervisory Committee. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 2 December 2005. H. Directors’ Report 1. Management’s Discussion and Analysis Changes in market environment and management’s opinion The year 2004 marked the end of the situation where people’s income outgrew that of property prices prevailing in the previous six years. A number of cities witnessed exponential growth in property prices and a relatively high proportion of property purchased for investment. The pressure felt by low to middle-income families of purchasing property and the financial risk associated with the property industry became the major concerns of the general public. Property prices remained on the upward trend in 2005. According to the National Development and Reform Commission and National Bureau of Statistics of China, the selling prices of property in 35 cities in the first quarter rose by 9.8 per cent from that of the same period last year. The selling prices of commodity housing increased by 10.5 per cent, and the land value rose by 7.8 per cent on that of the same period last year. Land used for residential property development rose by 9.6 per cent. Along with the continued rise in property prices, the macroeconomic austerity measures focused on the property market had been tightened up. In the work report of the State Council, curbing exponential growth in property prices was listed as a priority task for 2005. On 17 March, the central bank adjusted housing loan policy. On 26 March, the General Office of the State Council issued “Notice of Stabilising 28 Housing Prices”. Thereafter, the central and local governments promulgated a series of relevant measures. On 27 April, the Standing Committee of the State Council analysed the property development trend, and put forward eight measures to strengthen its guidance and control. On 9 May, the General Office of the State Council circulated the “Opinions on Execution of Measures to Stabilise Housing Prices”, which were jointly promulgated by seven ministries and central government agencies. After the introduction of this document, more people tended to wait and see, i.e. withholding their plan to sell or purchase property. In cities such as Shanghai, Hangzhou, Beijing, Xiamen, transaction volume in May dropped by more than 20 per cent from that of April. The impact was more obvious in Shanghai. The average transaction volume of commodity housing in Shanghai in May and June was around 800,000 sq m, which was only 30 per cent of the monthly average of 270,000 sq m in 2004. All this showed that, during the year under review, the operating environment of the property industry underwent substantial changes. Industry’s perspective and market expectations also took a surprise twist within several months. At the beginning of the year, most of the industry players were optimistic due to the continued rise in property prices, or due to the fact that property prices in core cities would rise to the same level as those of the metropolises of developed countries within the next few years. However, in the middle of the year, people became uncertain about the market outlook, or thought that the bleak outcome of the previous round of macroeconomic austerity measures would happen again. In contrast to the sudden reverse of opinion of some of the industry players during the year under review, the management of the Company held a different view. Since the second half of 2004, the Company’s management had been paying high regard to the changes happening and those to happen in the industry. The management believed, whether the operating environment appeared to be at the peak or bottom, that was only a small part of a big picture. To find out more, to get the gist and to make appropriate judgement would require understanding of two basic characteristics of the property industry. First, residential property is a special commodity with both social and investment attributes. It is a daily necessity, as well as an important element to improve the quality of living. It can even become an investment product that generates profits. 29 When it becomes scarce, the conflicts among the basic needs, requirements for enhancement and investment demands will intensify. Low-income group has more pressing needs, but its house purchasing ability is low. As a result, when property prices rose to extraordinarily high levels or exceeded the level at which the low- income group can afford, it is legitimate for the government to take control measures. Second, China’s urbanisation is proceeding at the fastest rate in world’s history. People’s consuming power is also increasing at steady pace. To meet the demand for property of most of the city dwellers through marketisation thus becomes an irrevocable trend. No fundamental change will take place in the unparalleled future demand of residential property in China, and undoubtedly the prospects of the property industry will remain bright. The management therefore believes it could draw two points for the operating environment. First, only stable development is truly favourable to the industry. An excessively active market cannot last very long and it is unreliable. Second, a market supported by real demand will never slide into a recession or collapse. Based on this analysis, the management had at the end of 2004 made a projection on the latest round of austerity measures. At the beginning of 2005, the management had adjusted its business plan for the potential risk in the Yangtze market. Yet, the management remained confident in the future prospects of the property industry and the Company’s results in the long run. The above opinions were revealed in the first quarterly report of the year under review. The conclusion was proved to be correct with the market changes at the beginning of the second quarter. Company’s response and business review Compared with that in 2004, the Company had made substantial improvement in its results during the year under review. During the year under review, the Company realized a sales area of 2,318,000 sq m, with a sales revenue of RMB13.95 billion, representing increases of 41.5 per cent and 52.3 per cent respectively from those of 2004. The booked area amounted to 1,769,000 sq m, which increased by 23.4 per cent. The booked revenue amounted to RMB9.73 billion, representing a 38.1 per cent increase. The net profit amounted to RMB1.36 billion, representing a 56.1 per cent increase. 30 Of the booked area, Shanghai Company accounted for 213,000 sq m, which were mainly attributable to projects of Shanghai Holiday Town and Yun Garden. Shenzhen Company booked 143,000 sq m, mainly from the projects of Shenzhen Vanke City and Shenzhen East Coast. In other cities, projects including Wuxi Charming City, Guangzhou Four Seasons Flower City, Nanchang Four Seasons Flower City, Shenyang Four Seasons Flower City, Tianjin Crystal City etc achieved satisfactory sales results, with 154,000 sq m, 131,000 sq m, 106,000 sq m, 104,000 sq m and 103,000 sq m sold respectively in the period. By the end of the year, the Company had sold but not yet booked 657,000 sq m, worth RMB4.87 billion. The achievement of the above-mentioned results was mainly attributable to the Company’s preparation for and timely response to the changes of operating environment. The industry in general was optimistic in 2004; relatively aggressive expansion became the choice of strategy at the time. The Company, with more than 10 years of experience in the industry, insisted on a stable financial strategy and a cost-efficient growth model, which were criticised by some as too conservative. However, the recent facts showed that the Company’s perseverance with such a practice does help mitigate the cyclical impact of the industry. The Company continued to maintain a growth momentum, while ensuring safe operation. By the end of 2004, with the sharp rising trend of property prices in certain cities, property developers were easily tempted to “withhold their plan to sell until the price surges”. On the other hand, the Company had insisted on its normal practice – getting a fair return, and persisted in launching products as scheduled and achieved satisfactory results. In particular, the return on certain projects sold but not yet booked at the end of 2004 was relatively high, which made considerable contribution to the Company’s results for the year under review. The Pearl River Delta region and the Yangtze River Delta region had been the two largest regional markets of the Company. Since the start of the year under review, the property prices in the Pearl River Delta region had been stable, which implied relatively low market risks. The rising trend for property prices in the Yangtze River Delta region, on the other hand, implied a greater possibility of fluctuations. In light of this situation, the Company adjusted its pace of operation accordingly before the year under review; particularly in the first quarter, the Company accelerated the progress 31 of project launch in the Yangtze River Delta region. From January to April, the Company realised a sales area of 210,000 sq m in the Yangtze River Delta with a sales revenue of RMB1.55 billion, which were substantially higher than those of the Pearl River Delta region (91,000 sq m and RMB600 million). In the second half of the year, the Pearl River Delta region and other regions became the major contributors to the Company’s operating results. In the second half of the year, the Company realised a sales area of 449,000 sq m in the Pearl River Delta with a sales revenue of RMB2.96 billion, accounting for 32 per cent and 36.4 per cent of the Company’s total sales area and sales revenue respectively. The Company realised a sales area of 278,000 sq m in the Yangtze River Delta with a sales revenue of RMB1.92 billion, accounting for 19.9 per cent and 23.5 per cent of the Company’s total sales area and sales revenue respectively. The Company realised a sales area of 673,000 sq m in other markets with a sales revenue of RMB3.26 billion, accounting for 48.1 per cent and 40.1 per cent of the Company’s total sales area and sales revenue respectively. Management and innovation To ensure safe operation amid cyclical changes in the industry, to sustain efficient growth and to lay a solid foundation for capturing the opportunities arising from industry consolidation became the main focus of the management for the year under review. The management believed the property industry was scattered, even China Vanke accounted for merely 1 per cent of the market. Therefore, despite cyclical adjustments in the industry, the Company was fully confident in handling the situation. Whether or not the Company would achieve this objective depended on customers’ recognition. Thus, during the year under review, the Company pushed ahead with the strategy of “customer segmentation”, which was formulated in 2004. This strategy aims at identifying and classifying the different demands of customers and, based on these data, developing products that suit the specific needs of customers. During the year under review, the Company also paid greater attention to customer relations and in return, gained further support from its loyal customers. A poll conducted in 2005 by an independent third party, Gallup, regarding the level of customer’s satisfaction, revealed that, on average, each existing customer recommended China Vanke’s property to 6.28 people in 2005, and the rate of actual transactions was 20.4 per cent. The continued increase in referrals and repeated 32 purchases from existing customers became the powerful tools of the Company used to ride out the storm caused by the austerity measures. To achieve both safety and growth, the Company adhered to the strategy of “being cautious but ambitious” in the development of its projects. The Company emphasised the importance of collaboration to acquire land and the importance to acquire the land reserves kept by other companies in the industry, in order to obtain better payment terms to improve the Company’s cash flow. During the year under review, the Company’s newly added land reserves amounted to a GFA of 6,512,000 sq m, of which 48.3 per cent was obtained through collaboration. The Company was even more cautious with the land value prevailing in the Yangtze River Delta region, which already reached a high level at the beginning of the year under review. During the year under review, 85.4 per cent of the newly added project resources in the region was obtained by acquisition of Nandu for a consideration which represented a discount on the market price, with a favourable term of payment by instalments in two years. The Company had been innovative in financing. On 28 April, “Ping An Trust—Vanke Guangzhou City Garden Project Collective Money Trust” and “Ping An Trust—Vanke Guangzhou Nanhu Project Collective Money Trust” were launched. On 30 June, the Company collaborated with Hypo Real Estate Bank International (“HI”) again on “Shenzhen Vanke City North”. On 1 July, “Beijing International Trust and Investment Co., Ltd.·Beijing Vanke Xishan Project Collective Money Trust” was launched, raising proceeds of RMB180 million. On 8 December, the Company jointly established “CITIC Capital Vanke China Property Development Fund” with CITIC Capital Investment Holdings Limited. In December, the Company entered into an agreement with Reco Ziyang Pte Ltd (“RZP”), a subsidiary of GIC Real Estate Pte Ltd (GIC RE), for the collaboration on the development of the projects of Wuxi Charming City and Shenyang Vanke City by way of transfer of partial equity interests. The Company is currently leading in innovative financing, particularly taking into account the wide range of financing channels. During the year under review, the Company proceeded with its product and service innovation, with the aim at leading the industry to carrying out radical changes and strengthening its core competitiveness for the future. The new design concept of the Fifth Garden project of Shenzhen Company – “Original Modern Chinese-style Residential Property” had gained wide recognition from customers and the market. Construction of the Phase I of the Tianjin Crystal City residential project had received 33 the highest professional award – “The Fifth Zhan Tianyou Civil Engineering Award”. Shenyang Xinyu Mansion project is a successful copy of the Company’s well- developed products – the time from land acquisition to the sale of Phase I had been shortened by eight months compared with the average time required for other projects of the Company. This project succeeded in making a breakthrough in enhancing the efficiency in development, demonstrating the effective results of the Company’s promotion of its “Prudent Advancement” principle. The Company pushed ahead with the centralised management of its property portfolio in 16 cities across the country. It consolidated over 70 “property management offices” of its property management company under a “property service centre”, and promoted its principle of “service orientation” among its 200,000 customers. The Company also had new ideas on enhancing the image and implications of property services. During the year under review, the Company further enhanced its brand value and was the first enterprise in the property industry to be awarded “China’s Famous Brand”. The Company’s image received further recognition, with the award of “The Most Respected Enterprise in the PRC” for the third time and “China’s Best Corporate Citizen” for the second time. The Company was again ranked first among “AsiaEC Listed companies with the greatest development potential”, and was named to “CCTV 2004 China’s most valuable listed companies” and “Forbes 200 Best Small Companies in Asia”. Under the guidance of the Ministry of Construction of the PRC and property industry leaders, the Company launched the campaign on “Gather ‘Solutions to Housing Problems of Low to Middle-income Group’”, which had a ripple effect on the society. During the year under review, China Vanke became the first listed company (with B shares) to complete non-tradable share reform. Such a move paved the way for the development of the Company and its shareholders. The Company’s investor relations also gained market recognition. The Company became one of the six listed companies to be given the “Merit” grading for disclosure of information for four years in a row by The Shenzhen Stock Exchange. The Company also received the UK- based IR Magazine China Award in the “Best Corporate Governance” category, and was the winner for “Best IR by a PRC company - large cap” in the First Edition of the China A-share Companies Category. During the year under review, the Company, based on its business strategies, adjusted its organisational structure, strengthened its workforce development and management succession planning, and fine-tuned its remuneration policy, with the 34 aim at attracting more talent joining and staying with the Company. A poll conducted by Gallup regarding employees’ dedication to work for 2005 found that China Vanke was on the 59th percentile of the global list. During the year, the Company was also elected as one of the “2005 Best Employers in China” co-organised by Fortune Magazine (Chinese edition) and Watson Wyatt and was named to “CCTV 2005 Best Employers”. 2. Operations of the Company (1) Implementation of Business Plan During the Year The Company is principally engaged in property development. The Company has completed the basic market planning according to its “3+X” cross-regional development plan by establishing presence in the Yangtze River Delta, Pearl River Delta and Bohai-Rim region, which are to be the Company’s core development areas and to be extended to other regional economic centers such as Wuhan and Chengdu. In 2005, the Company made good progress in its business development. In accordance with the macroeconomic austerity measures, the Company insisted on carrying out its “Cash is King” strategy, accelerating the pace in project sales, and during the 2005 interim period, adjusted the plan for new construction work and completed work, in order to lower its cash expenses. Such a move had a favourable effect, and ensured the Company’s flexibility in developing its business. For the whole 2005 year, the Company actually completed area under construction of 2,593,000 sq m and area completed during the year of 2,174,000 sq m. During the year, the Company realised a sales area of 2,318,000 sq m, with a sales revenue of RMB13.95 billion. At the end of the year, the Company’s booked area amounted to 1,769,000 sq m, with a booked revenue of RMB9.73 billion. The Company had sold but not yet booked 657,000 sq m, with a value of RMB4.87 billion. While ensuring its operating results for 2005 were achieved, a solid foundation for its future development has been laid. (2) The scope and operations of the Company’s core business A. Turnover and Net Profit from Core Business by Sectors (Unit: RMB ’000) Turnover Cost of Sales Gross Margin Net Profit Sectors Amount +/ - (%) Amount +/ - (%) +/ - Amount +/ - (%) 35 Property 9,727,014 38.1% 6,838,894 31.9% 29.7% 2.6% 47.0% 1,310,546 Property management 193,725 2.6% 173,378 20.8% 10.5% 4.1% 316.3% and others 54,143 Total 9,920,739 36.7% 7,012,272 31.6% 29.3% 2.8% 56.1% 1,364,690 Note: Tax and surcharge for core business have been included in calculating gross profit margin. B.Turnover, Cost, Gross Profit Margin and Market Share of Major Products The Company specializes in property development business with commodity housing as its major products. In 2005, the Company’s sales floor area and sales revenue of commodity residential properties were 2,318,000 sq m and RMB13.95 billion, representing increases of 41.5 per cent and 52.3 per cent respectively compared with those of last year. As at the end of the year, the booked area, booked revenue and booked cost were 1,769,000 sq m, RMB9.73 billion and RMB6.84 billion, representing increases of 23.4 per cent, 38.1 per cent and 31.9 per cent respectively when compared with those of last year. The gross profit margin for the year was approximately 29.7 per cent, up by 2.6 percentage points when compared to that of last year. According to the information published on www.realestate.cei.gov.cn, the total sales of commodity housing of the domestic market amounted to RMB1,489.605 billion. Based on the aforesaid amount, the Company thus accounted for 0.94 per cent of the domestic market in terms of sales revenue. The statistical approach used to obtain the sales data published on www.realestate.cei.gov.cn had been adjusted since August 2005. Under the new approach, there has been a significant increase in the national aggregate figure. As such, it would be inappropriate to make any comparison between the data on the Company’s market share in 2005 and those on the Company’s market share in the past years. C. Revenue, Net Profit, and Booked Area from the Property Development by Regions (Unit: ’000) Revenue Net Profit Booked area % % % (RMB ’000) (RMB ’000) (000 sq m) Pearl River Delta Region Shenzhen 1,415,431 14.55 360,066 27.47 143.00 8.08 Guangzhou 702,840 7.23 95,068 7.25 154.70 8.75 Zhongshan 231,786 2.38 22,641 1.73 70.10 3.96 36 Dongguan 277,163 2.85 17,809 1.36 75.90 4.29 Sub-total 2,627,219 27.01 495,584 37.82 443.70 25.08 Yangtze River Delta Region Shanghai 2,118,097 21.78 371,511 28.35 213.20 12.06 Nanjing 290,414 2.99 35,986 2.75 43.80 2.47 Nanchang 302,536 3.12 33,369 2.55 106.20 6.00 Wuxi 441,869 4.54 31,348 2.39 97.80 5.53 Sub-total 3,152,917 32.42 472,215 36.03 461.00 26.06 Beijing- Tianjin and North- Eastern district Beijing 959,526 9.86 44,755 3.41 148.10 8.37 Tianjin 705,271 7.25 71,422 5.45 112.70 6.37 Shenyang* 765,991 7.87 56,764 4.33 210.80 11.92 Dalian 447,651 4.60 53,873 4.11 97.00 5.48 Changchun 231,598 2.38 13,902 1.06 74.30 4.20 Sub-total 3,110,036 31.97 240,716 18.36 642.90 36.34 Others Chengdu 515,689 5.30 74,405 5.69 130.20 7.36 Wuhan 321,154 3.30 27,627 2.11 91.20 5.15 Sub-total 836,842 8.60 102,032 7.79 221.40 12.51 Total 9,727,014 100.00 1,310,546 100.00 1,769.00 100.00 * Including Anshan (2) Major Suppliers and Customers A. The Company’s five largest suppliers and aggregate purchase amount from these suppliers as a percentage of the total purchase for the year In 2005, the purchase amount from the five largest suppliers was about RMB217 million, accounting for 21.70 per cent of the total direct purchase amount of the Company. Property development is the Company’s core business. Development projects are contracted out to construction companies by means of tendering. As such, most of the building materials are supplied by construction companies. The products the Company directly procured from suppliers included mechanical and electrical equipment and external or internal decoration materials, such as electrical supply and heating equipment, elevators, glass facades, doors and windows etc. Such equipment and materials are purchased through centralized procurement on the 37 internet. For this procurement method, the Company has formed a strategic network of suppliers. B. The Company’s major customers and sales to the five largest customers as a percentage of the total sales for the year The Company’s property development mainly focuses on commodity housing. Most of its customers are individual consumers, buying properties from the Company’s projects in different cities. As a result, sales to major customers only account for a small proportion of the year’s turnover. Only for certain projects, there indicates a small number of institutional buyers or bulk purchasers. Sales to the five largest customers amounted to RMB219 million, representing 2.07 per cent of the total sales revenue of the year. 3. Financial Status of the Company During the year under review, the Company maintained steady growth in its operation with improved asset quality. The Company’s financial position remained healthy, and the land resources acquired in the year laid a solid foundation for the continued development of the Company. (Unit: RMB ‘000) Financial 31 Dec 31 Dec +/ - (%) Reasons for changes indicators 2005 2004 Expansion of operating scale and increase in Total assets 22,274,021 15,500,261 43.7 net assets and liabilities Increase in project resources and area under 15,680,594 10,540,267 48.7 Inventory construction Long-term 1,293,326 97,427 1,227.48 investment Acquisition of equity interests in Nandu Property,plan t and 217,975 232,553 -6.27 equipment Disposal and write-off partial fixed assets Long-term Conversion of some of the Company’s 2,472,563 2,777,529 -10.98 liability convertible bonds Shareholders Increase in net profit and conversioin of some of ’ equity 8,373,406 6,286,041 33.2 the Company’s convertible bonds Growth in the revenue generated from the Gross profit 2,908,467 1,926,601 51.00 property business Net profit 1,364,689 874,360 56.08 Growth in total profit Increase in cash and 117,040 2,163,210 -94.59 cash equivalents Decrease in cash flow from financing activities Other financial indicators Increase in receipts in advance, long-term Gearing ratio 1.20 60.0% 58.8% borrowings and long-term account payable Faster growth of receipts in advance in current Current ratio 1.19 1.73 -0.54 liabilities Quick ratio -0.27 Faster growth of receipts in advance in current 38 0.46 0.73 liabilities Shareholders Increase in liabilities and increase in total ’ equity ratio 37.6% 40.6% -3.0 assets Account receivable Increase in sales turnover (Day) 14 16 -2 Inventory Faster growth of land to be developed and land turnover 667 638 29 under construction (Day) 4. Operating Results of the Wholly-owned Subsidiaries and Holding Companies of the Company (Unit: RMB ’000) Net profit Total % of Sales attributable Company name assets at Major projects equity revenue in to China (including subsidiary companies) the end of developed in 2005 held 2005 Vanke in 2005 2005 Blue Mountain City, Holiday Scenery, Langrun Court, Shanghai Vanke Real Estate 2,172,460 371,393 6,244,425 Rancho Santa Fe, Yannan Company Limited 100% Garden, Yun Garden, New Miles, Baima Garden Shenzhen Vanke Real Estate 100% East Coast, Vanke City, 1,437,942 368,558 4,749,455 17 Miles, The Fifth Garden Company Limtied 100% Four Seasons Flower City, Guangzhou Vanke Real Estate 715,812 97,004 2,266,450 City Garden, Blue Company Limited Mountain City Zhongshan Vanke Real Estate 100% 232,345 21,984 415,078 City Scenery Company Limtied Nanjing Vanke Property 100% 292,360 35,986 702,770 Bright City Company Limited Wuxi Vanke Real Estate 100% 441,869 31,348 919,029 Charming City Company Limited 100% City Garden, West Wuhan Vanke Real Estate 323,451 27,976 812,614 Peninsula, Hong Kong Company Limited Road 100% City Garden, Metropolitan Chengdu Vanke Real Estate 524,333 75,023 1,124,790 Apartments, Charming Company Limited City 100% Metropolitan Apartments, Shenyang Vanke Real Estate Development Company Limited 779,250 55,904 758,512 Four Seasons Flower City, Xinyu Mansion Jiangxi Vanke Yida Real 50% Estate Development 302,897 33,720 279,897 Four Seasons Flower City Company Limited Tianjin Vanke Real Estate 100% Crystal City, Dongli Lake, 718,956 80,048 1,692,279 Holiday Scenery Company Limited 100% Star Garden, Green Beijing Vanke Company Limited 999,240 41,065 1,104,880 Garden, Xishan Garden Changchun Vanke Real Estate 100% 234,707 13,811 217,702 Shangdong Court Development Company Limtied Dongguan Vanke Real Estate 100% 283,184 17,164 415,071 City Golf Company Limited Dalian Vanke Real Estate 100% 450,482 53,515 539,077 Vanke City Garden Development Company Limited 39 Note: Please refer to the notes to the financial statements for the registered capital of the aforesaid companies. The Group’s Major Projects in 2005 (Unit: sq m) Equity Area under Complete Accumulate Planned Project name Location intere Site area constructio d area in d completed GFA st n in 2005 2005 area Pearl River Delta Region Shenzhen East Yantian 100% 268,484 203,400 59,400 17,672 161,672 Coast Shenzhen 17 Miles Yantian 100% 67,571 50,678 - 27,535 27,535 Shenzhen Fifth Longgang 100% 420,400 549,400 125,798 - - Garden Shenzhen Vanke City Longgang 100% 398,000 439,000 144,471 50,939 182,339 Shenzhen Vanke City Longgang 44% 71,210 92,500 45,259 - - North City Guangzhou Four Nanhai 100% 492,800 560,100 176,700 133,500 309,800 Seasons Flower City Guangzhou Blue Baiyun 100% 82,000 148,000 65,000 17,861 17,861 Mountain City Guangzhou City Huanggang 100% 136,000 193,000 94,000 73,700 73,700 Garden Dongguan Golf Liaobu 100% 275,000 462,300 107,845 43,696 75,959 Garden Town Dongguan Yunhe East Nancheng 44% 83,157 241,154 74,417 22,653 22,653 Zhongshan City Nanqu 100% 324,000 592,054 64,063 104,768 104,768 Scenery Foshan Metropolitan Nanhai 100% 74,600 293,300 70,196 - - Apartments Sub-total ** 2,693,222 3,824,886 1,027,149 492,325 976,288 Yangtze River Delta Region Shanghai Rancho Santa Minhang 100% 317,485 90,380 7,057 32,829 62,829 Fe Shanghai Blue Pudong 100% 430,530 226,972 23,877 73,700 106,000 Mountain City Shanghai Rancho Santa Fe Outer Minhang 75% 60,880 54,800 5,268 - - Garden Shanghai Four Baoshan 100% 383,678 462,190 96,733 - 184,923 Seasons Flower City Shanghai Holiday Minhang 100% 599,647 576,000 7,300 127,427 478,938 Scenery Shanghai Yannan Minhang 50% 192,000 122,000 47,958 - - Garden Shanghai Yun Garden Nanhui 70% 219,422 65,004 30,254 30,254 65,004 Shanghai Baima Songjiang 70% 123,711 110,449 40,624 31,755 31,755 Garden Shanghai New Miles Pudong 63% 238,920 326,300 122,648 - - Industrial Suzhou Linglong Bay 49% 384,044 833,358 126,960 299,500 299,500 Garden Nanjing Bright City Hexi 100% 134,000 276,150 - 72,730 72,730 Nanchang Four Seasons Flower City Gaoxin 50% 347,300 404,469 128,176 123,190 170,434 (North district) Wuxi Charming City Binhu 100% 960,000 1,347,000 - 101,551 101,551 Sub-total ** 4,391,617 4,895,072 636,855 892,936 1,573,664 Beijing-Tianjin and North-Eastern district Beijing Xishan Haidian 100% 98,811 126,500 - 6,724 109,724 40 Garden Beijing Green Garden Chaoyang 100% 251,639 290,400 - 50,200 290,400 Beijing Star Garden Chaoyang 100% 112,348 285,200 - 22,800 285,200 Beijing Zitai Project Fengtai 100% 43,800 130,460 1,500 - - (Xiaotun) Tianjin Crystal City Hexi 100% 350,175 384,100 76,939 53,608 238,858 Tianjin Dongli Lake Dongli 100% 2,730,014 1,902,100 57,553 33,619 62,746 Tianjin Holiday Xiqing 55% 228,534 297,095 102,462 - - Scenery Shenyang Four Yuhong 100% 446,900 553,870 110,102 91,016 361,983 Seasons Flower City Shenyang Metropolitan Dadong 100% 83,300 175,007 - 28,355 175,007 Apartments Shenyang Xinyu Hunnan 100% 110,200 150,600 49,565 40,915 40,915 Mansion New Zone Shenyang Vanke Heping 49% 361,400 1,060,000 25,530 - - City(Changbai) Changchun Erdao 100% 153,000 204,000 49,206 85,563 131,595 Shangdong Court Changchun Jingyue Rancho Santa Developmen 100% 130,873 104,700 - - - Fe t Zone Dalian City Garden Shahekou 100% 161,890 248,486 74,860 105,115 178,164 Anshan City Garden Tiedong 100% 154,000 163,000 22,021 47,636 110,136 Sub-total ** 5,416,884 6,075,518 569,737 565,551 1,984,727 Others Chengdu City Jinjiang 100% 407,000 476,800 15,800 29,515 358,815 Garden Chengdu Shuangshui Xindu 100% 449,002 339,633 71,913 - - Coast Chengdu Charming Chenghua 60% 444,176 677,000 123,000 100,000 100,000 City Wuhan West Dongxi Lake 100% 201,800 222,000 65,820 - - Peninsula Wuhan City Garden Hongshan 100% 400,200 400,500 82,918 94,011 190,011 Sub-total ** 1,902,178 2,115,933 359,451 223,526 648,826 Total ** ** ** 2,593,192 2,174,337 ** 5. Business Development Plan for the Year 2006 (1) Development prospects for 2006 In 2005, the real estate industry lived through a new round government regulation. With the property industry further regulated by the austerity measures in 2005, the Company proactively made adjustment and corresponding response to the austerity measures As a result, the Company was able to maintain rapid growth, as well as to enhance its competitive edge. Looking ahead, the property industry will continue to be recognised as the pillar industry. On the other hand, the macroeconomic austerity measures will continue to be implemented. The measures continue to focus on solving the problems of overheating investment in the property industry and exponential growth in property 41 prices in certain cities. With the deepening of the austerity measures against finance, credit facilities, land, taxation, sales, etc, the property industry will enter a new development stage. With the market raising the requirements for capital capability, operation experience, management quality of property developers, there will sharp division between property developers in 2006. Market consolidation will accelerate, and the trend for a few market players will become more apparent.. Undoubtedly, premium companies will be provided with valuable opportunities for development. The Company will take advantage of this change and leverage its competitive edge to escalate its development progress. IIn future, the Company will continue to push ahead with the city-economic hubs- oriented development strategy, with the focus on the Pearl River Delta, the Yangtze River Delta and Bohai-rim region, and accelerate its project development. In 2006, the Company will intensify project development in various regions and cities, and expects to increase its land bank by about 10 million sq m. The focus will be on the core cities including Shenzhen, Guangzhou, Shanghai, Tianjin, and particularly Beijing. The Company will also pay high regard to the acquisition of premium sites, improve the structure of its property inventory, and through the rapid development of various projects, fully utilise the rate of turnover and economies of scale, raise human resources and capital efficiency rate, as well as increase its market presence and brand influence. As such, the Company expects the capital requirements for 2006 will be approximately RMB20 billion, which will be used for land acquisition and project construction. To meet its capital needs, the Company will continue to expedite sales progress, increase cash flow from operating activities, as well as increase its financial leverage through active pursuit of strategic collaboration opportunities, and further exploration of new financial channels. The Company will also increase collaboration with domestic and overseas partners on financing through pushing ahead with the establishment of property fund for project collaboration, as well as explore new financial instruments and financing methods in the property-related capital market. On the other hand, the Company plans to undertake an equity financing exercise during the year. Details on the financing method will be determined in accordance with any changes in policy and market environment and after taking into account of the interest of the Company’s shareholders. 42 In 2006, the Company will implement the strategy of rapid development, which will pose challenges to the Company in acquiring land. The Company’s ability to control risk associated with the expansion of operating scale will put its specialisation and organisational ability to test. As such, the Company will strengthen collaboration, augment its ability to achieve strategic collaboration, while pushing ahead with the adjustment to its organisational structure and establishment of regional centres. Based on the above, the Company will, in 2006, implement customer segmentation strategy, accelerate product categorisation progress, enhance product innovation, and promote radical changes in operation with the aim of making progress in prefabricated homes . (2) Project development plan The Group has 60 projects under development in 2006. It is estimated that areas under construction and area completed will amount be 3.29 million sq m and 3.25 million sq m respectively. As at the end of 2005, there were 12.09 million sq m of project resources under the control of the Group. In terms of interest owned, the Group’s project resources amounted to 10.19 million sq m. The Group’s Major Projects in 2006: (Unit: sq m) Planned GFA Planned Planned not yet under Equity Planned area to be completed Project name Location Site area construction interest GFA developed area in as at the end in 2006 2006 of 2005 Peaarl River Delta Region Shenzhen East Yantian 100% 268,484 203,400 - 41,728 - Coast Shenzhen 17 Miles Yantian 100% 67,571 50,678 - 23,143 - Shenzhen Fifth Longgang 100% 420,400 549,400 120,497 77,372 42.4 Garden Shenzhen Vanke City Longgang 100% 398,000 439,000 146,686 145,461 16.3 Shenzhen Vanke City Longgang 44% 71,210 92,500 47,241 45,259 4.7 North City* Shenzhen Yunding Yantian 100% 74,500 60,600 60,600 - 6.1 Project Shenzhen Vanke Yantian 100% 61,730 80,200 80,200 - 8.0 Convention Centre Shenzhen Dajiadao Huizhou 100% 364,500 230,000 - - 23.0 Shenzhen Xizhi Valley Shiyan 60% 158,600 47,300 6,960 - 4.7 Guangzhou Four Nanhai 100% 492,800 560,100 68,800 80,300 12.4 Seasons Flower City Guangzhou Blue Baiyun 100% 82,000 148,000 - 70,963 - 43 Mountain City Guangzhou City Huangbu 100% 136,000 193,000 - 119,300 - Garden Guangzhou Science Luogang 70% 222,001 178,000 56,300 46,300 17.8 City Guangzhou Dongfeng Dongshan 100% 7,131 47,065 47,065 - 4.7 East Dongguan Golf Liaobu Town 100% 275,000 462,300 19,683 58,556 29.7 Garden Dongguan Yunhe Nancheng 44% 83,157 241,154 144,445 67,156 16.7 East Industrial Dongguan Songshan Garden of 40% 133,300 93,300 93,300 40,000 9.3 Lake Songshan Lake Zhongshan City Nanqu 100% 324,000 592,054 86,700 108,895 46.5 Scenery Foshan Metropolitan Nanhai 100% 74,600 293,300 79,645 70,196 22.3 Apartments Sub-total ** 3,714,984 4,561,351 1,058,122 994,628 264.6 Yangtze River Delta Region Shanghai Rancho Santa Minhang 100% 317,485 90,380 15,679 4,228 2.3 Fe Shanghai Blue Pudong 100% 430,530 226,972 23,430 - 9.7 Mountain City Shanghai Rancho Santa Fe Outer Minhang 75% 60,880 54,800 46,715 - 5.0 Garden Shanghai Four Baoshan 100% 383,678 462,190 71,031 84,356 18.1 Seasons Flower City Shanghai Holiday Minhang 100% 599,647 576,000 - 97,062 - Scenery Shanghai Langrun Minhang 100% 110,000 120,000 - 120,000 - Court Shanghai Yannan Minhang 50% 192,000 122,000 28,165 32,508 7.4 Garden Shanghai Qibao Town Minhang 100% 57,900 145,000 - - 14.5 53# Shanghai Qibao 187 Minhang 100% 61,724 127,000 - - 12.7 Shanghai Yun Garden Nanhui 70% 219,422 65,004 - - - Shanghai Baima Songjiang 70% 123,711 110,449 69,825 40,624 7.0 Garden Shanghai New Miles Pudong 63% 238,920 326,300 124,787 122,648 20.4 Shanghai Ludao Lake Qingpu 36% 143,485 13,100 - - 1.3 Villa Industrial Suzhou Linglong Bay 49% 384,044 833,358 65,000 131,460 40.2 Garden Zhenjiang Charming Nanxu New 70% 849,998 872,500 85,000 - 87.3 City Town Nanjing Bright City Hexi 100% 134,000 276,150 30,000 74,970 12.8 Nanchang Four Seasons Flower City Gaoxin 50% 347,300 404,469 168,314 109,364 18.2 (North district) Wuxi Charming City Binhu 60% 960,000 1,347,000 117,862 144,912 105.6 Bacheng Kunshan Golf 85% 560,000 330,000 - - 33.0 Town Sub-total ** 6,174,724 6,502,672 845,808 962,133 395.4 Beijing-Tianjin and North-Eastern district Beijing Xishan Haidian 100% 98,811 126,500 - 16,776 - Court 44 Beijing Zitai Project Fengtai 100% 43,800 130,460 119,607 20,046 12.9 (Xiaotun) Beijing Shunyi Project Shunyi 100% 153,000 230,000 87,260 87,260 23.0 Tianjin Crystal City Hexi 100% 350,175 384,100 69,433 120,152 6.9 Tianjin Dongli Lake Dongli 100% 2,730,014 1,902,100 68,658 126,212 178.1 Tianjin Garden New Beichen 100% 550,896 408,916 - - 4.0 Town Tianjin Holiday Xiqing 55% 228,534 297,095 27,740 87,505 19.5 Scenery* Tianjin Changjiangdao Nankai 50% 58,400 105,110 105,110 - 10.5 Shenyang Four Yuhong 100% 446,900 553,870 131,863 106,926 13.2 Seasons Flower City Shenyang Xinyu Hunnan New 100% 110,200 150,600 56,560 52,088 10.1 Mansion Zone Shenyang Botanical Dongling 100% 411,600 142,500 10,500 10,500 14.3 Garden Project Shenyang Vanke City* Heping 49% 361,400 1,060,000 170,178 105,065 103.4 Changchun Erdao 100% 153,000 204,000 72,405 42,665 7.2 Shangdong Court Jingyue Changchun Jingyue Development 100% 130,873 104,700 32,580 15,684 10.5 Project Zone Dalian City Garden Shahekou 100% 161,890 248,486 - - 3.8 Dalian Xishan Ganjingzi 100% 143,030 171,060 97,340 71,480 17.1 Reservior Anshan City Garden Tiedong 100% 154,000 163,000 30,843 22,021 3.1 Sub-total ** 6,286,523 6,382,497 1,080,077 884,379 437.6 Other Cities Chengdu City Jinjiang 100% 407,000 476,800 11,402 89,249 1.1 Garden Chengdu Xindu Xindu 100% 449,002 339,633 70,835 71,913 26.8 Project Chengdu Charming Chenghua 60% 444,176 677,000 70,000 70,000 55.4 City Wuhan West Dongxi Lake 100% 201,800 222,000 56,910 65,820 15.6 Peninsula Wuhan Hong Kong Jiang’an 100% 6,943 48,300 - 48,300 - Road Project Wuhan City Garden Hongshan 100% 400,200 400,500 92,944 66,057 12.6 Sub-total ** 1,909,121 2,164,233 302,091 411,339 111.6 Total ** 18,085,353 19,610,753 3,286,098 3,252,479 1,209.1 ： From the end of the year under review to 16 March 2006, the Company acquired 11 new projects, with a total planned GFA of 1,681,800 sq m. Details are as follows: (1) On 13 January 2006, the Company acquired the land lot in Shawan, Jinniu District of Chengdu through a public auction. The project has a site area of 42,400 sq m and a proposed planned GFA of 186,600 sq m. (2) On 13 January 2006, the Company acquired a land lot with an area of 129 mu. It is situation on the east of Changjiangbeilu, Wuxi through tendering. The project has a site area of 86,000 sq m and a proposed planned GFA of 225,300 sq m. 45 (3) On 15 January 2006, the Company acquired a land lot for the development of the last phase of the Shanghai Baima project. The project has a site area of 247,000 sq m and a proposed planned GFA of 247,000 sq m. (4) On 27 January 2006, the Company acquired a land lot in Shunde Centre Zone of Foshan through tendering. The project has a site area of 197,500 sq m and a proposed planned GFA of 318,500 sq m. (5) On 10 February 2006, the Company acquired a land use right for the land lot in Putian, Wuchang Centre Zone through tendering. The land lot has a total planned site area of 36,000 sq m and a proposed planned GFA of 87,000 sq m. (6) On 13 February 2006, the Company acquired a land use right for the land lot in Kangwanglu, Liwan Centre Zone of Guangzhou through tendering. The site could be used for the development of commercial and residential property. The project has a total planned site area of 6,600 sq m and a proposed planned GFA of 70,100 sq m. (7) The Company’s acquisition of Beijing Chao Wan Property Development Centre On 18 January 2006, the Company and the State-owned Assets Supervision and Administration Commission of the People’s Government of the Chaoyang district, Beijing (“SASAC of Chaoyang district”) entered into an agreement to acquire the 60 per cent equity interests in Beijing Chao Wan Property Development Centre (“Chao Wan Centre”) for a consideration of RMB389,001,360. Projects owned by Chao Wan Centre: (Unit: sq m) Planned GFA Projects Location Land area (At present) Chaoyang district, Beijing, with Tianshuiyuan Building No 17 Street to the east, residential communities to the 14,106 46,988 of Liulitun west and to the south, and Liulitun Road to the north Chaoyang district, Beijing, with Tianshuiyuan Phase 3 of No Street to the east, Tuanjiehu East Road to the 36,543 96,240 5 Park west, Chaoyang North Road to the south, and Tuanjiehu Zhong Road to the north Chaoyang district, Beijing, with the warehouse of the headquarters of Chaoyang District Foodstuff Phase 3 of Wholesale Corporation to the east, Beijing Sanqi 12,534 17,260 Shifoying Kitchenware Company to the south, Ziluo community to the west, and Yaojiayuan Road to the north Sunshine Qiaoli Administrative District, Changping Town, 526,314 294,255 Village Dongguan Dalingshan Lianping Administrative District, Dalingshan, 146,676 91,966 Project Dongguan 46 Total 736,173 546,709 Note: The aforesaid planned GFA does not include the area of an underground carpark. Newly Acquired Projects from the End of the Year under Review to the announcement of the Report: (Unit: sq m) Planned area Planned Equity Planned GFA to be Project name Location Site area completed interest (At present) developed in area in 2006 2006 Chengdu Shawan Project Jinniu 100% 42,435 186,557 186,557 - Wuxi Changjianglu Project Xinqu 70% 86,000 225,285 102,375 - Shanghai Baima (last phase) Songjiang 70% 246,790 246,790 45,000 - Foshan Shunde Project Shunde 100% 197,500 318,500 71,000 26,000 Wuhan Putian Project Wuchang 100% 36,389 87,335 87,335 - Guangzhou Kangwanglu Project Liwan 100% 6,576 70,083 70,083 - Beijing Building No 17 of Liulitun Chaoyang 60% 14,106 46,988 - 46,988 Phase 3 of Beijing Garden No 5 Chaoyang 60% 36,543 96,240 96,240 - Phase 3 of Beijing Shifoying Chaoyang 60% 12,534 17,260 - - Dongguan Sunshine Changping Resort Town 60% 526,314 294,255 50,000 - Dongguan Dalingshan Dalingshan Project Town 60% 146,676 91,966 - - Total 1,351,863 1,681,259 708,590 72,988 Special Remarks: (1) The above project schedule may be adjusted due to the following factors: a) changes in macro economy and real estate market and the sales progress of the relevant projects; b) further specification and change of the policy on transfer of land use right may present uncertainties to the Company’s projects held for development; c) approval requirements may be tightened by new rules and regulations such that the application progress for permits will be slowed down, and thereby affect the schedule of projects development; d) unfavourable weather conditions may delay the progress of projects and affect the booked value of completed floor area. (2) Among the project resources achieved, the Group has received land use right permits or completed land transfer agreements for a construction area of 10.57 million sq m. The Group has received notices of successful tendering for the rest 47 of project resources. 6. Investment of the Company During the year under review, the Group’s net long-term investment amount increased by RMB1,195.90 million, representing an increase of 1,227 per cent from that of the previous year. Please refer to note 17-19 to the financial statements for names of investments, principal operating activities and percentage of equity investment held by the Group. (1) Use of proceeds Having obtained the approval from the relevant authority, the Group issued convertible bonds with the amount of RMB1.99 billion to the public on 24 September 2004. The proceeds were received on 30 September 2004. The aforesaid proceeds were used to invest in six projects in Shenzhen, Shanghai, Guangzhou and Nanjing etc. These projects varied in development progress and market performance. Due to the fact that some high margin projects, including Langrun Court, had not been booked, the booked profits were therefore slightly lower than those disclosed in the “Convertible Bonds’ Offering Circular”. However, according to the current market situation and performance of the projects, it was estimated that the overall net profit margin of these projects would be around 15 per cent while the overall return on investment would be approximately 20 per cent, which were generally higher than those disclosed in the “Convertible Bonds’ Offering Circular”. As at the end of the year under review, the investment amount, returns and development progress of the projects were as follows: (Unit: RMB ‘000) Statement made on the issue of Use of proceeds as of present convertible bonds Net Net Project Investment Amount Investment Amount of profit Committed profit development projects of return rate committed rate investment rate on progress proceeds on booked investment on return rate booked injected sales sales sales Shenzhen Vanke City Project (formerly 400.00 11.4% 14.0% 400.00 11.6% 14.3% 56.7% “Shenzhen Banxuegang Project”) Guangzhou Four Seasons 400.00 11.1% 14.4% 400.00 17.1% 25.5% 62.1% Flower City Project 48 Shanghai Langrun 400.00 14.9% 20.6% 345.75 - - 65.0% Court Project Shanghai 200.00 19.6% 30.7% 92.25 - - - Qibao 53# Nanjing 300.00 10.3% 13.0% 273.65 -9.4% -9.1% 42.5% Bright City Wuhan City 252.89 14.9% 20.8% 252.89 11.4% 14.7% 48.7% Garden Total 1,952.89 12.8% 16.8% 1,764.54 11.8% 15.3% Note: Investment amount, development progress and estimated income of projects: 1) Shanghai Langrun Court had realised a sales area of 54,000 sq m with a total contract amount of RMB640 million, but the project had not been completed and therefore not yet booked. The current selling price of the project is higher than the estimated selling price stated in the offering circular. As there has been substantial increase in unit profit, the overall return of this project would be much higher than that disclosed in the offering circular. 2) The construction of Shanghai Qibao 53# project was delayed due to the construction of subway station. The overall development plan of the project would be adjusted according to the construction progress of the subway station. However, the construction of the subway can increase the value of the land at the same time. 3) Affected by several factors including austerity measures, serious competition within the region and incomplete anxillary facilities, the sales performance of Nanjing Bright City was not satisfactory and the amount of captial invested in this project was relatively high. Taking into account all the factors, the Company gave priority to achieving cash inflow. The gross profit margin of the booked sales was 3.3 per cent. However, due to the higher expenditures on marketing and promotion in the preliminary stage, the part of the project booked reported loss. The Company will dedicate to improving the operation of the project, with the aim at helping the project realise profits. 4) Due to the fact that the Wuhan City Garden had a relatively low selling price but comparatively high expenditures on marketing and promotion in the preliminary stage, the booked investment return of this project was lower than that disclosed in the Offering Circular. However, the selling price of this project is now on a rising trend. (2) Use of capital not from the capital market (1) Equity investment 49 1) During the year under review, the Group established or acquired companies with registered capital exceeding RMB30 million as follows: A、 During the year under review, the Company acquired partial interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu for a consideration of RMB1,857.85 million .Please refer to “Significant acquisition and disposal of assets” for details. B、 During the year under review, the Company established Beijing Vanke Property Co., Ltd. with a registered capital of US$18.4 million, of which 75 per cent equity interest was held by Beijing Vanke Co., Ltd., a subsidiary of the Company, 25 per cent equity interest was held by Wancheng Co., Ltd. It is principally engaged in the development and operation of Zitai (Xiaotun) project and as a result, it was incorporated into the Company’s consolidated financial statements for the year under review. C、 On 22 July 2005, Vanke (Hong Kong) Real Estate Co., Ltd., a subsidiary of the Company, acquired 70 per cent equity interest of Dong Tai Industrial Development Co., Ltd. that held by KEEN SINO SERVICES LIMITED for a consideration of RMB38.59 million. Please refer to Note 4 of the Notes on the financial statements and consolidated financial statements. 2) Apart from the companies listed above, the Group also established or acquired10 companies with registered capital below RMB30 million. The total investment amount was RMB94.27 million. 3) During the year under review, the Group increased the registered capitals of six subsidiaries below with an aggregate amount of RMB910 million with the aim to support the business development of the subsidiaries of the Group, the details were as follows: (Unit: RMB million) Original Registered capital Equity interest held Company name registered after increment by the Company capital Shenzhen Vanke Real 300 600 100% Estate Company Limited Shanghai Vanke Real Estate Group Company 300 800 100% Limited *1 Shanghai Vanke Pudong Property Company Limited 100.07 100.07 100% *2 Chengdu Vanke Property USD8 million USD12.1 million 60% Company Limited Beijing Vanke Property Management Company 3 5 100% Limited Chengdu Vanke Property Management Company 3 5 100% Limited 50 *1 During the year under review, Shanghai City Garden Development Co., Ltd. was renamed as Shanghai Real Estate Group Co., Ltd. *2 Shanghai Pudong Property Co., Ltd. is a Sino-foreign joint venture. The actual registered capital of the company was RMB27.76 million in 2004, and the total amount of registered capital was received in 2005. (2) Other investments During the year under review, the Company added 24 new projects to its property development business portfolio. The total site area and planned GFA were approximately 4.441 million sq m and approximately 6.512 million sq m respectively. Planned Equity Site area Region Project name Location GFA Progress interest (’000 sq m) (’000 sq m) Hele land lot of Longgang 100% 200 299 Pre-construction Fifth Garden Shenzhen Dajiadao Huizhou City 100% 365 230 Pre-construction Xizhi Valley Shiyan Town 60% 159 47 Pre-construction Science City Luogang 70% 222 178 Pre-construction Dongfeng East Dongshan 100% 7 47 Pre-construction Guangzhou Four Seasons Flower City (last Nanhai 100% 55 55 Pre-construction phase) Industrial Garden of Songshan Lake 40% 133 93 Pre-construction Dongguan Songshan Lake Golf (last phase) Liaobu Town 100% 152 277 Pre-construction Metropolitan Under Foshan Apartments Nanhai 100% 75 293 construction Under Yun Garden* Nanhui 70% 102 30 construction Under New Miles* Pudong 63% 239 326 construction Under Baima Garden* Songjiang 70% 124 110 construction Shanghai Ludao Lake Qingpu 36% 144 13 Pre-construction Villa* Four Seasons Under Flower City Baoshan 100% 169 246 construction Phase 2 Qibao Town 187 Minhang 100% 62 127 Pre-construction Industrial Under Suzhou Linglong Bay* 49% 384 833 Garden construction Nanxu New Zhenjiang Charming City 70% 850 873 Pre-construction Town Zitai Project Under Fengtai 100% 44 130 Beijing (Xiaotun) construction Shunyi Project Shunyi 100% 153 230 Pre-construction Changjiangdao Nankai 50% 58 105 Pre-construction Tianjin Under Dongli Lake Dongli 100% - 481 construction Hunnan New Under Xinyu Mansion 100% 110 151 Zone construction Shenyang Vanke Under Heping 49% 361 1,060 City(changbai) construction 51 Jingyue Changchun Jingyue Project Developmen 100% 131 105 Pre-construction t Zone Xishan Dalian Reservior Ganjingzi 100% 143 171 Pre-construction Project Total 4,441 6,512 Note: 1、As at the end of 2005, the Company had paid RMB3.649 billion as land premium for the above projects; 2、In 2005, the newly-added planned GFA of 481,000 sq m of Dongli Lake was due to plot ratio adjustment; 3、Projects obtained through acquisition of Shanghai Nandu are marked with “ * “. From the end of the year under review to 16 March 2006, the Company acquired 11 new projects, with a total planned GFA of 1,681,800 sq m. The Company had to pay the consideration of RMB389 million to Beijing Chao Wan Property Development Centre for the transfer of 60 per cent equity interests. The Company had to pay for RMB1,107 million in total for land premium for the other six projects. 7. Work Report of the Board of Directors (1) During 2005, the Board of Directors held 6 board meetings. A. On 4 March 2005, the 14th Meeting of The 13th Board of Directors was held to consider and approve the following resolutions: the resolution regarding acquisition of partial equity interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu; the announcement regarding acquisition of partial equity interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu; the resolution regarding increment of registered capital of Shanghai Vanke; the resolution regarding authorization to the Chairman to handle procedures in relation to the acquisition of equity interests; report regarding the resignation of Ning Gaoning as the director and deputy chairman of the Company. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 5 March 2005. B. On 18 March 2005, the 15th Meeting of The 13th Board of Directors was held to consider and approve the following resolutions: the resolution regarding 2004 audited financial report; “2004 Annual Report” and “Summary of 2004 Annual Report”; the resolution regarding appropriation and write-off of the provision for diminution in asset value for 2004; the resolution regarding profit appropriation, bonus share and dividend distribution, and transfer of capital surplus reserve to share capital for the year of 2004; the resolution regarding the remuneration policy of directors, independent directors and the members of the Supervisory Committee; the resolution regarding the purchase of liability insurance for the directors, members of the Supervisory Committee and senior management; the resolution regarding the election of the Board for a new term; the resolution regarding the appointment of auditors of the Company for the year 2005; and the resolution regarding the convention of the 17th AGM. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 22 March 2005. C. On 21 April 2005, the 16th Meeting of The 13th Board Meeting was held to consider and approve the 2005 First Quarterly Report and financial statements. 52 The related report was published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 25 March 2005. D. On 29 April 2005, the 1st Meeting of The 14th Board Meeting was held to consider and approve the following resolutions: to elect Wang Shi as the Chairman; to elect Song Lin as Deputy Chairman; to appoint Shirley L. Xiao as the Secretary of the Board; to grant the Chairman the mandate to obtain loans from banks and to stand surety on behalf of the Board. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 30 April 2005. E. On 28 July 2005, the 2nd Meeting of the 14th Board of Directors was held to consider and approve the following resolutions: the 2005 Interim Report, unaudited financial statements and Summary of 2005 Interim Report; the resolution regarding no profit appropriation and no transfer of surplus reserve to share capital for the 2005 interim period; the Implementation Details of the Audit Committee, Implementation Details of the Investment and Decision- making Committee and Implementation Details of the Remuneration and Nomination Committee of the Board; to elect Director David Li Ka Fai, Director Jiang Wei and Director Sun Jianyi as members of Audit Committee of the Board, to elect Director Li Chi Wing, Director Jiang Wei and Director Shirley L. Xiao as members of the Investment and Decision-making Committee of the Board, and to elect Director Sun Jianyi, Director Li Chi Wing and Director Chen Zhiyu as members of the Remuneration and Nomination Committee of the Board; and to appoint Xu Hongge as the Company’s Deputy General Manager. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 1 August 2005. F. On 27 October 2005, the 3rd Meeting of the 14th Board of Directors was held to consider and approve the following resolutions: the 2005 Third Quarterly Report and unaudited financial statements; the resolution regarding the issue of short- term financing bills; and the resolution of convening the First Special General Meeting of 2005. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 31 October 2005. (2) In 2005, the Board of Directors considered and approved the following resolutions through 17 voting by communication means: A. On 7 January 2005, the resolutions regarding the listing of Shenyang Changbai Project and the internal control system of China Vanke Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. B. On 18 January 2005, the resolutions regarding establishment of Dongguan Property Management Co., Ltd. and the listing of Wuxi Binhu New Town Project were submitted for the Board of Directors’ approval through voting by communication means. C. On 20 January 2005, the resolution regarding the listing of Dalian Jiefanglu Project was submitted for the Board of Directors’ approval through voting by communication means. D. On 2 February 2005, the resolution regarding establishment of Shenyang Vanke Hunnan Real Estate Development Co., Ltd. was submitted for the Board of Directors’ approval through voting by communication means. 53 E. On 25 March 2005, the resolutions regarding the amendment of the Company’s Articles of Association and adjustment of the agenda of the 17th AGM were submitted for the Board of Directors’ approval through voting by communication means. F. On 28 March 2005, the resolution regarding the change of the AGM’s convention time was submitted for the Board of Directors’ approval through voting by communication means. G. On 11 April 2005, the resolutions regarding the supplementary amendment of the Company’s Articles of Association, the establishment of Jingyue branch of Changchun Vanke Real Estate Development Co., Ltd. and the transfer of partial equity interest in Shenzhen Vanke Fifth Garden Real Estate Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. H. On 25 April 2005, the resolutions regarding the increment of the registered capital of Chengdu Vanke Property Co., Ltd., the acquisition of 65 per cent equity interests in Bestgain Finance Limited and collaboration with Reco Ziyang Pte Ltd.to establish a Sino-foreign joint venture investment company were submitted for the Board of Directors’ approval through voting by communication means. I. On 9 May 2005, the resolution regarding the establishment of a Sino-foreign joint venture project company by Guangzhou Vanke was submitted for the Board of Directors’ approval through voting by communication means. J. On 27 May 2005, the resolutions regarding the establishment of a Sino-foreign joint venture project company by Beijing Vanke, the establishment of Dongguan Songshan Property Co., Ltd. and the establishment of Foshan Vanke Property Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. K. On 11 July 2005, the resolutions regarding the acquisition of the equity interests of [Hong Kong Dong Tai Industrial Development Co., Ltd.] for the possessing of Guangzhou Science City Project, the transfer of equity interests in Songshan Property Co., Ltd. by Dongguan Company and the consolidation of equity interests in Suzhou Nandu Property Management Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. L. On 24 August 2005, the resolutions regarding the establishment of two Sino- foreign joint ventures (or collaboration) in Shenzhen and the launch of overseas equity collaboration for Project No 158 of Shanghai Company were submitted for the Board of Directors’ approval through voting by communication means. M. On 8 September 2005, the resolutions regarding the establishment of a Sino- foreign joint venture project company by Shenyang Vanke and the increment of registered capital in Chengdu Vanke Property Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. N. On 21 October 2005, the resolutions regarding the increment of registered capital of Shanghai Vanke Rancho Property Co., Ltd. and the increment of registered capital and the adjustment of shareholding structure of Beijing Vanke Property Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. O. On 24 November 2005, the resolutions regarding the establishment of a Sino- foreign joint venture project company – “Tianjin Vanke Xinhu Property Co., Ltd.”, the joint establishment of a real estate investment fund with CITIC Capital Investment Holdings Limited and the transfer of equity interests in Trendell Limited, the intention proposal for the acquisition of partial equity interests in Beijing Chao Kai and the increment of registered capital of Shenzhen Vanke were submitted for the Board of Directors’ approval through voting by communication means. P. On 9 December 2005, the resolutions regarding the establishment of special incentive policy for outstanding profitability of medium to high-level 54 management and the authorization of General Manager to arrange the issue of short-term financing bills were submitted for the Board of Directors’ approval through voting by communication means. Q. On 22 December 2005, the resolution regarding the establishment of Beijing Vanke Four Seasons Flower City Real Estate Development Co., Ltd. was submitted for the Board of Directors’ approval through voting by communication means. The progress of the relevant issues was disclosed in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 30 March, 14 April, 1 July, 20 December 2005 and 19 January 2006. (3) The directors’ implementation of the resolutions approved at general meetings A. The implementation of profit appropriation plan for 2004 In accordance with the authorization by the 17th AGM, the Board had proceeded with the work of dividend distribution and transfer of capital surplus reserve to share capital for 2004. The distribution plan for 2004 was as follows: a cash dividend of RMB1.5 was paid for every 10 existing shares held (including tax; a cash dividend of RMB1.35 for every 10 existing shares held was actually paid to individual shareholders among public shareholders of A share and investment funds after tax; no tax for B share). The dividend distribution record date for A share was 28 June 2005. The last trading date for B share was 28 June 2005, while the ex-rights and ex-dividend date for A share and B share was 29 June 2005. The exchange rate for B share cash dividend was HK$1.0 = RMB1.0609, being the benchmark exchange rate of Renminbi for Hong Kong dollars published by the People’s Bank of China on the first working day after the approval of profit and dividend distribution proposal at the Company’s general meeting (9 May 2005). The transfer of capital surplus reserve to share capital proposal was as follows: five shares were transferred from the capital surplus reserve to share capital for every 10 existing shares held. The record date for A share was 28 June 2005, while the last trading date for B share was 28 June 2005. The listing days of newly issued tradable A shares and B shares through the transfer of capital surplus reserve to share capital for 2004 were 29 June 2005 and 4 July 2005 respectively. B. The application for the issue of the short-term financing bills: Affected by the policy, the Company had not completed the issue of short-term financing bills within the year. 8. Profit Appropriation and Dividend Distribution Proposal Details on the profit available for appropriation of the Company in 2005 prepared in accordance with PRC accounting standards and International Financial Reporting Standards (“IFRS”) are as follows: (Unit: RMB) PRC accounting standards IFRS Profit available for appropriation after tax 1,424,112,158.00 1,443,809356.00 Include: Net profit for 2005 1,350,362,816.78 1,364,689,853.00 Transferred profit available for appropriation at the beginning of 414,846,412.17 420,216,574.00 the year Allocation of dividend for 2004 -341,097,070.95 -341,097,071.00 55 The upper limit of profit available for distribution was based on the lower of the unappropriated profit calculated in accordance with PRC accounting standards and that calculated in accordance with IFRS. Therefore, the Company’s profit available for distribution in 2005 was RMB 1,424,112,158.00. According to the relevant rules, regulations and the Article of Association, and considering shareholders’ interest and the Company’s development requirements in the long run, the Board of Directors proposed the following profit allocation proposal: 1. to appropriate 10 per cent of the 2005 net profit calculated in accordance with the PRC accounting standards to statutory surplus reserve; 2. to appropriate 50 per cent of the 2005 net profit calculated in accordance with the PRC accounting standards to discretionary surplus reserve; 3. to retain 40 per cent of the 2005 net profit calculated in accordance with the PRC accounting standards as unappropriated profits at the end of 2005, and together with the profits for distribution brought forward from the previous year serves as the source for dividend distribution; 4. Dividend distribution proposal: A cash dividend of RMB1.5 (including tax) will be distributed for every 10 shares held. Based on the total share capital of 3,722,687,670 shares as at 31 December 2005, the total dividend distribution amounted to RMB558,403,150.50. The balance of the unappropriated profit will be brought forward to the following financial year. The allocation of the profit available for appropriation of RMB1,424,112,158.00 is as follows: Amount (RMB) Statutory surplus reserve 135,036,281.68 Discretionary surplus reserve 675,181,408.40 Profit for the year The unappropriated profit available for 540,145,126.70 prepared in accordance appropriation for the with PRC accounting following financial year standards and brought The unappropriated profit 73,749,341.22 forward to the following retained and carried forward financial year from the previous year Total 613,894,467.92 Include: Dividend distribution for 2005 (calculated based 558,403,150.50 on the share capital as at the end of 2005) Profit available for appropriation for the following financial year (calculated based on the share 55,491,317.42 capital as at the end of 2005) The unappropriated profit prepared in accordance with 633,591,665.92 IFRS and brought forward to the following financial year Include: Dividend distribution for 2005 (calculated based 558,403,150.50 on the share capital as at the end of 2005) Profit available for appropriation for the following 75,188,515.42 financial year (calculated based on the share 56 capital as at the end of 2005) Special note: Out of the RMB1.99 billion “Vanke Convertible Bonds 2”, the convertible bonds issued by the Company, there were 8,814,702 not yet converted as of 31 December 2005. During the period from 4 January 2006 to 21 February 2006, the closing price of the Company’s A share was higher than 130 per cent (that is RMB4.615 per share) of the conversion price (RMB3.55 per share) for a total of 20 trading days in 28 consecutive trading days. It had already satisfied the related regulations and the conditions of early redemption as stipulated in the “Convertible Bonds’ Offering Circular”. After the Board of Directors’ approval through voting by communication means, the Company decided to exercise the redemption rights for “Vanke Convertible Bonds 2” and redeemed all the outstanding “Vanke Convertible Bonds 2” that are not yet converted before 7 April 2006. The total number of the Company’s share will be increased by 248,301,464 shares, to 3,970,989,134 shares, as a result of the conversion of “Vanke Convertible Bonds 2” if the aforesaid convertible bonds are all converted into shares. As such, the Board of Directors proposed to set the total share capital as at the close of the market on the registration trading day for entitlement to dividend distribution as the basis for the implementation of the dividend distribution. As the total amount of cash dividend payment will increase correspondingly due to the conversion of “Vanke Convertible Bonds 2”, while the profit available for appropriation will decrease correspondingly. It was estimated that the maximum amount for dividend distribution would be RMB595,648,370.10, while the profit carried forward for appropriation for the following financial year could be reduced to a minimum amount of RMB18,246,097.82. The dividend distribution proposal mentioned above is subject to shareholders’ approval at the general meeting. In accordance with the Company Law of the People’s Republic of China, which came into effect on 1 January 2006, the Company had not appropriated its profit for 2005 for the statutory public welfare fund. In accordance with the Company Law of the People’s Republic of China, the Company will also make corresponding amendment to the profit allocation provisions of the Company’s Articles of Association, which will be submitted together with the [dividend distribution proposal] to the shareholders’ meeting for consideration. As such, the issue regarding that there has been no appropriation for the statutory public welfare fund under the 2005 profit allocation proposal will become effective only after approval of the amendments to the Company’s Articles of Association at the shareholders’ meeting 9. Media for Disclosure of Information The Company has chosen China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong for placing notices and announcements of the Company. 10. During the year under review, the Company does not provide surety to external parties I. Report of Supervisory Committee On behalf of the Supervisory Committee, I hereby present the activity report of the committee for the year 2005 as follows: I．Meetings and resolutions of the Supervisory Committee A total of five meetings were held by the Supervisory Committee during the year under review: 57 1. The 4th Meeting of the 5th Supervisory Committee was held on 4 March 2005. The meeting considered and approved unanimously the “Resolution Regarding Acquisition of Partial Equity Interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu”; 2. The 5th Meeting of the 5th Supervisory Committee was held on 18 March 2005. The meeting considered and confirmed the Company’s audit report for the year 2004; considered and confirmed the 2004 Annual Report and Summary of the 2004 Annual Report; considered and confirmed the resolutions regarding profit appropriation and bonus share and dividend distribution and transfer of capital surplus reserve to share capital for the year of 2004; be informed and accepted Jiang Wei’s request of resignation as a supervisor of the 5th Supervisory Committee of the Company, Mr Hu Yonglei was nominated as a candidate to a member of the 5th Supervisory Committee and submitted to the 17th AGM for consideration and approval; 3. The 6th Meeting of the 5th Supervisory Committee was held on 21 April 2005. The meeting considered and confirmed the 2005 First Quarterly Report and the unaudited financial statements; 4. The 7th Meeting of the 5th Supervisory Committee was held on 28 July 2005. The meeting considered and confirmed the 2005 Interim Report, unaudited financial statements and the Summary of the 2005 Interim Report; considered and confirmed the resolutions of no profit appropriation and transfer of capital surplus reserve to share capital for the 2005 interim period; 5. The 8th Meeting of the 5th Supervisory Committee was held on 27 October 2005. The meeting considered and confirmed the 2005 Third Quarterly Report and the unaudited financial statements; considered the resolution regarding issuing the short-term financing bills; be informed and accepted Mr Hu Yonglei’s request of resignation as a supervisor of the 5th Supervisory Committee of the Company, by- elected Mr Fang Ming as a candidate to a member of the 5th Supervisory Committee according to the recommendation of the Company’s shareholders and submitted to the 2005 1st SGM for consideration and approval. Independent opinions of the Supervisory Committee on the related matters of the Company 1. Regulatory compliance: During the year under review, the Supervisory Committee monitored the Company’s operations pursuant to the relevant regulations. Members of the Supervisory Committee were present at all of the meetings of the Board of Directors and made inspection tours to the Company’s subsidiaries. The Supervisory Committee noticed that the Company further enhanced its internal control through the establishment of the Professional Committee of Board of Directors and Risk Management Department. In the opinion of the Supervisory Committee, all the decisions made by the Company were in compliance with applicable laws. In addition, the directors and management team of the Company were in compliance with the law, rules and the Company’s Articles of Association. They did not exercise their duties against the interest of the Company, nor did they abuse their power in any way to endanger the interest of the shareholders and employees. 2. Financial monitoring: During the year, the Supervisory Committee performed its duty of monitoring the Company’s financial position. In the opinion of the Supervisory Committee, the audit opinions from KPMG Huazhen and KPMG are non-biased and their reports reflect a true and fair view on the Company’s financial position and operating results. 3. Use of proceeds from the latest fund raising exercise: Through reviewing 58 financial statements, inspecting investment projects, etc, the Supervisory Committee consistently monitored the applications of proceeds from “Vanke Convertible Bond 2”, the convertible bonds of the Company issued in 2004. The actual investments in various projects were in line with the amount earmarked for use in the destinated investment projects, and there was no change in the investment projects. The construction of Shanghai Qibao Town Land Lot No 53, an investment project to be funded by the proceeds, was affected by the adjustment to the subway construction plan. As a result, there had been a delay in the planning and construction of the project. 4. Acquisition and disposal of assets: In 2005, the Company entered into an agreement regarding the acquisition of partial interests in Shanghai Nandu Land Co., Ltd., Suzhou Nandu Jianwu Co., Ltd. and Zhejiang Nandu Property Group Co., Ltd. with Shanghai Zhongqiao Infrastructure (Group) Co., Ltd. The transaction enabled the Company to have a more appropriate project reserve in the Yangtze River Delta. During the year under review, the Company disposed 51 per cent equity interests in Shenyang Vanke Yongda Real Estate Development Co., Ltd. and 40 per cent equity interests in Wuxi Vanke Real Estate Co., Ltd. to a subsidiary of GIC Real Estate Pte Ltd. The Supervisory Committee monitored the decision-making and the implementation of the aforesaid transactions. In the opinion of the Supervisory Committee, the transaction did not involve insider trading or any act that would endanger the interests of shareholders, the consideration of the transaction was reasonable and the agreement had been implemented smoothly. 5. Connected transaction of the Company: During the year under review, the Company was not involved in any significant connected transactions. 6. Operation of the Company: Under the austerity measures in 2005, the Company’s principal business and profit experienced rapid growth, which further reflected the Company’s competitive advantages. During the year under review, Beijing Vanke continued to push forward the adjustment in operational management and significantly enlarged its new project reserve and had constituted the new project reserve obtained increased, contributing a solid foundation for the further development of Beijing Vanke. 59 J. Significant Events 1. Material litigation and arbitration The Company continued to disclose that Tianjin Heping Jiangong (Group) Co., Ltd. (“Tianjin Heping”) lodged a lawsuit against Tianjin Vanke Real Estate Co., Ltd. (Tianjin Vanke”), regarding the dispute over the balance of construction fee for Vanke New Town Project. The case was tried by Tianjin No 1 Intermediate People’s Court which passed a first trial judgement on 24 December 2004, according to which Tianjin Vanke had to make a one-off payment of RMB24,506,180 plus the related interest (during the litigation, Tianjin Heping paid RMB3 million for the principal of the overdue payment on January 2004, and interest loss was calculated up to December 2003) for the construction fee to the plaintiff, a one-off payment of RMB30,000 as compensation to the plaintiff for making advance and arbitration fee of RMB538,606. Tianjin Vanke considered the verdict of the first trial failed to recognize certain facts and the legislation based upon which the ruling was found not appropriate, and had thus filed an appeal to the Tianjin People’s High Court on 6 January 2005. Under the intercession of the second trial court, the parties reached a settlement in September 2005, the content of settlement agreement was as follows: 1)Tianjin Vanke paid a construction fee of RMB11,601,446.5 in cash to Tianjin Heping; Tianjin Vanke also handover to Tianjin Heping (i) Room 304, Block B, Shimao Plaza, Nanjing Road, Heping District, Tianjin (GFA: 80.63 sq m); (ii) the whole 18th Floor of Shimao Plaza (GFA: 716.45 sq m); and (iii) a flat on the 19th Floor of Shimao Plaza (GFA: 169.50 sq m). (The aforesaid areas are subject to survey by relevant property authorities; 2)The legal fee, deposit and evaluation fee for the first and second trials amounted to a total of RMB627,212, and each of the two parties was responsible for the settlement of RMB313,606. The case has been settled. Pursuant to the settlement agreement, Tianjin Vanke have paid Tianjin Heping a sum of RMB6 million, and the remaining RMB5,826,446.5 is to be paid at times agreed upon in the settlement. The transfer of residential units to Tianjin Heping is in process of finalizing necessary procedures. 2. Significant acquisition and disposal of assets The Company entered into an agreement regarding the acquisition of partial interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu with Zhongqiao for a consideration of RMB1,857.85 million on 4 March 2005. The summary of the transaction is as follows: 60 (1) Names of the parties involved in the Transaction: Shanghai Zhongqiao Infrastructure (Group) Co., Ltd. (“Zhongqiao”), Shanghai Vanke City Garden Development Co., Ltd. (“Shanghai Vanke”), Shanghai Vanke Pudong Property Co., Ltd. (“Vanke Pudong”) and Shenzhen Vanke Real Estate Co., Ltd. (“Shenzhen Vanke”). (2) Offeree companies: Shanghai Nandu Zhidi Co., Ltd. (“Shanghai Nandu”), Suzhou Nandu Jianwu Co., Ltd. (“Suzhou Nandu”) and Zhejiang Nandu Property Group Co., Ltd. (“Zhejiang Nandu”). (3) Equity interests in the offeree companies: 70 per cent of equity interests in Shanghai Nandu, 49 per cent of equity interests in Suzhou Nandu, 20 per cent of equity interests in Zhejiang Nandu and the corresponding shareholders’ equity of the abovementioned equity interests held by Zhongqiao. (4) Transaction: Zhongqiao transferred its 70 per cent of equity interests in Shanghai Nandu to Vanke Pudong and Shenzhen Vanke, wholly-owned subsidiaries of China Vanke, of which Shenzhen Vanke and Vanke Pudong acquired 65 per cent and 5 per cent of the equity interests in Shanghai Nandu respectively. Zhongqiao also transferred its 49 per cent of equity interests in Suzhou Nandu and 20 per cent of equity interests in Zhejiang Nandu to Shanghai Vanke. (5) The Transaction did not constitute a connected transaction. (6) Signing date of the agreement: 3 March 2005 (7) Effective date of the agreement: 4 March 2005, same day on which the agreement was considered and approved by the Board of Directors (8) Consideration of the transfer of the equity interests: RMB1,857.85 million (9) Determination of consideration: The consideration of the Transaction was determined in accordance with the net assets value and the valuation of all projects. The values of the offeree companies’ brand name, management team and staff were also considered. (10) Payment method: In cash (11) Source of funding: Internal resources (12) Payment terms: A. Within 10 working days from the effective date of the relevant agreement, China Vanke made the first instalment payment of RMB743.14 million for the equity transfer, which accounted for 40 per cent of the total consideration; 61 B. Within five working days from Zhongqiao’s completion of transfer of 70 per cent of equity interests in Shanghai Nandu and 20 per cent equity interests in Zhejiang Nandu to China Vanke, China Vanke makes the second instalment payment of RMB185.785 million for the equity transfer, which accounts for 10 per cent of the total consideration; C. Within one year from the effective date of the relevant agreement, China Vanke makes the third instalment payment of RMB557.355 million for the equity transfer, which accounts for 30 per cent of the total consideration; D. Within two years from the effective date of the relevant agreement, China Vanke makes the fourth instalment payment of RMB371.57 million, which accounts for 20 per cent of the total consideration. For details of the aforesaid transaction, please refer to the announcement published on 5 March 2005 in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong. As at the end of the year under review, the Company paid RMB929 million in accumulation for the consideration of the equity interests transfer, which is equivalent to 50 per cent of total payment for the consideration of Nandu. The transfer procedures of the equity interests have been completed. For details of project development plan for Nandu in 2006, please refer to “5. Development Plan for 2006” of “Directors Report”. 3. During the year under review, the Company was not involved in any substantial connected transactions. 4. Regarding the guarantor of and the ability to repay for “Vanke Convertible Bonds 2” (1) During the year under review, there was no material change in the profitability, asset position and credibility of Agricultural Bank of China, Shenzhen Branch, which was the guarantor of Vanke Convertible Bonds 2; (2) During the period from 4 January 2006 to 21 February 2006, the closing price of the Company’s A share was higher than 130 per cent (that is RMB4.615 per share) of the conversion price (RMB3.55 per share) for a total of 20 trading days in 28 consecutive trading days. In accordance with the related regulations and as stipulated in the “Convertible Bonds’ Offering Circular”, the Company has announced all the outstanding “Vanke Convertible Bonds 2” will be redeemed in full on 7 April 2006. As of 16 March 2006, there were 1,846,992 62 outstanding “Vanke Convertible Bonds 2”, which was equivalent to RMB184,699,200 in total. 5. Major contracts and their implementation (1) During the year under review, the Company did not put any material assets under substantial custodial management, sub-contract or lease any assets from other companies. Nor were the Company’s any material assets put under custodial management, subcontracted or leased by other companies. (2) During the year under review the outstanding surety for bank borrowing the Company provided to its subsidiaries amounted to RMB1,029 million. As at the end of the year under review, the total amount of surety accounted for 12.3 per cent of net assets. The Company did not provide surety to shareholders, beneficiary controllers and their connected parties. Nor did it provide direct or indirect loan guarantee to any subject with debt-asset ratio of over 70 per cent. (3) During the year under review, the Company did not make any trust arrangement for its financial assets. (4) During the year under review, the Company and China Construction Bank Corporation (“CCB”) Shenzhen branch entered into the “Integrated Credit Line Agreement”. Accordingly, CCB will provide the Company with an integrated credit line of RMB2 billion in total. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 28 June 2005. (5) During the year under review, the Company entered into an agreement with Reco Ziyang Pte Ltd., a subsidiary of GIC RE, to jointly invest in the establishment of a Sino-foreign equity joint investment company — “Vanke Reco Real Estate Investment Co., Ltd.” – with a registered capital of US$100 million. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 1 July 2005. (6) During the year under review, Shenzhen Vanke Real Estate Co., Ltd., a wholly- owned subsidiary of the Company acquired the land lot of the Hele Project in Shenzhen. The project is situated in Nanpian Zone of Banxuegang of Longgang District in Shenzhen. The project has a site area of 200,000 sq m and a planned GFA of 299,000 sq m, with a plot ratio of 1.36. (7) On 17 September 2005, Huizhou Vanke Real Estate Co., Ltd., a wholly-owned subsidiary of the Company, acquired the land lot of the Dajiadao Project in Huizhou through bidding for a consideration of RMB48 million. The acquired land lot has a site area of 365,000 sq m and a planned GFA of 230,000 sq m, with a 63 plot ratio of 0.65. (8) During the year under review, Guangzhou Vanke Real Estate Co., Ltd. (“Guangzhou Vanke”), a wholly-owned subsidiary of the Company acquired the Dongfengdong Project in Guangzhou The project is situated on No 746 Dongfeng Donglu of Dongshan District in Guangzhou, and east of Nonglin Xialu. The project has a net site area of 7,000sq m and a planned GFA of 47,000 sq m, with a plot ratio of 6.3. Guangzhou Vanke obtained the land certificate of the related land lot on 28 September 2005. (9) On 30 September 2005, Tianjin Vanke Real Estate Co., Ltd., a wholly-owned subsidiary of the Company, acquired the land lot of the Changjiangdao Project in Tianjin through a public auction for a consideration of RMB268 million. The acquired land lot is situated east of Yejinlu of Nankai District in Tianjin and north of Changjiangdao. The acquired land lot has a site area of 58,000 sq m and a planned GFA of 105,000 sq m. (10) On 8 December 2005, Shenzhen Vanke Real Estate Co., Ltd., a wholly-owned subsidiary of the Company, acquired the land lot of the Shunyi Project in Beijing through a public auction for a consideration of RMB275 million. The project is situated in Renhe Town of Shunyi District in Beijing. The project has a total site area of 180,000 sq m and a planned GFA of 230,000 sq m, with a plot ratio of 1.5. (11) On 30 December 2005, Dongguan Vanke Real Estate Co., Ltd., a wholly-owned subsidiary of the Company, acquired the land lot extension for the “City Golf” Project for a consideration of RMB228 million. The land lot has a total site area of 152,000 sq m and a planned GFA of 277,000 sq m. (12) During the year under review, the Company and CITIC Capital Investment Holdings Limited entered into a cooperative agreement to jointly establish “CITIC Capital · Vanke China Property Development Fund”, which invests specifically in property projects developed by the Company and its associated companies in the People’s Republic of China. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 20 December 2005. (13) During the year under review, Yongda China Investment Co., Ltd. (“Yongda China”), a wholly-owned subsidiary of the Company, entered into an agreement with Reco Ziyang Pte Ltd. (“RZP”), a subsidiary of GIC Real Estate Pte Ltd. (“GIC RE”). Yongda China transferred 51 per cent equity interests held in Shenyang Vanke Yongda Real Estate Development Co., Ltd. (“Shenyang Yongda”) to RZP. During the year under review, Shanghai Vanke Real Estate 64 Group Co., Ltd. (“Shanghai Vanke”), a wholly-owned subsidiary of the Company, entered into an agreement with RZP. Shanghai Vanke transferred the entire 40 per cent equity interests it held in Wuxi Vanke Real Estate Co., Ltd. to RZP. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 20 December 2005. On 26 November, the Company received from RZP the payment for the transfer of 51 per cent equity interests in Shenyang Vanke Yongda Real Estate Development Co., Ltd. On 19 January 2006, the Company received from RZP the payment for the transfer of 40 per cent equity interests in Wuxi Vanke Real Estate Co., Ltd. 。 (14) During the year under review, the Company also acquired projects in Changchun, Shanghai, Shenyang, Foshan, Beijing, Dalian, Dongguan, etc. For details, please refer to the Company’s “2005 Interim Report” disclosed on www.cninfo.com.cn on 1 August 2005. 6. Implementation of Undertaking made by the Company or shareholders holding 5% or above equity interest in the Company The profit distribution policy for the year 2004 was announced in the 2004 annual report. For details, please refer to “The directors’ implementation of the resolutions approved at general meetings” of this report. CRNC, the Company’s former largest shareholder and the present largest shareholder CRC’s controlling shareholder, made a significant undertaking to the Company in 2001: CRNC would provide as much support to the Company as it did in the past, as long as such support was beneficial to the Company’s development, and that it would remain impartial n the event of any competition between the investment projects of the Company and that of CRNC and its subsidiaries, and in the event of any disagreements or disputes arising from such competition. CRNC has fulfilled its undertaking. Under the Company’s non-tradable share reform, CRC undertakes not to trade or transfer its non-tradable shares in 12 months from the date when such non-tradable shares become transferable. After that period, the original non-tradable shares would be sold on the SSE. The amount of shares to be sold would not exceed five per cent of the Company’s total share capital within 12 months and not exceed 10 per cent within 24 months. In addition, the price for the disposal of its share will not be less than 120 per cent of exercise price of the put warrant (the price for the disposal of its share will be adjusted during the statute share disposal restriction period and according to the adjustment methods for the exercise price of the put warrant). All other non-tradable share holders of the Company have undertaken that their non- tradable shares would not be traded or transferred within 12 months from the day of 65 their non-tradable shares become transferable. The original holders of non-tradable shares, including CRC, strictly complied with the aforesaid undertaking. 7. Appointment of the service of Certified Public Accountants At 2004 Annual General Meeting, the Group resolved to appoint KPMG Huazhen CPA and KPMG CPA as the auditors of the Company to audit the Company’s 2005 accounts. The appointment of accounting firms for the Company and its subsidiaries are as follows: 2005 2004 Audited item Auditors Audit fee Year of service Auditors Audit fee The Group’s consolidated financial report and annual financial reports of its subsidiaries in Beijing, KPMG Tianjin, Shanghai, Shenzhen, RMB1,000,000.00 5 KPMG Huazhen RMB800,000.00 Huazhen Shenyang, Guangzhou in accordance with the PRC accounting standards The Group’s consolidated financial KPMG HK$1,500,000.00 13 KPMG HK$1,100,000.00 report in accordance with the IFRS The annual financial reports of the Deloitte Deloitte Touche Group’s regional subsidiaries in Touche RMB250,000.00 5 Tohmatsu RMB250,000.00 Wuhan, Chengdu, Manjing, Tohmatsu Shanghai CPA Nanchang Shanghai CPA The annual financial reports of the Dalian Hualian Dalian Hualian Group’s regional subsidiaries in RMB110,000.00 4 RMB100,000.00 CPA CPA Dalian, Changchun, Anshan The annual financial report of the Fan, Chan & HK$100,000.00 Fan, Chan & Co. Group’s regional subsidiary in 13 HK$24,000.00 Co. CPA CPA Hong Kong Total (in RMB) － RMB3,024,000.00 － － RMB2,340,000.00 Note: The above-mentioned audit fee included the travel expenditure incurred during the auditing period. 8. No disciplinary action was taken against the Company and the Company’s Directors, members of Supervisory Committee and senior management during the reported period. 9. Subsequent event On 18 January 2006, the State-owned Assets Supervision and Administration Commission of the People’s Government of the Chaoyang district, Beijing (“SASAC of Chaoyang district”) and the Company entered into an agreement, pursuant to which the SASAC of Chaoyang district transferred its 60 per cent State-owned equity interests in Beijing Chao Wan Property Development Centre (“Chao Wan Centre”) to the Company for a consideration of RMB389,001,360. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 19 January 2006. 66 K. A Chronology of 2005 On 4 March 2005, the Company published an announcement of the resolutions of Board of Directors regarding the acquisition of partial interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu for a consideration of RMB1,857.85 million. The Company’s project resources in Shanghai and Jiangsu regions would be increased by 2.19 million sq m through the collaboration. The collaboration was an important move of the Company’s strategic planning in the Yangtze River delta and reflected the Company had fully leveraged opportunities aroused in market change. On 22 March 2005, the Company published its 2004 Annual Report. The Company realized a turnover of RMB7,257 million and a net profit of RMB874 million, representing increases of 21.5 per cent and 67.8 per cent respectively. In 2005, the Company fully grasped the opportunities driven by the rapid growth of the market, and brought additional growth to the Company’s shareholder return. On 24 March 2005, “Vanke Convertible Bonds 2”, the convertible bonds issued by the Company, became eligible for conversion. On 29 April 2005, the 2004 AGM of the Company was convened. At the AGM, the Company’s annual report and proposal on dividend distribution was approved, Wang Shi, Song Lin, Yu Liang, Chen Zhiyu, Wang Yin, Shirley L. Xiao, Jiang Wei, Sun Jianyi, Li Chi Wing, David Li Ka Fai and Judy Tsui Lam Sin Lai was elected as the Company’s Board of Directors for a new term; Hu Yonglei was by-elected as a member of the Supervisory Committee; and the Company's Articles of Association was amended. The Company entered into a new era of development. On 23 June 2005, the “Vanke” trademark of the Company was accredited as a “Famous Brand Name in China” by the State Administration For Industry & Commerce of the People’s Republic of China (“PRC”). The “Vanke” trademark is the first and, up to the present, the only brand name in the PRC property industry to be recognised by the State as a famous brand name. On 28 June 2005, the Company began to implement the dividend distribution and transfer of capital surplus reserve to share capital proposal for 2004. The Company’s total share capital increased to 3,410,970,711 shares. On 10 October 2005, the Company published the non-tradable share reform memorandum, marking the launch of the Company’s non-tradable share reform. On 15 November 2005, the Company’s shareholder’s meeting on non-tradable share reform adjourned. At the meeting 95.95 per cent A share holders vote in favour of the proposal and 94.66 per cent tradable A share holders in favour of the proposal. The Reform proposal was approved with a high percent of votes, demonstrating investors’ support to the Company’s development. On 1 December 2005, the Company held its first special general meeting, at which the resolution regarding the short-term financing bonds was passed, and the by- election of Fang Ming as a member of the Supervisory Committee took place. On 5 December 2005, Vanke put warrants became listed and the Company’s non- tradable share reform was completed. The Company was the first company with both A and B shares to complete its non-tradable share reform. The completion of non- tradable share reform improved the structure of share capital of the Company and further enhance its corporate governance. As endorsed by the market, the sole application of warrant in Vanke’s non-tradable share reform proposal offered a win- 67 win situation for non-tradable shareholders, tradable shareholders as well as the Company, and provided an innovative approach for the non-tradable share reform. 68 ABCD L. Financial Statements Report of the independent auditors to the shareholders of China Vanke Co., Ltd. (Established as a joint stock company in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of China Vanke Co., Ltd. (the “Company”) and its subsidiaries (together with the Company referred to as the “Group”) as of 31 December 2005 and the related consolidated statements of income, changes in equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s directors. Our responsibility is to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. 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 the directors, 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 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 its cash flows for the year then ended in accordance with International Financial Reporting Standards. Certified Public Accountants Hong Kong, 17 March 2006 69 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated income statement for the year ended 31 December 2005 (Expressed in Renminbi Yuan) Note 2005 2004 (restated) Revenue 3 9,920,738,936 7,257,182,725 Cost of sales (7,012,271,559) (5,330,581,746) Gross profit 2,908,467,377 1,926,600,979 Other operating income 6 35,447,160 46,570,944 Distribution costs (466,289,325) (328,757,939) Administrative expenses (506,300,671) (365,944,951) Other operating expenses 7 (9,364,651) (29,352,565) Operating profit before financing costs 1,961,959,890 1,249,116,468 Financial income 9 64,384,154 15,909,625 Financial expenses 9 (83,632,010) (11,332,859) Share of profits less losses of 17 12,217,378 (475,042) associates Share of losses of jointly controlled entities 18 (14,292,860) (3,365,944) Profit before taxation 1,940,636,552 1,249,852,248 Income tax 10(a) (524,987,007) (340,844,929) Profit for the year 1,415,649,545 909,007,319 =========== =========== Attributable to: Equity shareholders of the Company 1,364,689,853 874,359,855 Minority interests 50,959,692 34,647,464 Profit for the year 1,415,649,545 909,007,319 =========== =========== Earnings per share 11 Basic 0.39 0.26 ===== ===== Diluted 0.37 0.25 ===== ===== The notes on pages 9 to 61 form part of these financial statements. 70 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated balance sheet at 31 December 2005 (Expressed in Renminbi Yuan) Note 2005 2004 (restated) Non-current assets Property, plant and equipment 13 217,974,889 232,552,613 Investment properties 14 91,020,125 136,990,011 Construction in progress 15 19,699,697 - Interests in associates 17 1,095,550,599 4,668,253 Interests in jointly controlled entities 18 158,367,843 53,351,735 Other investments 19 39,407,447 39,407,447 Deferred tax assets 20 25,650,972 7,882,030 Properties held for development 7,637,079,936 4,044,272,068 Total non-current assets 9,284,751,508 4,519,124,157 ------------------- ------------------- Current assets Inventories 21 41,520,598 42,254,949 Completed properties for sale 2,298,059,418 1,729,922,956 Properties under development 5,612,914,315 4,586,827,311 Trade and other receivables 22 1,787,740,574 1,490,132,492 Cash and cash equivalents 23 3,249,034,710 3,131,999,522 Total current assets 12,989,269,615 10,981,137,230 ------------------- ------------------- TOTAL ASSETS 22,274,021,123 15,500,261,387 =========== =========== CAPITAL AND RESERVES Share capital 24 3,722,687,670 2,273,627,871 Reserves 25 4,650,718,366 4,012,412,736 Total equity attributable to equity shareholders of the Company 8,373,406,036 6,286,040,607 Minority interests 26 541,095,823 102,248,755 TOTAL EQUITY 8,914,501,859 6,388,289,362 ------------------- ------------------- 71 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated balance sheet at 31 December 2005 (continued) (Expressed in Renminbi Yuan) Note 2005 2004 (restated) Non-current liabilities Interest-bearing loans and borrowings 27 1,181,282,713 899,693,475 Convertible bonds 28 843,505,199 1,877,835,439 Other long term liabilities 29 447,774,990 - Total non-current liabilities 2,472,562,902 2,777,528,914 ------------------- ------------------- Current liabilities Interest-bearing loans and borrowings 27 1,562,980,000 1,109,361,599 Trade and other payables 30 9,256,505,694 5,041,255,878 Provisions 31 23,979,011 19,141,566 Current taxation 10(b) 43,491,657 164,684,068 Total current liabilities 10,886,956,362 6,334,443,111 ------------------- ------------------- TOTAL LIABILITIES 13,359,519,264 9,111,972,025 ------------------- ------------------- TOTAL EQUITY AND LIABILITIES 22,274,021,123 15,500,261,387 =========== =========== Approved and authorised for issue by the board of directors on 17 March 2006 ) ) ) Directors ) ) The notes on pages 9 to 61 form part of these financial statements. 72 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated statement of changes in equity for the year ended 31 December 2005 (Expressed in Renminbi Yuan) Note 2005 2004 (restated) Total equity at 1 January (2004: as restated) 2(b) 6,388,289,362 4,799,050,058 ------------------- ------------------- Net profit/(loss) recognised directly in equity: Exchange differences on translation of financial statements of foreign subsidiaries 25 4,675,212 (396,670) Profit for the year (2004: as restated) 2(b) 1,415,649,545 909,007,319 Total recognised income and expense for the year 1,420,324,757 908,610,649 ------------------- ------------------- Attributable to: Equity shareholders of the Company 1,369,365,065 873,963,185 Minority interests 50,959,692 34,647,464 1,420,324,757 908,610,649 ------------------- ------------------- Dividends declared or approved during the year 12 (341,097,071) (75,787,596) ------------------- ------------------- Movement in equity arising from capital transactions: Equity portion of convertible bonds issued 25 - 82,585,582 Shares issued upon conversion of convertible bonds 1,061,648,898 638,089,216 Shares issuing cost 25 (15,345,816) (8,812,881) Interest forfeited upon conversion of convertible bonds 25 958,774 7,288,562 Discount transferred to share premium upon conversion of convertible bonds 25 11,835,579 26,158,286 Deferred tax released upon conversion of convertible bonds 25 - 2,894,701 Redemption of convertible bonds 25 - (287,215) Dividend paid to minority shareholder of a 26 subsidiary (50,000,000) - Capital injections from minority shareholders of subsidiaries (2004: as restated) 26 12,281,000 1,000,000 Acquisition of subsidiaries (2004: as restated) 26 425,606,376 7,500,000 1,446,984,811 756,416,251 ------------------- ------------------- Total equity at 31 December (2004: as restated) 8,914,501,859 6,388,289,362 =========== =========== The notes on pages 9 to 61 form part of these financial statements. 73 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated cash flow statement for the year ended 31 December 2005 (Expressed in Renminbi Yuan) Note 2005 2004 Operating activities Profit before taxation 1,940,636,552 1,249,852,248 Adjustments for: Depreciation 46,661,782 48,277,791 Gain on disposal of property, plant and equipment (129,838) (437,238) Write off of property, plant and equipment - 19,655,642 Loss on disposal of other investments - 6,747,500 Impairment loss of other investments - 2,800,000 Loss on disposal of investment properties 1,937,307 - Gain on disposal of interest in a subsidiary (1,947,074) - Impairment loss of investment properties 10,753,203 2,101,942 Provision for diminution in value of inventories 2,474,304 - Impairment loss of trade and other receivables 21,767,497 7,609,176 Write back of provision for diminution in value of completed properties for sale (7,195,134) (9,076,466) Interest income (63,929,154) (15,377,063) Interest expense 82,149,837 9,931,911 Dividend income (455,000) (532,562) Share of profits less losses of associates (12,217,378) 475,042 Share of losses of jointly controlled entities 14,292,860 3,365,944 Operating profit before changes in working capital and provisions 2,034,799,764 1,325,393,867 Increase in amount due from associates (96,270,971) (20,624,274) Increase in amounts due from jointly controlled entities (88,156,891) (279,396,065) Increase in trade and other receivables (179,003,933) (274,999,763) Increase in trade and other payables and other long term liabilities 2,085,609,792 2,087,828,332 Increase in inventories (1,739,953) (36,333,226) Decrease/(increase) in properties under development 32,719,250 (1,916,599,856) (Increase)/decrease in completed properties for sale (565,032,684) 145,143,651 Operating profit before changes in working capital and provisions carried forward 3,222,924,374 1,030,412,666 ------------------- ------------------- 74 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated cash flow statement for the year ended 31 December 2005 (continued) (Expressed in Renminbi Yuan) Note 2005 2004 Operating profit before changes in working capital and provisions brought forward 3,222,924,374 1,030,412,666 (Increase)/decrease in properties held for development (1,656,542,889) 208,807,071 Increase in provisions 20,671,813 628,434 Provisions used (11,743,012) - Increase in amounts due to associates 6,957,195 - (Decrease)/increase in amounts due to jointly controlled entities (87,894,535) 87,894,535 Decrease in other tax payable included in taxation (104,768,250) (45,900,627) Cash generated from operations 1,389,604,696 1,281,842,079 Income taxes paid (559,180,110) (282,473,961) Net cash from operating activities 830,424,586 999,368,118 ------------------- ------------------- Investing activities Proceed of capital injection from minority interests 9,000,000 1,000,000 Acquisition of subsidiaries, net of cash acquired 4 (112,483,247) (42,500,000) Acquisition of interests in associates (368,029,968) (127) Acquisition of interests in jointly controlled entities (43,090,866) (56,717,679) Disposal of a subsidiary, net of cash disposed of 5 98,717,571 - Deposits paid for acquisition of equity interests in certain unrelated entities - (350,000,000) Proceeds from disposal of fixed assets 10,184,690 14,171,131 Proceeds from disposal of investment properties 25,992,766 24,839,479 Acquisition of property, plant and equipment (27,109,276) (44,434,966) Acquisition of construction in progress (19,699,697) - Proceeds from disposal of other investments - 6,000,000 Interest received 63,929,154 15,377,063 Dividend received from other investments and an associate 20,455,000 532,562 Net cash used in investing activities (342,133,873) (431,732,537) ------------------- ------------------- 75 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Consolidated cash flow statement for the year ended 31 December 2005 (continued) (Expressed in Renminbi Yuan) Note 2005 2004 Financing activities Interest paid (209,200,573) (201,464,171) Net proceeds from issuance of convertible bonds - 1,952,887,579 Net proceeds from/(repayment of) loans and borrowings 224,369,238 (73,629,725) Cash refund for conversion of convertible bonds (2,331) (4,650) Redemption of convertible bonds - (6,023,900) Dividend paid to minority shareholder of a subsidiary (50,000,000) - Dividend paid (341,097,071) (75,787,596) Net cash (used in)/from financing activities (375,930,737) 1,595,977,537 ------------------- ------------------- Net increase in cash and cash equivalents 112,359,976 2,163,613,118 Cash and cash equivalents at 1 January 23 3,131,999,522 968,783,074 Effect of foreign exchange rates 4,675,212 (396,670) Cash and cash equivalents at 31 December 23 3,249,034,710 3,131,999,522 =========== =========== The notes on pages 9 to 61 form part of these financial statements. 76 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 1 Significant accounting policies Notes to the financial statements (Expressed in Renminbi Yuan) China Vanke Co., Ltd (the “Company”) is a company domiciled in the People’s Republic of China (the “PRC”). The consolidated financial statements of the Company for the year ended 31 December 2005 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interests in associates and jointly controlled entities. The consolidated financial statements of the Group were authorised for issue by the directors on 17 March 2006. (a) Statement of compliance The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRSs”) and its interpretations adopted by the International Accounting Standards Board (“IASB”). A summary of the significant accounting policies adopted by the Group is set out below. The IASB has issued a number of new and revised IFRSs that are effective for accounting periods beginning on or after 1 January 2005. Information on the changes in accounting policies resulting from initial application of these new and revised IFRSs for the current and prior accounting periods reflected in these financial statements is provided in note 2. (b) Basis of preparation of the financial statements The consolidated financial statements are presented in Renminbi Yuan. They are prepared on the historical cost basis. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 38. (c) Subsidiaries A subsidiary is a company in which the Group, directly or indirectly, holds more than half of the issued share capital/paid-in capital or controls more than half of the voting power or controls the composition of the board of directors. Subsidiaries are 77 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 considered to be controlled if the Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities. An investment in a controlled subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra- group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment. Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and statement of changes in equity within equity separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company. Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered. (d) Associates and jointly controlled entities An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions. A jointly controlled entity is an entity which operated under a contractual arrangement between the Group or Company and other parties, where the contractual arrangement establishes that the Group or Company and one or more of the other parties share joint control over the economic activity of the entity. An investment in an associate or a jointly controlled entity is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the associate’s or the jointly controlled entity’s net assets. The consolidated income statements includes the Group’s share of the post-acquisitions, post-tax results of the associates and jointly controlled entities for the year, including any impairment loss on goodwill relating to the investment in associates and jointly controlled entities recognised for the year (see notes 1(e) and (l)). When the Group’s share of losses exceeds its interest in the associate or the jointly controlled entity, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or the jointly controlled entity. For this purpose, the Group’s interest in the associate or the jointly controlled entity is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate or the jointly controlled entity. 78 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Unrealised profits and losses resulting from transactions between the Group and its associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the associate or jointly controlled entity, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss. (e) Goodwill Goodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment as well as when there are indications of impairment (see note 1(l)). In respect of associates or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity. Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate or a jointly controlled entity is recognised immediately in profit or loss. On disposal of a cash generating unit, an associate or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal. 79 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 (f) Other investments in equity securities The Group’s policies for investments in equity securities, other than investment in subsidiaries, associates and jointly controlled entities are as follows: Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognised in the balance sheet at cost less impairment losses (see note 1(l)). Investments are recognised/derecognised on the date the Group commits to purchase/sell the investments or they expire. (g) Investment properties Investment properties are land and buildings which are owned or held under a leasehold interest (see note 1(j)) either to earn rental income and/or for capital appreciation. Investment properties are stated at cost less accumulated depreciation and impairment losses (see note 1(l)). The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs. Rental income from investment property is accounted for as described in note 1(x). Depreciation is calculated to write off the cost of items of investment properties, less their estimated residual value of 4% of costs, using straight line method, after taking into account the estimated residual value of 4% of costs, over their estimated useful lives of 25 years. (h) Property, plant and equipment Items of property, plant and equipment are initially recognised at cost less accumulated depreciation (see below) and impairment losses (see note 1(l)). The cost of self- constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see note 1(z)). (h) Property, plant and equipment (continued) Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal. Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follow: Estimated residual value as a percentage Year of costs 80 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Buildings 12.5 - 25 4% Improvements to premises 5 years or over terms of leases - Plant and machinery 5 - 10 4% Furniture, fixtures and equipment 5 - 10 4% Motor vehicles 5 4% Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. (i) Construction in progress Construction in progress represents items of property, plant and equipment under construction and pending installation, and is stated at cost less impairment losses (see note 1(l)). Cost comprises cost of materials, direct labour, borrowing costs capitalised (see note 1(z)), and an appropriate proportion of production overheads incurred during the periods of construction and installation. Capitalisation of those costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress. (j) Leased assets (i) Classification of assets leased to the Group Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, with the exception that property held under operating leases that would otherwise meet the definition of an investment property is classified as an investment property on a property-by-property basis and, if classified as investment property, is accounted for as if held under a finance lease (see note 1(g)). (ii) Operating lease changes Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred. (k) Properties held for development Properties held for development are stated at cost less impairment losses (see note 1(l)). (l) Impairment of assets (i) Impairment of investments in equity securities and other receivables 81 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Investments in equity securities and other current receivables that are stated at cost or amortised cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognised as follows: - For unquoted equity securities and current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for current receivables are reversed if in a subsequent period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed. (l) Impairment of assets (continued) (i) Impairment of investments in equity securities and other receivables (continued) - For financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets). If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit of loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years. (ii) Impairment of other assets Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased: - investment properties; - property, plant and equipment; - construction in progress; - interests in associates; - interests in jointly controlled entities; and - properties held for development. If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment. (l) Impairment of assets (continued) (ii) Impairment of other assets (continued) 82 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 - Calculation of recoverable amount The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). - Recognition of impairment losses An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash- generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable. - Reversals of impairment losses In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised. (m) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Work in progress and manufactured finished goods are valued at production cost including direct production costs (cost of materials and labour) and an appropriate proportion of production overheads. The cost of raw materials is computed using the weighted average cost method. (n) Completed properties for sale Completed properties for sale are stated at the lower of cost and net realisable value. Cost is determined by apportionment of the total land and development costs attributable to unsold properties, and an appropriate proportion of production overheads and borrowing costs. Net realisable value represents the estimated selling price less the estimated costs to be incurred in selling the properties. (o) Properties under development 83 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Properties under development held for sale are stated at the lower of cost and net realisable value. Cost includes cost of land use rights acquired, development costs and an appropriate proportion of production overheads and borrowing costs during the period of construction. Net realisable value represents the estimated selling price less the estimated costs of completion and the estimated costs to be incurred in selling the properties. On completion, the properties are transferred to completed properties for sales. Properties under development are classified as current assets unless the construction period of the relevant property development project is expected to complete beyond 12 months from the balance sheet date. (p) Trade and other receivables Trade and other receivables are initially recognised at fair value and thereafter at amortised cost less impairment losses for bad and doubtful debts (see note 1(l)), except where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts (see note 1(l)). (q) Convertible bonds Convertible bonds that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments. At initial recognition the liability component of the convertible bonds is calculated as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity component. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. The liability component is subsequently carried at amortised cost. The interest expense recognised in profit or loss on the liability component is calculated using the effective interest method. The equity component is recognised in the convertible bonds reserve until either the bond is converted or redeemed. If the bond is converted, the convertible bonds reserve, together with the carrying value of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the convertible bonds reserve is released directly to retained profits. (r) Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the profit and loss over the period of the borrowings on an effective interest method. (s) Trade and other payables 84 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost. (t) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and on hand, and demand deposits with banks. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement. (u) Short term employee benefits and contributions to defined contribution retirement plans Salaries, annual bonuses, contributions to defined contribution plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values. (v) Income tax Income tax for the year comprises current tax and movements in deferred assets and liabilities. Current tax and movement in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits. Apart from certain limited exceptions, all deferred tax liabilities and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised. (v) Income tax (continued) 85 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 No temporary differences are recognised on the initial recognition of goodwill. In addition, the following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future. The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised. Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current and the following additional conditions are met: - in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or - in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either: - the same taxable entity; or - different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously. (w) Provisions and contingent liabilities Provisions are recognised for liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non- 86 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. (x) Revenue recognition Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows: (i) Revenue from the sale of completed properties is recognised when the significant risks and rewards of ownership have been transferred to the buyers. Deposits and instalments received on properties sold prior to the date of revenue recognised are included in the consolidated balance sheet under deposits received in advance. (ii) Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to customers. (iii) Revenue from services is recognised when services are rendered. (iv) Rental income from investment properties is recognised on a straight-line basis over the terms of the respective leases. Lease incentives granted are recognised as an integral part of the total rental income. (v) Interest income Interest income is recognised as it accrues using the effective interest method. (vi) Dividend income Dividend income from other investments is recognised when the shareholder’s right to receive payment is established. The above revenue is net of the relevant taxes and is after the deduction of any trade discounts. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods. (y) Translation of foreign currencies Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in profit or loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined. The results of foreign operations are translated into Renminbi Yuan at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items are translated into Renminbi Yuan at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity. 87 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal. (z) Borrowing costs Borrowing costs are expensed in profit or loss in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete. (aa) Related parties For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group. (bb) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. In accordance with the Group’s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements. Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories, trade receivables and property, plant and equipment. Segment revenue, expenses, assets, and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra- group balances and transactions are between group entities within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties. 88 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period. Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financing expenses. 89 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 2 Changes in accounting policies The IASB has issued a number of new and revised IFRSs that are effective for accounting periods beginning on or after 1 January 2005. The accounting policies of the Group after the adoption of these new and revised IFRSs have been summarised in note 1. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in the consolidated financial statements. The Group has not applied any new standards or interpretation that is not yet effective for the current accounting period (see note 39). (a) Amortisation of positive and negative goodwill (IFRSs 3, Business combinations and IAS 36, Impairment of assets) In prior periods: - positive goodwill was amortised on a straight line basis over its useful life not exceeding five years and was subject to impairment testing when there were indications of impairment; and - negative goodwill was amortised over the weighted average useful life of the depreciable/amortisable non-monetary assets acquired, except to the extent it related to identified expected future losses and expenses as at the date of acquisition. In such cases it was recognised in the consolidated income statement as those expected losses and expenses recognised. Negative goodwill in excess of the fair value of the non- monetary assets acquired was recognised immediately in the consolidated income statement. With effect from 1 January 2005, in order to comply with IFRS 3 and IAS 36, the Group has changed its accounting policies relating to goodwill. Under the new policy, the Group no longer amortises positive goodwill but tests it at least annually for impairment. Also with effect from 1 January 2005 and in accordance with IFRS 3, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill under the previous accounting policy), the excess is recognised immediately in profit or loss as it arises. Further details of these new policies are set out in note 1(e). The new policy in respect of the amortisation of positive goodwill has been applied prospectively in accordance with the transitional arrangements under IFRS 3. The change in policy relating to goodwill and negative goodwill had no effect on the financial statements as there was no goodwill and negative goodwill deferred as at 31 December 2004. (b) Changes in presentation of minority interests (IAS 1, Presentation of financial statements and IAS 27, Consolidated and separate financial statements) In prior years, minority interests at the balance sheet date were presented in the consolidated balance sheet separately from liabilities and as deduction from net assets. Minority interests in the results of the Group for the year were also separately presented in the consolidated income statement as a deduction before arriving at the profit attributable to shareholders (the equity shareholders of the Company). With effect from 1 January 2005, in order to comply with IAS 1 and IAS 27, the Group has changed its accounting policy relating to presentation of minority interests. Under 90 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 the new policy, minority interests are presented as part of equity, separately from interests attributable to the equity shareholders of the Company. Further details of the new policy are set out in note 1(c). These changes in presentation have been applied retrospectively with comparatives restated. (c) Definition of related parties (IAS 24, Related party disclosure) As a result of the adoption of IAS 24, Related party disclosure, the definition of related parties as disclosed in note 1(aa) has been expanded. The revised IAS 24 also requires the compensation of key management personnel to be disclosed. The Group has included these additional disclosures in note 32(b) to the financial statements. 91 3 Segment reporting The Group’s results for the year ended 31 December 2005 were almost entirely attributable to the property development in the PRC. Accordingly no analys Below is an analysis of the revenue, assets and capital expenditure of the Group according to the geographical location of the property development projects Shenzhen, Dongguan Tianjin Beijing Shanghai region Northeast region Guangzhou and Zhongshan (Note 1) (Notes 1 and 2) (Note2) Fos 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2 (restated) (restated) Revenue Property 1,924,379,3 1,435,231,62 705,270,89 617,459,9 959,525,89 1,009,000,6 2,850,380,0 1,446,351,6 1,445,239, 1,044,493, 702,840,1 469,0 sales 14 5 4 87 5 92 02 34 068 228 19 39 Property 22,626,991 96,460,689 12,564,581 12,968,15 36,728,872 20,381,272 43,430,330 30,378,138 16,653,88 19,790,54 12,972,24 3,157 Managem 5 0 9 2 ent Rental 6,464,575 5,308,208 1,120,723 2,935,633 2,985,699 3,710,224 12,878,240 8,784,920 2,545,882 3,706,205 - Total 1,953,470,8 1,537,000,52 718,956,19 633,363,7 999,240,46 1,033,092,1 2,906,688,5 1,485,514,6 1,464,438, 1,067,989, 715,812,3 472,2 revenue 80 2 8 75 6 88 72 92 830 982 61 55 ========= ========== ========= ======== ========= ========= ========= ========= ======== ======== ======== ===== === == === == === === === === == === == == Segment 6,729,165,7 4,365,466,93 1,684,047,1 1,422,931, 1,103,441,2 1,557,028,2 8,303,635,3 5,775,144,9 1,502,061, 1,449,007, 2,256,531, 845,4 assets 64 4 08 994 06 85 30 58 372 392 166 17 ========= ========== ========= ======== ========= ========= ========= ========= ======== ======== ======== ===== === == === == === === === === == === == == Capital 3,500,100 9,904,490 1,088,229 1,775,858 2,497,141 2,873,638 33,056,563 7,613,950 1,617,527 11,343,72 2,607,230 3,442 expenditur 9 e ========= ========== ======== ========= ============================= ======== ========= ===== === == ========= == ========== === == == == === == == == = Revenue is based on the geographical location of the property development projects. Assets and capital expenditures are disclosed by the geographical loc Capital expenditure is the total cost incurred during the year to acquire assets that are expected to be used for more than one year. Note 1: Property development project in Dongguan, Zhongshan, Wuxi and Kunshan were included in “Others” in 2004. This year, Dongguan and Zhong Kunshan are included in Shanghai region. Comparative figures have been reclassified in order to conform with the current year’s presentation. Note 2: Shanghai region represents Shanghai, Nanjing, Wuxi and Kunshan. Note 3: Northeast region represents Shenyang, Changchun, Dalian and Anshan. 92 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 4 Acquisition of subsidiaries Acquisition of subsidiaries by the Group during the year are summarised as follows: (a) Pursuant to an equity transfer agreement dated 3 March 2005 and certain supplementary agreements subsequently entered into in October 2005, the Group acquired 70% equity interests in Shanghai Nandu Land Company Limited (“Shanghai Nandu”), Zhenjiang Runzhong Property Company Limited and Zhenjiang Runqiao Property Company Limited (collectively the “Nandu Group”) for an aggregate consideration of RMB789 million satisfied in cash by 4 instalments, which are due between May 2005 to March 2007. The Nandu Group is principally engaged in property development in Shanghai. During the year, Shanghai Nandu contributed net profit of RMB19 million to the Group. (b) On 31 May 2005, the Group acquired 51% equity interest in Shenzhen Vanke Fifth Garden Company Limited (“Vanke Fifth Garden”), which was previously a 49% owned jointly controlled entity of the Group, for a consideration of RMB5 million satisfied in cash. Vanke Fifth Garden is principally engaged in property development in Shenzhen. During the year, Vanke Fifth Garden contributed net loss of RMB8.4 million to the Group. (c) On 22 July 2005, the Group acquired 70% equity interest in Dong Tai Industrial Development Company Limited (“Dong Tai”) for a consideration of RMB39 million satisfied in cash. Dong Tai is principally engaged in property development in Guangzhou. During the year, Dong Tai contributed net loss of RMB0.3 million to the Group. (d) On 18 December 2005, Chengdu Vanke Property Company Limited ( “Chengdu Vanke” ), in which the Group had 60% equity interest, was changed from a jointly controlled entity to a subsidiary of the Group as the Group obtained control over Chengdu Vanke from the original joint venture partner. Chengdu Vanke is principally engaged in property development in Chengdu. The change did not have any impact on the result of the Group. (e) On 1 December 2005, the Group acquired the remaining 32.81% equity interest in Shenyang Vanke Hunnan Real Estate Development Company Limited (“Shenyang Hunnan”), a subsidiary set up during the year in which the group originally had 67.19% equity interest, for a consideration of RMB13 million satisfied in cash. Shenyang Hunnan is principally engaged in property development in Shenyang. Effect of acquisitions The acquisitions had the following effect on the Group’s assets and liabilities. Combined net assets of the above acquired entities at the respective acquisition dates: Recognised Fair value Carrying values adjustments amounts Cash and cash equivalents 225,355,965 - 225,355,965 Property, plant and equipment 4,593,587 - 4,593,587 Properties held for development, properties under development 93 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 and completed properties for 3,046,272,524 928,010,080 2,118,262,444 sales Trade and other receivables 306,061,067 - 306,061,067 Interest-bearing loans and borrowings (505,000,000) - (505,000,000) Interest in a jointly controlled entity (56,956,145) - (56,956,145) Minority interests (425,606,376) (301,578,355) (124,028,021) Trade and other payables (1,748,334,287) - (1,748,334,287) Net identifiable assets and liabilities 846,386,335 626,431,725 219,954,610 ============= === ============= ============= = === Considerations paid during the year, satisfied in cash 846,386,335 Cash acquired (225,355,965) Prepayment of considerations in previous years (140,000,000) Considerations not yet paid (368,547,123) Net cash outflow 112,483,247 ============= == 94 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 5 Disposal of a subsidiary On 28 November 2005, the Group disposed of a 51% equity interest in Shenyang Vanke Yongda Real Estate Company Limited (“Shenyang Yongda”), which was previously wholly owned by the Group, for a consideration of US$12.3 million (RMB equivalent of 99.2 million). After the disposal, Shenyang Yongda was changed from a subsidiary to a jointly controlled entity. A gain of RMB1.9 million arose from the disposal. Effect of the disposal on individual assets and liabilities of the Group Cash and cash equivalents 473,257 Interest in a jointly controlled entity (93,431,370) Property, plant and equipment 131,563 Properties under development 219,322,195 Trade and other receivables 117,283 Trade and other payables (29,369,174) Net identifiable assets and liabilities 97,243,754 Gain on disposal of interest in a subsidiary 1,947,074 Consideration received, satisfied in cash 99,190,828 Cash disposed of (473,257) Net cash inflow 98,717,571 ========= 6 Other operating income 2005 2004 Consultancy fee income 4,746,511 22,581,447 Commission income 4,686 2,541,926 Forfeited deposits and compensation from customers 6,318,054 5,108,836 Gain on disposal of interest in a subsidiary 1,947,074 - Gain on disposal of property, plant and equipment 129,838 437,238 Other sundry income 22,300,997 15,901,497 35,447,160 46,570,944 ========= ========= 95 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 7 Other operating expenses 2005 2004 Compensation to customers 3,093,125 16,809,028 Loss on disposal of other investments - 6,747,500 Impairment loss of other investments - 2,800,000 Loss on disposal of investment properties 1,937,307 - Penalties to government 901,304 915,568 Other sundry expenses 3,432,915 2,080,469 9,364,651 29,352,565 ========= ========= 8 Personnel expenses 2005 2004 Wages, salaries and other staff costs 500,032,784 362,784,529 Contributions to defined contribution plans 45,680,576 36,527,684 545,713,360 399,312,213 ========= ========= 9 Net financing (expense)/income 2005 2004 Interest income 63,929,154 15,377,063 Dividend income 455,000 532,562 Financial income 64,384,154 15,909,625 --------------- ----------------- Interest expense and other borrowing costs 250,270,741 224,812,624 Less: Interest capitalised (168,120,904) (214,880,713) 82,149,837 9,931,911 Foreign exchange loss 1,482,173 1,400,948 Financial expenses 83,632,010 11,332,859 --------------- ----------------- Net financing (expense)/income (19,247,856) 4,576,766 ========= ========== Interest expense and other borrowing costs have been capitalised at an average rate of 5.7% (2004: 4.8%) per annum. 96 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 10 Taxation (a) Taxation in the consolidated income statement comprises: 2005 2004 PRC income tax for the year 539,758,684 343,536,926 Under-provision in respect of prior years 2,997,265 4,138,600 542,755,949 347,675,526 Change in deferred taxation (note 20) (17,768,942) (6,830,597) 524,987,007 340,844,929 ========== ========== The provision for PRC income tax is calculated based on the estimated taxable income at the rates applicable to each company in the Group. The following is a reconciliation of income taxes calculated at the applicable tax rates with income tax expense: 2005 2004 Profit before taxation 1,940,636,552 1,249,852,248 ========== ========== Notional tax on profit before taxation calculated at the rates applicable to profits in the cities 495,580,741 326,804,940 concerned Non-taxable income (5,280,000) (204,262) Non-deductible expenses 44,517,711 5,974,874 Effect of temporary difference not recognised 26,111,290 14,120,181 Effect of tax losses utilised (38,940,000) (9,989,404) Under-provision in respect of prior years 2,997,265 4,138,600 Income tax expense 524,987,007 340,844,929 ========== ========== The tax rates applicable to the principal subsidiaries in the PRC range between 15% and 33%. 97 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 (b) Current taxation in the consolidated balance sheet represents: 2005 2004 Brought forward balance of PRC income tax 144,287,998 79,086,433 Provision for PRC income tax for the year 542,755,949 347,675,526 PRC income tax paid (559,180,110) (282,473,961) 127,863,837 144,287,998 (Prepaid)/provision for PRC business tax and city construction tax (95,928,130) 17,353,207 PRC value added tax recoverable (130,013) (363,444) Other PRC taxes 11,685,963 3,406,307 43,491,657 164,684,068 ========== ========== 11 Earnings per share (a) Basic earnings per share The calculation of basic earnings per share is based on the net profit for the year attributable to equity shareholders of the Company of RMB1,364,689,853 (2004: RMB874,359,855) and on the weighted average number of ordinary shares outstanding during the year of 3,462,943,078 shares (2004 restated: 3,361,151,678 shares). (b) Diluted earnings per share The calculation of diluted earnings per share is based on the net profit for the year attributable to equity shareholders of the Company of RMB1,379,436,005 (2004: RMB877,378,809) and on the weighted average number of ordinary shares of 3,711,244,543 shares (2004 restated: 3,508,894,405 shares), calculated as follows: Net profit attributable to ordinary shareholders (diluted): 2005 2004 Net profit attributable to shareholders 1,364,689,853 874,359,855 After tax effect of effective interest on liability component of convertible bonds 14,746,152 3,018,954 Net profit attributable to ordinary equity shareholders (diluted) 1,379,436,005 877,378,809 ========== ========== 98 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 (b) Diluted earnings per share (continued) Weighted average number of ordinary shares (diluted): 2005 2004 (restated) Weighted average number of ordinary shares at 31 December 3,462,943,078 3,361,151,678 Effect of conversion of convertible bonds 248,301,465 147,742,727 Weighted average number of ordinary shares (diluted) at 31 December 3,711,244,543 3,508,894,405 ========== ========== (c) During the year, the Company issued additional ordinary shares out of the share premium in the ratio 10:5. Accordingly, the weighted average number of ordinary shares used in the calculation of the basic and diluted earnings per share in 2004 were adjusted to 3,361,151,678 and 3,508,894,405 respectively. As a result, the basic and diluted earnings per share were adjusted to RMB0.26 and RMB0.25 respectively based on the net profit for the year attributable to shareholders of RMB874,359,855 and net profit attributable to ordinary shareholders (diluted) of RMB877,378,809. 12 Dividend A cash dividend of RMB0.15 per share resulting in a total dividend payment of RMB341,097,071, in respect of the year ended 31 December 2004 was declared and paid out during the year ended 31 December 2005 (note 25). A cash dividend of RMB0.15 per share, resulting in a total dividend payment of RMB558,403,151, in respect of the year ended 31 December 2005 are to be proposed at the Company’s forthcoming annual general meeting. The dividend has not been recognised as a liability at the balance sheet date. 99 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 13 Property, plant and equipment Furniture, Improvements Plant and fixtures and Motor Buildings to premises machinery equipment vehicles Total Cost: At 1 January 2004 237,997,162 59,698,495 6,842,145 77,506,484 47,299,555 429,343,841 Additions 167,093 6,076,735 357,054 15,803,206 12,660,631 35,064,719 Disposals/write off (35,962,713) (7,186,064) (1,171,115) (6,310,476) (7,649,993) (58,280,361) At 31 December 2004 202,201,542 58,589,166 6,028,084 86,999,214 52,310,193 406,128,199 ----------------- ----------------- --------------- ----------------- ----------------- ------------------- At 1 January 2005 202,201,542 58,589,166 6,028,084 86,999,214 52,310,193 406,128,199 Additions 242,271 3,232,824 375,809 19,614,263 11,518,696 34,983,863 Disposals (4,068,844) (7,006,669) (423,901) (12,421,307) (4,032,047) (27,952,768) At 31 December 2005 198,374,969 54,815,321 5,979,992 94,192,170 59,796,842 413,159,294 ----------------- ----------------- --------------- ----------------- ----------------- ------------------- Accumulated depreciation and impairment loss: At 1 January 2004 42,086,324 39,335,646 3,672,386 44,559,742 28,639,325 158,293,423 Charge for the year 11,869,740 8,937,263 616,342 11,688,847 7,060,797 40,172,989 Written back on disposals/write off (10,854,707) (4,345,958) (436,556) (4,883,494) (4,370,111) (24,890,826) At 31 December 2004 43,101,357 43,926,951 3,852,172 51,365,095 31,330,011 173,575,586 ----------------- ----------------- --------------- ----------------- ----------------- ------------------- At 1 January 2005 43,101,357 43,926,951 3,852,172 51,365,095 31,330,011 173,575,586 Charge for the year 9,200,244 6,742,857 541,493 14,248,930 8,641,648 39,375,172 Written back on disposals (1,888,433) (4,588,251) (406,413) (8,477,615) (2,405,641) (17,766,353) At 31 December 2005 50,413,168 46,081,557 3,987,252 57,136,410 37,566,018 195,184,405 ----------------- ----------------- --------------- ----------------- ----------------- ------------------- Net book value: At 31 December 2005 147,961,801 8,733,764 1,992,740 37,055,760 22,230,824 217,974,889 ========== ========== ========= ========== ========== =========== At 31 December 2004 159,100,185 14,662,215 2,175,912 35,634,119 20,980,182 232,552,613 ========== ========== ========= ========== ========== =========== 100 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 14 Investment properties 2005 2004 Cost: At 1 January 206,486,260 224,357,027 Additions - 9,370,247 Disposals (38,589,539) (27,241,014) At 31 December 167,896,721 206,486,260 ------------------- ------------------- Accumulated depreciation and impairment loss: At 1 January 69,496,249 61,691,040 Charge for the year 7,286,610 8,104,802 Provision for impairment loss 10,753,203 2,101,942 Written back on disposals (10,659,466) (2,401,535) At 31 December 76,876,596 69,496,249 ------------------- ------------------- Net book value: At 31 December 91,020,125 136,990,011 =========== =========== Investment properties comprise certain commercial properties that are leased to external parties. The directors, having regard to recent market transactions of similar properties in the same location as the Group’s investment properties, consider the estimated fair value of the investment properties to be RMB164,701,000 (2004: RMB193,717,000). 15 Construction in progress 2005 2004 Additions during the year and balance at 31 December 19,699,697 - =========== =========== 16 Principal subsidiaries Details of principal subsidiaries at 31 December 2005 are as follows: Percentage of equity held by the Group Principal Name of company 2005 2004 activities 101 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Shenzhen Vanke Real Estate 100% 100% Property Company Limited Development Shenzhen Vanke Property Company 100% 100% Property Limited Development Shenzhen Vanke Xizhigu Real Estate 60% - Property Company Limited Development Shenzhen Vanke Nancheng Real Estate 90% - Property Company Limited Development Shanghai Vanke Rancho Property 100% - Property Company Limited Development Shenzhen Vanke Property Management 100% 100% Property Company Limited Management Shenzhen Vanke Financial 100% 100% Investment Consultancy Company Limited trading and consultancy services Shenzhen Vanke East Coast 74.5% 90% Property Company Limited Development Shenzhen Vanke Fifth Garden Company 100% 49% Property Limited Development Shanghai Vanke Real Estate 100% 100% Property Company Limited Development Shanghai Vanke Real Estate Group 100% 100% Property (formerly “Shanghai Vanke City Development Garden Property Development Company Limited”) 102 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Percentage of equity held by the Group Principal Name of company 2005 2004 activities Shanghai Vanke Xuhui Property 100% 100% Property Company Limited Development Shanghai Vanke Zhongshi Property 50% 50% Property Company Limited Development Shanghai Huaou Real Estate 100% 100% Property Company Limited Development Shanghai Vanke Pudong 100% 100% Property Property Company Limited Development Shanghai Vanke Baoshan 100% 100% Property Property Company Limited Development Shanghai Nandu Land Company 70% - Property Limited Development Shanghai Blue Mountain Property 100% - Property Company Limited Development Beijing Vanke Haikai Real Estate 100% 100% Property Development Company Limited Development Beijing Vanke Enterprises 100% 100% Property Shareholding Company Limited Development Tianjin Vanke Real Estate 100% 100% Property Company Limited Development Tianjin Vanke Shine Development 100% 100% Property Company Limited Development Shenyang Vanke Real Estate 100% 100% Property Company Limited Development Shenyang Vanke Wonderland Company 100% 100% Property Limited Development Shenyang Vanke Metropolitan Company 100% 100% Property Limited Development Percentage of equity held by the Group Principal Name of company 2005 2004 activities Dalian Vanke Property 100% 100% Property Development Company Limited Development Dalian Vanke Jinxiu Flower City 100% 100% Property 103 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Development Company Limited Development Changchun Vanke Real Estate 100% 100% Property Company Limited Development Anshan Vanke Property 100% 100% Property Development Company Development Limited Zhongshan Vanke Real Estate Company 100% 100% Property Limited Development Foshan Vanke Real Estate Company 100% 100% Property Limited Development Guangzhou Vanke Real Estate Company 100% 100% Property Limited Development Guangzhou Vanke Property Company 100% 100% Property Limited Development Dongguan Vanke Real Estate 100% 100% Property Company Limited Development Wuxi Vanke Real Estate 100% 100% Property Company Limited Development Kunshan Jiahua Investment 85% 85% Property Company Limited Development Chengdu Vanke Real Estate 100% 100% Property Company Limited Development Chengdu Vanke Property Development 60% 60% Property Company Limited Development Shenyang Vanke Hunnan Real Estate 100% - Property Company Limited Development Percentage of equity held by the Group Principal Name of company 2005 2004 activities Foshan Vanke Property Company Limited 100% - Property Development Top Glory International Property 70% - Property (Guangzhou) Company Limited Development Huizhou Vanke Real Estate Company 100% - Property Limited Development All the above companies’ country of establishment and operations is the PRC. 104 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 17 Interests in associates Details of associates at 31 December 2005 are as follows: Percentage of interest held by the Group Principal Name of company 2005 2004 activities Shanghai Vansheng Real Estate 50% 50% Property Company Limited Management Beihai Vanda Real Estate 40% 40% Property Company Limited Development Trendell Limited * 30% 30% Investment Holding Fohill Limited * 30% 30% Investment Holding Dreamtown Limited * 30% 30% Investment Holding Dongguan Vanke Property 44% - Property Company Limited Development Suzhou Nandu Construction Co., Ltd. 49% - Property Development Zhejiang Nandu Property Co., Ltd. 20% - Property Development All the above companies’ country of establishment and operations is the PRC, except for companies marked with “＊” where their place of establishment and operation is Hong Kong. 17 Interests in associates (continued) Summary financial information on associates Assets Liabilities Minority Equity Revenues Profit/(loss) 2005 Interests attributable to parent 100 per cent 8,688,307,21 4,633,489,94 335,223,65 3,719,593,62 1,312,385,08 28,759,867 7 7 0 0 4 Group’s effective 2,527,261,49 1,364,666,16 67,044,730 1,095,550,59 12,217,378 interest 0 1 9 606,855,097 ========== ========== ========= ========== ========= ============= === === ==== === ==== 105 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 2004 100 per cent 59,904,437 51,475,657 - 8,428,780 423,091 (805,899) Group’s effective 24,296,360 19,628,107 - 4,668,253 169,236 (475,042) interest ========== ========== ========= ========== ========= ============= === === === === ==== 18 Interests in jointly controlled entities Details of the Group’s interests in jointly controlled entities at 31 December 2005 are as follows: Percentage of equity Principal held by the Group activities Name of company 2005 2004 Shenzhen Vanke East Coast Real Estate 49% 39% Property Development Company Limited development Tianjin Xinhai Real Estate Development 55% 55% Property Company Limited development Dongguan Songshanju Property Company Limited 39.6% - Property development Shanghai Qingchen Real Estate Company Limited 35.7% - Property development Zhejiang Nandu Property Company Limited 20% - Property development All the above companies’ country of establishment and operation is the PRC. 106 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 18 Interests in jointly controlled entities (continued) Summary financial information on jointly controlled entities – Group’s effective interest 2005 2004 Non-current assets 5,384,490 123,926 Current assets 585,678,138 488,228,717 Non-current liabilities (73,500,000) (136,900,000) Current liabilities (359,194,785) (298,100,908) Net assets 158,367,843 53,351,735 ============ =========== == === Income - 587 Expenses (14,292,860) (3,366,531) Loss for the year (14,292,860) (3,365,944) ============ =========== == === 19 Other investments 2005 2004 Non-current investments Equity securities, at cost less impairment loss of RMB7,860,000 (2004: RMB7,860,000) 39,407,477 39,407,447 ========= ========= 20 Deferred tax assets Deferred tax assets at 31 December 2005 and 2004 are attributable to the items detailed as follows: 2005 2004 Deferred tax assets: Tax losses 2,990,393 3,136,516 Accounting depreciation in excess of tax depreciation 732,226 794,338 Impairment loss of trade and other receivables 3,550,182 1,045,241 Provision for diminution in value of properties 11,895,293 2,905,935 Impairment loss of investment properties 6,482,878 - 25,650,972 7,882,030 ======== ======== 107 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 20 Deferred tax assets (continued) Movements in net deferred tax assets/(liabilities): 2005 2004 At 1 January 7,882,030 (1,843,268) Transferred to consolidated income statement (note 10(a)) 17,768,942 6,830,597 Transferred to reserves (note 25) - 2,894,701 At 31 December 25,650,972 7,882,030 ======== ======== Deferred tax assets have not been recognised in respect of the following items: 2005 2004 Deductible temporary differences 35,120,000 92,959,000 Tax losses 86,691,000 214,056,000 121,811,000 307,015,000 ========= ========= The tax losses will expire between 2006 and 2010. The deductible temporary differences will not expire under current tax legislation. The above deferred tax assets have not been recognised because it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom. 21 Inventories 2005 2004 Raw materials 1,945,000 11,581,110 Work in progress 22,877,340 28,850,507 Finished goods 16,698,258 1,823,332 41,520,598 42,254,949 ========= ========= Inventories recognised as cost of sales for the year 19,952,820 21,024,199 ========= ========= Included in inventories recognised as cost of sales for the year is a provision of RMB2,474,304 (2004: Nil) made in order to state these inventories at the lower of their cost and net realisable value. 22 Trade and other receivables 2005 2004 Debtors, prepayments and other receivables 1,296,498,228 1,183,318,008 Amounts due from associates 123,689,390 27,418,419 108 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Amounts due from jointly controlled entities 367,552,956 279,396,065 1,787,740,574 1,490,132,492 ========== ========== All of the trade and other receivables, apart from rental and utility deposits of RMB4,337,208 (2004: RMB2,203,733), are expected to be recovered within one year. Apart from the amounts due from jointly controlled entities of RMB307,861,608 (2004: Nil) which are interest bearing at market interest rate, trade and other receivables are interest free, unsecured and have no fixed terms of repayment. The interest income received during the year amounted to RMB13,259,008 (2004: Nil). The Group’s credit policy is set out in note 35(b). Included in trade and other receivables are the following amounts denominated in a currency other than the functional currencies of subsidiaries to which they relate: 2005 2004 United States Dollars USD 172,547 USD 214,021 Hong Kong Dollars HKD 25,055,532 HKD 14,057,182 ======== ======== 23 Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks. The balance includes deposits with banks of RMB19,201,125 (2004: RMB31,986,779) with specific use. Included in cash and cash equivalents are the following amounts denominated in a currency other than the functional currencies of subsidiaries to which they relate: 2005 2004 United States Dollars USD 9,356,116 USD 3,690,361 Hong Kong Dollars HKD 15,631,346 HKD 193,438,015 Japanese Yen YEN 3,751 YEN 444,593 Euro EUR 1,268 EUR - Australian Dollars AUD 3,186 AUD - ========= ========== 109 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 24 Share capital Registered, issued and fully paid up capital consist of A and B shares of RMB1 each. The holders of A and B shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. A share B share Total 2005 2004 2005 2004 2005 2004 At 1 January 1,908,362,463 1,152,339,1 365,265,408 243,510,272 2,273,627,8711,395,849,444 72 Issued upon conversion of convertible bonds 312,069,562 119,902,470 - - 312,069,562 119,902,470 Issued out of share premium (note 25(a)) 954,357,533 508,896,656 182,632,704 97,404,108 1,136,990,237606,300,764 Bonus shares issued - 127,224,165 - 24,351,028 - 151,575,193 At 31 December 3,174,789,558 1,908,362,4 547,898,112 365,265,408 3,722,687,6702,273,627,871 63 ========== ========= ========= ========= ========== ========== = During the year, 312,069,562 (2004: 119,902,470) A shares were issued on the conversion of convertible bonds with total carrying value of RMB1,108,527,469 (2004: RMB701,429,450) made up as follows: 2005 2004 Liability component 1,061,651,229 638,093,866 Equity component (note 25) 46,878,571 63,340,234 Cash refund to bondholders (2,331) (4,650) 1,108,527,469 701,429,450 ========== ========= Represented by: Share capital 312,069,562 119,902,470 Share premium (note 25) 796,457,907 581,526,980 1,108,527,469 701,429,450 ========== ========= 352,603 new A shares were issued from 1 January 2005 to 28 June 2005. On 28 June 2005, these shares were entitled to the additional shares issued upon capitalisation of share premium in a ratio of 10:5 (note 25(a)). 110 China V Financial statements for the year ended 31 D 25 Reserves Foreign Statutory Convertible Share exchange reserves bonds Retained premium reserve reserve profits (note (a)) (note (b)) (note (c)) (note (d)) At 1 January 2004 1,448,059,704 11,026,043 1,569,250,384 59,640,247 256,122,945 3,3 Profit for the year - - - - 874,359,855 87 Shares issued out of the share premium in the ratio 10:4 (note 24) (606,300,764) - - - - (60 Adjustment on translation of foreign subsidiaries - (396,670) - - - Bonus share issued - - - - (151,575,193) (15 Issuance of convertible bonds - - - 82,585,582 - 8 Proposed transfer from retained profits - - 482,903,440 - (482,903,440) Shares issued upon conversion of convertible bonds (note 24) 581,526,980 - - (63,340,234) - 51 Redemption of convertible bonds - - - (287,215) Share issuing cost (10,162,131) - - 1,349,250 ( Interest forfeited upon conversion of convertible 7,288,562 - - - - bonds Discount transferred to share premium upon conversion of convertible bonds 26,158,286 - - - - 2 Deferred tax released upon conversion of convertible bonds (note 20) - - - 2,894,701 Dividend paid – 2003 - - - - (75,787,596) (7 At 31 December 2004 1,446,570,637 10,629,373 2,052,153,824 82,842,331 420,216,571 4,0 =========== =========== =========== =========== =========== == At 1 January 2005 1,446,570,637 10,629,373 2,052,153,824 82,842,331 420,216,571 4,0 Profit for the year 1,364,689,853 1,3 Shares issued out of the share premium in the ratio 10:5 (note 24) (1,136,990,237) (1, Adjustment on translation of foreign subsidiaries 4,675,212 Proposed transfer from retained profits 810,217,690 (810,217,690) Shares issued upon conversion of convertible bonds (note 24) 796,457,907 (46,878,571) 74 Share issuing cost (16,220,076) 874,260 (1 Interest forfeited upon conversion of convertible 958,774 bonds Discount transferred to share premium upon conversion of convertible bonds 11,835,579 1 Dividend paid – 2004 (note 12) - (341,097,071) (34 At 31 December 2005 1,102,612,584 15,304,585 2,862,371,514 36,838,020 633,591,663 4,6 =========== =========== =========== =========== =========== == Notes: (a) Share premium During the year, the Company issued additional shares out of the share premium in the ratio 10:5 to all shareholders. After taking into acco conversion of convertible bonds up to the date of capitalisation issue, a total of 1,136,990,237 shares with a par value of RMB1 each were 111 China V Financial statements for the year ended 31 D addition to the total share capital of 2,273,980,474 shares as at 28 June 2005. 112 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 (b) Statutory reserves Statutory reserves include the following items: (i) Statutory surplus reserve According to the PRC Company Law, the Company is required to transfer 10% of its profit after taxation, as determined under PRC Accounting Regulations, to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders. Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital. (ii) Statutory public welfare fund In prior years, according to the PRC Company Law, the Company was required to transfer 5% to 10% of its profit after taxation, as determined under PRC Accounting Regulations, to the statutory public welfare fund. This fund could only be utilised on capital items for the collective benefits of the Group’s employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund was non-distributable other than in liquidation. The transfer to this reserve must be made before distribution of a dividend to shareholders. During the year, after the amendment of the PRC Company Law, the company was not required to transfer profit after taxation to the statutory public welfare fund. The directors did not recommend any transfer of profit to the statutory public welfare fund during the year. (iii) Discretionary surplus reserve The transfer to this reserve from the consolidated income statement and its usage are subject to the approval of shareholders at general meetings. (c) Convertible bonds reserve Convertible bonds reserve comprises the value of option granted to bondholders to convert their convertible bonds into A shares of the Company (see note 28). (d) Retained profits According to the PRC Company Law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IFRS. As of 31 December 2005 the reserve available for distribution was RMB613,894,468 (2004: RMB414,846,412). 113 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 26 Minority interests 2005 2004 At 1 January 102,248,755 59,101,291 Profit attributable to minority interests for the year 50,959,692 34,647,464 Capital injection 12,281,000 1,000,000 Dividend paid to minority interests (50,000,000) - Acquisition of subsidiaries 425,606,376 7,500,000 At 31 December 541,095,823 102,248,755 ========== ========== 27 Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group’s interest- bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign exchange risk, please refer to note 35. 2005 2004 Non-current Secured bank loans 435,123,480 350,743,475 Unsecured - bank loans 359,765,700 350,000,000 - other borrowings 386,393,533 198,950,000 1,181,282,713 899,693,475 ========== ========== 2005 2004 Other borrowings represents: Proceeds 400,000,000 198,950,000 Transaction costs (13,606,467) - 386,393,533 198,950,000 ========== ========== At 31 December 2005, bank loans and other borrowings were repayable as follows: 2005 2004 After one year but within two years 1,181,282,713 268,950,000 After two years but within five years - 630,743,475 1,181,282,713 899,693,475 =========== =========== 114 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 27 Interest-bearing loans and borrowings (continued) 2005 2004 Current Unsecured - bank loans 900,000,000 795,000,000 - current portion of long term bank loans 284,030,000 60,000,000 - current portion of long term other borrowings 378,950,000 254,361,599 1,562,980,000 1,109,361,599 =========== =========== 2005 2004 Other borrowings represent: Proceeds 378,950,000 260,200,000 Transaction costs - (5,838,401) 378,950,000 254,361,599 =========== =========== The secured bank loans of RMB435,123,480 as at 31 December 2005 (2004: RMB350,743,475) are secured over certain properties held for development and properties under development with aggregate carrying value of RMB1,135 million (2004: RMB520 million) and the Group’s interests in certain subsidiaries with total net asset value of RMB85 million (2004: RMB67 million). 115 27 Interest-bearing loans and borrowings (continued) The Group’s total bank loans outstanding at the end of 2005 and 2004 are analysed as follows: Type Original amount Effective interest rate Fixed/floa 2005 2004 2005 2004 2005 RMB denominated bank loans 550,000,000 635,000,000 5.58% 5.04%-5.31% Fixed RMB denominated bank loans 530,000,000 220,000,000 5.08%-5.76% 5.31%-5.58% Fixed HKD denominated bank loans 104,030,000 159,555,000 HIBOR+3.15% HIBOR+3.15% Floating RMB denominated bank loans 554,000,000 70,000,000 5.18%-5.76% 5.49% Fixed HKD denominated bank loan 19,765,700 - HIBOR+1.75% - Floating RMB denominated bank loans - 280,000,000 - 5.49% - USD denominated bank loans 221,123,480 191,188,475 LIBOR+4.25% LIBOR+4.25% Floating RMB denominated other borrowing 198,950,000 - 4.00% - Fixed RMB denominated other borrowing 180,000,000 260,200,000 5.18% 4.50% Fixed RMB denominated other borrowings 400,000,000 198,950,000 5.18% 4.00% Fixed 2,757,869,180 2,014,893,475 ========== ========== Other borrowings represent borrowings from a non-bank financial institution, which are guaranteed by a bank. 28 Convertible bonds 2005 Convertible Converti bonds bon issued in 2004 issued in 20 Proceeds from issue of 15,000,000 convertible bonds of RMB100 each - Proceeds from issue of 19,900,000 convertible bonds of RMB 100 each 1,990,000,000 1,990,000,0 Transaction costs (37,112,421) (37,112,4 Net proceeds 1,952,887,579 1,952,887,5 Amount classified as equity (Note) (82,585,582) (82,585,5 Conversion into A shares (1,061,651,229) Redemption of convertible bonds - Discount released to share premium upon conversion (11,835,579) Transaction costs released to share premium upon conversion 15,345,816 Discount on convertible bonds amortised 23,284,839 5,756,2 Transaction costs amortised 8,059,355 1,777,1 Carrying value of liability at 31 December 843,505,199 1,877,835,4 =========== ========= 116 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 28 Convertible bonds (continued) Note: The amount of the convertible bonds initially recognised in equity is net of attributable transaction costs of RMB2,860,769 (2004: RMB2,860,769). On 24 September 2004, the Company issued convertible bonds (the “2004 Bonds”) amounting to RMB1,990,000,000. The 2004 Bonds are listed on the Shenzhen Stock Exchange (the “Stock Exchange”) and are guaranteed by the Agricultural Bank of China Shenzhen branch. Each 2004 Bond will, at the option of the holder, be convertible from 24 March 2005 to 24 September 2009 into A shares with a par value of RMB1 each of the Company (“A Shares”) at a conversion price of RMB5.48 per share. The conversion price of the 2004 Bonds will be adjusted accordingly if the Company distribute bonus issues, dividends, right issues and increase the share capital (not including the share issue upon conversion of the 2004 Bonds) which lead to change in equity of the Company. On 29 June 2005, the conversion price was adjusted to RMB3.55 per share upon distribution of dividends and additional ordinary shares issued out of share premium in the ratio 10:5. The 2004 Bonds are interest bearing at a rate of 1%, 1.375%, 1.75%, 2.125% and 2.5% per annum payable in arrears on 24 September 2005, 2006, 2007, 2008 and 2009 respectively. The Company will redeem all the unconverted 2004 Bonds after 5 working days of the expiry date at a price of 107% of the par value, which includes the accrued interest for the year ending 24 September 2009. The Board of Directors of the Company can lower the conversion price of the 2004 Bonds by not more than 20% if the closing price of the Company’s A shares on the Stock Exchange is lower than 70% of the conversion price for 20 consecutive dealing days. The Company may redeem in whole or in part the 2004 Bonds from 6 months after 24 September 2004 if the closing price of the Company’s A shares on the Stock Exchange is at least 130% of the conversion price for 20 consecutive dealing days. The redemption prices will be par value plus accrued interest for the respective year. The bondholders may require the Company to redeem all or part of the 2004 Bonds from 6 months after 24 September 2004 if the closing price of the A shares on the Stock Exchange is lower than 60% of the conversion price for 20 consecutive trading days. The redemption prices will be 101% of the par value plus the accrued interest for the respective year. Accordingly, the redemption prices will be 102.375%, 102.75%, 103.125% and 103.5% for the years ending 24 September 2006, 2007, 2008 and 2009 respectively. 28 Convertible bonds (continued) From 4 January 2006 to 21 February 2006, the closing prices of the Company’s A shares on the Stock Exchange were over 130% of the conversion price of RMB3.55 per share for 28 consecutive days. The Company decided to exercise the right to redeem the convertible bonds outstanding in whole. The redemption date will be 7 April 2006 and the redemption price will be 101.375% of the par value. 117 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 29 Other long term liabilities Other long term liabilities represent consideration payable in connection with acquisition of subsidiaries (see note 4) and is due for settlement by instalments throughout the period to 2007 pursuant to the relevant agreements. 30 Trade and other payables 2005 2004 RMB RMB Trade payable 3,318,835,002 2,424,131,909 Bills payable 3,781,990 - Amounts due to associates 15,261,942 8,304,747 Amounts due to jointly controlled entities - 87,894,535 Deposits received in advance 4,664,152,791 2,166,856,261 Other payables and accrued expenses 1,254,473,969 354,068,426 9,256,505,694 5,041,255,878 =========== =========== All of the trade and other payables are expected to be settled within one year. Included in trade and other payables are the following amounts denominated in a currency other than the functional currencies of subsidiaries to which they relate: 2005 2004 United States Dollars USD 11,999,98 USD - 0 Hong Kong Dollars HKD 9,981,912 HKD 246,471 ======== ======== 31 Provisions Compensation Claims to customers Total Balance at 1 January 2004 16,351,012 2,162,120 18,513,132 Provisions made during the year 33,718,658 - 33,718,658 Provisions used during the year (31,069,670) (2,020,554) (33,090,224) Balance at 31 December 2004 19,000,000 141,566 19,141,566 ========= ========= ========= Balance at 1 January 2005 19,000,000 141,566 19,141,566 Provisions (reversed) /made during the year (3,307,198) 23,979,011 20,671,813 Provisions used during the year (15,692,802) (141,566) (15,834,368) Balance at 31 December 2005 - 23,979,011 23,979,011 ========= ========= ========= Claims 118 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 In 2002, a subsidiary was sued by a contractor (the “plaintiff”) in respect of payment of construction costs of a project in Tianjin No.1 Intermediate People’s Court (the “Intermediate Court”). On 24 December 2004, the Intermediate Court made a first judgement that the Group was required to pay RMB28,674,786 to the plaintiff, including RMB24,506,180 for the construction costs, RMB30,000 for compensation, RMB538,606 for legal expenses and related interest expense which was estimated to be RMB3,600,000. The Group appealed to the Tianjin People’s High Court on 6 January 2005. On 30 September 2005, Tianjin People’s High Court made a final judgement that the Group was required to pay RMB11,601,446 and 3 properties with total area of 967 square metre to the plaintiff. As at 31 December 2005, the properties and RMB6,000,000 were paid to the plaintiff and the remaining balance of RMB5,601,446, which was recorded under “Trade and other payables”, will be settled in 2006. Compensation to customers The balance represented the estimated expenses to be incurred in relation to property management, maintenance and services provided to customers. 32 Material related party transactions (a) Reference should be made to the following notes regarding related parties: Associates (notes 17, 22, 30) Jointly controlled entities (notes 18, 22, 30) Key management personnel (see note (b) below) (b) Key management personnel compensations The key management personnel compensations are as follows: 2005 2004 Short-term employee benefits 22,403,000 16,334,000 Post-employment benefits 334,000 292,000 22,737,000 16,626,000 ========= ========= The above compensations are included in “personnel expenses” (see note 8). Save for the above, the Group also provides non-monetary employee benefits to the key management personnel in the form of purchase discount on sale of the Group’s properties to the key management personnel. The details of such transactions are as follows: 2005 2004 Sales of properties to the key management personnel 9,772,000 2,340,000 Related cost of sales (6,241,000) (2,466,000) Gross profit/(loss) 3,531,000 (126,000) ========== ========== 119 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Estimated fair value of the properties sold to the key management personnel 14,778,000 3,882,000 ========== ========== All the above were approved by the Board of Directors as a kind of employment benefits to the key management personnel. Apart from the above, during the year, certain key management personnel purchased properties from the Group at market price with total value of RMB407,000 (2004: RMB3,518,000). 33 Operating leases (a) Leases as lessee At 31 December, non-cancellable operating leases are payable as follows: 2005 2004 Not later than one year 6,427,558 1,658,976 Between one and five years 7,975,748 3,281,146 Later than five years 2,113,312 649,130 16,516,618 5,589,252 ========= ========= Total rental expenses for all operating leases were RMB17 million for the year (2004: RMB16 million). The operating leases mainly relate to the rental payments for offices. The leases typically run for an initial period of between two to ten years. None of the leases includes contingent rentals. (b) Leases as lessor The Group leases out certain properties under non-cancellable operating leases. Rentals are receivable as follows: 2005 2004 Not later than one year 21,142,269 20,125,152 Between one and five years 74,167,156 76,481,532 Later than five years 74,869,141 79,804,871 170,178,566 176,411,555 ========= ========= Total rental income for all operating leases was RMB29 million (2004: RMB27 million) which has been included in revenue and expenses of RMB25 million (2004: RMB26 million) were charged to the consolidated income statement relating to investment properties. The operating leases mainly relate to the rental income for shops. The leases typically run for an initial period of between two to five years. None of the leases includes contingent rentals. 120 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 34 Capital commitments and contingent liabilities (a) Capital commitments Capital commitments outstanding at 31 December not provided for in the financial statements were as follows: 2005 2004 Contracted for 5,622,000,000 2,994,290,251 Authorised but not contracted 469,000,000 1,507,850,000 6,091,000,000 4,502,140,251 =========== =========== (b) Contingent liabilities As at 31 December 2005, there were contingent liabilities in respect of guarantees given by the Group to banks to secure the mortgage arrangement of property buyers. The outstanding guarantees to the banks amounted to RMB6,748 million (2004: RMB5,100 million), including guarantees of RMB4,930 million (2004: RMB3,070 million) which will be terminated upon the completion of the transfer procedures with the buyers in respect of the legal title of the properties, and guarantees of RMB1,818 million (2004: RMB2,030 million) which will be terminated upon full repayment of mortgage loans by buyers to the banks. 121 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 35 Financial instruments Exposure to interest rate, credit, liquidity and currency risks arises in the normal course of the Group’s business. The risks are limited by the Group’s financial management policies and practices described below. (a) Interest rate risk The interest rates and terms of repayment of bank loans and other borrowings of the Group are disclosed in note 27 to the financial statements. The interest rates and terms of the convertible bonds are disclosed in note 28 to the financial statements. (b) Credit risk The Group’s credit risk is primarily attributable to trade and other receivables. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. In respect of trade receivables, credit risk is minimised as the Group normally receives full payment from buyers before transfer of property legal title. In respect of other receivables, the Group chases the debtors to settle outstanding balances and monitors the settlement progress on an ongoing basis. Normally, the Group does not obtain collateral from debtors. The impairment losses on bad and doubtful accounts are within management’s expectation. (c) Liquidity risk The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer terms. (d) Foreign exchange risk The Group is exposed to foreign currency risk primarily borrowings that are denominated in a currency other than the functional currency of the operations to which they relate. The currencies giving rise to this risk are primarily US dollars and HK dollars. (d) Foreign exchange risk Substantially all the Group’s cash flows are denominated in RMB. Apart from the US dollar and HK dollar denominated trade and other receivables, cash and cash equivalents, bank loans and trade and other payables as disclosed in notes 22, 23, 27 and 30 to the financial statements respectively, the Group has no material balance 122 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 sheet exposure in respect of the subsidiaries’ net monetary assets denominated in foreign currencies. (e) Fair value The fair values of cash and cash equivalents, trade and other receivables, trade and other payables and bank loans and other borrowings are not materially different from their carrying amounts. Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (f) Sensitivity analysis In managing interest rate and currency risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer-term, however, permanent changes in interest rates would have an impact on consolidated earnings. At 31 December 2005, it is estimated that a general increase of one percentage point in interest rates would decrease the Group’s profit before tax by approximately RMB4.7 million (2004: RMB7.5 million). 36 Post balance sheet event (i) On 18 January 2006, the Group entered into an agreement with an independent third party to acquire 60% equity interests in Beijing Chao Wan Property Development Centre Company Limited (“Beijing Chao Wan”) at a consideration of RMB389 million, payable by cash. The principal activity of Beijing Chao Wan is property development in the PRC. (ii) On 22 February 2006, the Company decided to exercise the right to redeem the convertible bonds outstanding in whole. Details are disclosed in note 28. 37 Comparative figures Certain comparative figures have been adjusted or reclassified as a result of the changes in accounting policies. Further details are disclosed in note 2. Certain comparative figures have also been reclassified to confirm with the current year’s presentation. Further details are disclosed in note 3. 38 Accounting estimates and judgments Key sources of estimation uncertainty Note 35 contains information about the assumptions relating to financial instruments. Other key sources of estimation uncertainty are as follows: (i) Development costs directly attributable to property development activities 123 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 The Group allocates portions of development costs to properties under development and completed properties for sale. As majority of the Group’s property development projects is developed and completed by phases over one year, the budgeted development costs of the whole project are dependent on estimating the total outcome of the constructions, based on the work done to date. Based on the Group’s experience and the nature of the constructions undertaken by the Group, the Group makes estimates and assumptions concerning the future events that are believed to be reasonable under the circumstances. Given the uncertainties involved in property development activities, the related actual results may be higher or lower than estimated at the balance sheet date. Any change in estimates and assumptions would affect the profit or loss in future years as an adjustment to the amounts recorded to date. (ii) Impairment provision for investment properties and properties held for development As explained in note 1(g) and 1(k), the Group makes impairment provision for the above properties taking into account the Group’s estimates of the recoverable amount from such properties. Given the volatility of the PRC property market, the actual recoverable amount may be higher or lower than estimated at the balance sheet date. Any increase or decrease in the provision would affect profit or loss in future years. (iii) Provision for completed properties for sale and properties under development As explained in notes 1(n) and 1(o), the Group’s completed properties for sale and properties under development are stated at the lower of cost and net realisable value. Based on the Group’s recent experience and the nature of the subject properties, the Group makes estimates of the selling prices, the costs of completion in case for properties under development, and the costs to be incurred in selling the properties. Given the volatility of the PRC property market and the unique nature of individual properties, the actual outcomes in terms of costs and revenue may be higher or lower than estimated at the balance sheet date. Any increase or decrease in the provision would affect profit or loss in future years. 39 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2005 Up to the date of issue of these financial statements, the IASB has issued the following amendments, new standards and interpretations which are not yet effective for the accounting period ended 31 December 2005 and which have not been adopted in these financial statements: Effective for accounting periods beginning on or after IFRS 6, Exploration for and evaluation of mineral resources 1 January 2006 IFRIC 4, Determining whether an arrangement contains a lease 1 January 2006 IFRIC 5, Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds 1 January 2006 IFRIC 6, Liabilities arising from 124 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 participating in a specific market - Waste electrical and electronic equipment 1 December 2005 IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies 1 March 2006 IFRIC 8, Scope of IFRS 2 1 May 2006 Amendments to IAS 19, Employee benefits - Actuarial Gains and Losses, Group Plans and Disclosures 1 January 2006 Amendments to IAS 39, Financial instruments: Recognition and measurement: - Cash flow hedge accounting of forecast intragroup transactions 1 January 2006 - The fair value option 1 January 2006 - Financial guarantee contracts 1 January 2006 IFRS 7, Financial instruments: disclosures 1 January 2007 Amendment to IAS 1, Presentation of financial statements: capital disclosures 1 January 2007 39 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2005 (continued) The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application but is not in a position to state whether these new IFRSs would have a significant impact on the Group’s results of operations and financial position. 125 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2005 Net Impact of IFRS Adjustments on the Results and Net Assets for the year ended 31 December 2005 (Expressed in Renminbi Yuan) Profit attributable Net assets as to equity shareholders attributable to equity of the Company shareholders of the for the year ended Company at 31 December 31 December 2005 2005 As determined pursuant to PRC accounting regulations 1,350,362,817 8,309,602,557 Adjustments to align with IFRS: Recognition and amortisation of negative goodwill (778,683) 2,978,900 Recognition and amortisation of goodwill 8,441,783 8,441,783 Deferred tax assets 17,768,942 25,650,972 Revaluation of properties 225,940 (16,762,845) Capitalised borrowing costs released to cost of sales (11,330,946) (44,260,035) Transaction costs released to share premium upon conversion of convertible bonds - (980,586) Discount released to share premium upon conversion 51,897,270 of convertible bonds - Discount on convertible bonds - 36,838,020 As restated in conformity with IFRS 1,364,689,853 8,373,406,036 =========== ============= 126