本钢板材(000761)本钢板Ｂ2005年年度报告（英文版）

本钢板材股份有限公司 BENGANG STEEL PLATES CO., LTD. Annual Report 2005 (Prepared Under International Accounting Standard) March 11th 2006 Important Notes The members of the Board and the Company acknowledge being responsible for the truthfulness, accuracy, and completeness of the announcement. Not any false record, misleading statement or significant omission carried in this announcement. No director against the guarantee about the authenticity, accuracy and integrality of this report’s content. Beijing TIN WHA CPAs and Ho and Ho & Company CPAs issued the standard audit report for the Company with the fair and true opinion. The Chairman of the Board and General Manager– Mr. Li Mohua, Accounting Superior – Mr. Zhang Guohua hereby declare: the truthfulness and completeness of the report are guaranteed. This report is prepared both in English and Chinese. When there is any conflict in understanding, the Chinese version shall prevail. 0 Table of Contents I. Company Profile................................................................................................................................2 II. Financial Highlight...........................................................................................................................3 III. The change of the capital stock and shareholder's situation............................................................6 IV. Particulars about the Directors, Supervisors and Employees ..........................................................9 V. Management structure ....................................................................................................................13 VI. The Shareholders’ Meeting ...........................................................................................................15 VII. Report of the Board of Directors .................................................................................................16 VIII. Report of the Supervisory Committee........................................................................................24 IX. Significant Events.........................................................................................................................25 X．Financial Report...........................................................................................................................34 XI．Documents for Reference ...........................................................................................................34 1 I. Company Profile 1. Name of the Company in Chinese: 本钢板材股份有限公司 In English: BENGANG STEEL PLATES CO., LTD. Legal name in short form: BSP 2. Legal Representative: Mr. Li Mohua 3. Secretary of the Board: Mr. Liang Guangde Liaison of stock affair: Mr. Lu Xiaoyong Address: No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province Tel: 0414－7828360 7828010 Fax: 0414－7824158 7827004 E-mail: bgbcgdl@online.ln.cn 4. Registered address: 18th Gangtie Road, Pingshan, Benxi, Liaoning Post Code: 117000 E-mail: bgbctwg@mail.bxptt.ln.cn 5. Information disclosure media stipulated by the company: China Securities Journal, Security Times, Hong Kong Commercial Daily Annual reports also published online at: http://www.cninfo.com.cn Place where the annual report is prepared and ready for reference: Stock Affair Department, No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province 6. Stock listed in: Shenzhen Stock Exchange (1) Short Form of B-Shares: BENGANGBAN-B Stock Code: 200761 (2) Short Form of the Stock of A-Share: BENGANGBANCAI Stock Code: 000761 7. Misc. information: Business registration renewed on: April 28, 1999 Business registration renewed with: Liaoning Provincial Commerce & Industry Administration Bureau Business license number: 2100001049024 Taxation registration number: 210502242690243 Public accountant invited by the Company: Beijing TIN WHA CPA Address: 17th Floor, Zhonghua Building, Fuxingmenwai Street, Beijing Ho and Ho & Company CPAs Address: Room 304, Leunfa Business Center, No. 2-12 Queen’s Road West, Hong Kong 2 II. Financial Highlight 1. Amount of Profit and Formulation In RMB’000 Items Indices Gross profit 864,099.00 Net profit 591,217.00 Net profit deducted non-recurring gain/loss 594,162.32 Major business profit 1,098,463.00 Other business profit 22,179.00 Operation profit 870,064.00 Net Cash flow generated by business operation 1,391,115.00 Net increasing of cash and cash equivalents 1,059,979.00 Note: Non-recurring gain/loss excluded are Gain/loss from disposal of fixed assets -5,155.00 None-business expenses deducting impairment provision 759.00 Impairment provisions carried back - Impact of income tax of above items 1,450.68 Total -2,945.32 2. Major accounting data and finance index in the prior 3 years of the Company (Unit: RMB’000) Items 2005 2004 2003 Major business turnover 20,182,458.00 17,349,451.00 11,210,196.00 Net profit 591,217.00 700,425.00 473,512.00 Gross Assets 7,920,607.00 8,164,472.00 7,398,116.00 Shareholders’ Equity (Exclude Minority Shareholders’ Equity) 5,483,628.00 5,119,611.00 4,646,386.00 Earnings per share (diluted) 0.52 0.62 0.42 Net asset per share 4.8271 4.5067 4.0901 Net asset per share, adjusted 4.8253 4.5034 4.0867 Net Cash flow per share generated by business operation 1.22 1.78 0.75 Earnings per share after deducting of non-recurring gain/loss 0.52 0.62 0.41 Net earnings / capital ratio (diluted) 10.78% 13.68% 10.19% Net earnings / capital ratio after deducting of non-recurring gain/loss (diluted) 10.84% 13.70% 9.93% 3 3. Profit Statement Attach Table 2005 2004 Net earnings / capital Net earnings / capital Profit of the report ratio (%) Per Share Income ratio (%) Earnings per share period On full On full On full On full amortizing weighted amortizing weighted amortizing weighted amortizing weighted basis average basis average basis average basis average Major business profit 20.03% 20.72% 0.9670 0.9670 23.59% 24.17% 1.0632 1.0632 Operation profit 15.87% 16.41% 0.7659 0.7659 18.42% 18.88% 0.8302 0.8302 Net profit 10.78% 11.15% 0.5204 0.5204 13.68% 14.02% 0.6166 0.6166 Earnings per share after deducting of non-recurring gain/loss Profit after equity 10.84% 11.21% 0.5230 0.5230 13.70% 14.04% 0.6174 0.6174 4. The status of shareholders’ equity movement In RMB’000 Total of Share Capital Reserves Statutory Un-distributed shareholders’ Items capital premium re-evaluated reserves profit equity Initial 1,136,000.00 1,403,670.00 292,081.00 491,684.00 1,796,176.00 3,983,611.00 Increased this year 94,833.00 594,815.00 689,648.00 Decreased this year 3,598.00 322,033.00 325,631.00 At the end of term 1,136,000.00 1,403,670.00 288,483.00 586,517.00 2,068,958.00 4,347,628.00 Reason of change 1} Reserves re-evaluated has decreased by RMB3,598,000 was caused by treatment of fixed assets re-evaluated. 2} Increasing of statutory reserves was caused by providing of statutory reserves against the net profit realized in the year. 3} The profit not distributed has increased by RMB594,815,000, which was due to the net profit realized in the year. The decreasing of RMB322,033,000 was due to distribution of dividend and providing of statutory reserves of previous year. 4 5. Diversity between the financial statements prepared under China Accounting Standard and “International Financial Report Standard”. Year 2005 Year 2004 RMB’000 RMB’000 Net profit carried by the financial statements under China Accounting Standard 632,216 732,062 Adjustment - Depreciation drawn on increasing of fixed assets (42,486) (2,532) - Properties, plant and equipment revised (3,598) (29,683) - Defered taxation 3,894 - - Gains from debt reconstruction 1,191 578 (40,999) (31,637) Net profit carried by the financial statements under International Financial Report Standard 591,217 700,425 The followings are the analysing on the influence of significant diversity between the two accounting system on the shareholders’ equity: Year 2005 Year 2004 RMB’000 RMB’000 Shareholders’ equity prepared under China Accounting Standard 5,308,918 4,902,711 Adjustment: - Depreciation drawn on increasing of fixed assets 321,764 321,764 - Buildings, plant and equipment revised (132,380) (89,894) - Defered taxation (33,281) (29,683) - Gains from debt reconstruction 18,607 14,713 174,710 216,900 Shareholders’ equity prepared under International Financial Report Standard 5,483,628 5,119,611 5 III. The change of the capital stock and shareholder's situation (I) Movement of Capital Share 1. Share movement table of the Company (End on 31th Dec. 2004 Unit: share) Before the change Changed (+,-) After the changed Amount Proportion Sub-total Amount Proportion I. None negotiable shares 616,020,000 54.23% 0 616,020,000 54.23% 1. Promoter’s shares 616,000,000 54.23% 0 616,000,000 54.23% Incl. State-owned shares 616,000,000 54.23% 0 616,000,000 54.23% Domestic legal person shares 0 0.00 0 0 0.00% Overseas legal person shares 0 0.00% 0 0 0.00% Others 0 0.00% 0 0 0.00% 2. Legal person shares placed 0 0.00% 0 0 0.00% 3. Employees’ shares 20,000 0.00% 0 20,000 0.00% 4. Preference shares or others 0 0.00% 0 0 0.00% II. Negotiable shares 519,980,000 45.77% 0 519,980,000 45.77% 1. Common shares in RMB 119,980,000 10.56% 0 119,980,000 10.56% 2. Foreign shares in domestic market 400,000,000 35.21% 0 400,000,000 35.21% 3. Foreign shares in overseas market 0 0.00% 0 0 0.00% 4. Others 0 0.00% 0 0 0.00% III. Total of capital shares 1,136,000,000 100.00% 0 1,136,000,000 100.00% 2. The issuance of stocks and listing situation (1) Share placing status in 3 years prior to the end of the report term The Company issued shares once in 3 years prior to the end of the report term. The Company issued domestic listing foreign capitals share (B-share) 400 million shares in Shenzhen Stock Exchange, the placing price is HKD2.38 on Oct. 12th 1997, the listing date was on July 8 , 1997 and the quantity was 400 million shares that got permission to be listed circulating. On November 3, 1997, issued the domestic listing RMB common stock (A-Share) 120 million shares in Shenzhen Stock Exchange, issue price is RMB5. 40, listing date was January 15th, 1998, the quantity was 108 million shares that got permission to be listed circulating. The issued to society 12 million shares of the 120 million RMB common stock was staff shares, the issuing date was November 3 , 1997, the issue price was RMB5. 40, company's staff shares were listed and circulated on July 16, 1998. The listing quantity is 11,970,000 shares to get permission this year and still have 30,000 shares which was held by senior executives were frozen. (2) Neither of the total share capital nor the share structure of the Company has been changed in the report term. 6 (II) Shareholder status 1. The total amount of shareholders is 82297 at the end of report term. 2. Holding status of the top 10 shareholders (End of Dec. 31th 2005) Properties of Share proportion Name of the shareholder Total shares shareholder % Benxi Steel (Group) Co., Ltd. State-owned 54.23%616,000,000 DEUTCHE BANK AG LONDON Foreign shares 0.43% 4,926,934 MORGAN STANLEY Foreign shares 0.27% 3,012,400 INT'L(CHINA)-FIRM Li Weiqin Foreign shares 0.24% 2,773,100 Dacheng Value-Adding Securities Investment Others 0.18% 2,000,000 Foundation Fang Yijun Foreign shares 0.17% 1,785,740 Huang Liandi Foreign shares 0.15% 1,763,924 Zhang Zukun Foreign shares 0.15% 1,690,000 NG CHARN FAI Foreign shares 0.14% 1,586,400 CUOTAI JUNAN SECURIES HONG KONG Foreign shares 0.13% 1,479,100 LIMITED Note:It is unknown to the Company whether there is any related connection or “Action in Concert” as described by Rules of Information Disclosing Regarding Changing of Shareholding Status of Listed Companies” existing among the above shareholders. 3. The introduction of controlling shareholder's status of the Company Name of controlling shareholder: Benxi Steel (Group) Co., Ltd. Legal representative: Zhang Yingfu Established date: July 10th 1996 Registration Capital: RMB 4,700 million Company's classification: State-own proprietorship, Authorized Business Business scope: steel smelt, mine exploitation, panel rolling, oxygen manufacturing, pipe manufacturing, power generating, coal industry, special steel material manufacturing, heating, supply of the water, electricity, wind and gas, metal processing, electro mechanics builds, device manufacturing, architecture installation, railway, highway transportation, import and export trade, traveling industry, construction material , refractory material , counting device instrument , goods and materials supply and marketing, development of real estate , scientific research , design , information service ,etc.. Authorized operate and manage state-own assets. The property right and control relationship between the Company and actual controller are shown as the follow picture: 7 State-own assets committee of Liaoning Province 100% Benxi Steel (Group) Co. Ltd. 54.23% Bengang Steel Plate Co. Ltd 4. There is no legal person shareholders holding shares more than 10% (including 10%) except for the controlling shareholder Benxi Steel (Group) Co. Ltd. of the Company. 5. Holding status of the top 10 currency share shareholders (End of Dec. 31th 2005) Name of the shareholder Current shares held Category of shares Foreign shares placed DEUTCHE BANK AG LONDON 4,926,934 in domestic exchange Foreign shares placed MORGAN STANLEY INT'L(CHINA)-FIRM 3,012,400 in domestic exchange Foreign shares placed Li Weiqin 2,773,100 in domestic exchange Dacheng Value-Adding Securities Investment Foundation 2,000,000 RMB common shares Foreign shares placed Fang Yijun 1,785,740 in domestic exchange Foreign shares placed Huang Liandi 1,763,924 in domestic exchange Foreign shares placed Zhang Zukun 1,690,000 in domestic exchange Foreign shares placed NG CHARN FAI 1,586,400 in domestic exchange Foreign shares placed CUOTAI JUNAN SECURIES HONG KONG LIMITED 1,479,100 in domestic exchange Foreign shares placed HSBC FUND SERVICES A/C 006-113039-431 1,361,000 in domestic exchange Note: the related transaction relationship between this the top 10 currency share shareholders are unknown. 8 IV. Particulars about the Directors, Supervisors and Employees (I) Profiles of the directors, supervisors and senior executives of the Company Hold Hold share at share at Name Sex Age Position Job term the beginning Remarks the end of of the year the year Chairman of the July 26th Li Mohua Male 57 Board,General 2003-July Manager 26th 2006 Get reward July 26th Yu Vice Chairman of form Male 53 2003-July 10000 10000 Tianzhen the Board Shareholder 26th 2006 Unit Director,Vice General manager July 26th Liang Male 51 and 2003-July 10000 10000 Guangde Secretary of The 26th 2006 Board of Directors Get reward July 26th form Liyu Male 50 Director 2003-July Shareholder 26th 2006 Unit July 26th Zhang Male 46 Director 2003-July Guiyu 26th 2006 July 26th Zhong Independent Female 50 2003-July Tianli Director 26th 2006 July 26th Xue Independent Male 52 2003-July Xiangxin Director 26th 2006 Chairman of July 26th Liu Male 53 Supervisory 2003-July Junyou Committee 26th 2006 Get reward Vice Chairman of July 26th He form Male 55 Supervisory 2003-July Yusheng Shareholder Committee 26th 2006 Unit Get reward May 25th form Yu Ping Female 53 Supervisor 2004-May Shareholder 25th 2007 Unit Employee July 26th Zhang Male 56 Representative 2003-July Fuchen Supervisor 26th 2006 Employee May 25th Li Male 40 Representative 2004-May Bingqiang Supervisor 25th 2007 March 17th Zhang Vice General Male 52 2005 – Mart Guohua Manager 17th 2008 Total 20,000 20,000 Note: Remunerations for directors, supervisors, and senior executives were distributed according to the regulations formulated by the Company and on monthly basis. 9 (II) Major working experience of director and supervisor Profies of the directors: Li Mohua, Male, age 56, postgraduate degree, senior economist, Mr. Li once held the position of Minister of propaganda department , Vice director of Bengang No.2 Steel Factory; Manager and secretary of Party Committee of Bengang Roller Factory and Roller Casting Company; director and secretary of Party Committee of Bengang Group Co. No.2 Steel Factory; the standing commissioner of Party Committee and vice general manager of Bengang Group Co.; Mr. Li now is taking the position of the standing commissioner of Party Committee of Bengang Group Co. and the chairman of the board and general manager of Bengang Steel Plate Co., Ltd.. Yu Tianzhen, Male, age 52, postgraduate degree, senior economist, Mr. Yu once held the position of Minister of propaganda department of Bengang No.2 Steel Factory; secretary and vice secretary of Party Committee of Bengang Construction Company; General Manager of No.3 Construction Company; secretary of Party Committee and chairman of the board of Bengang Construction Co.; Vice General manager of Bengang Group Co; Mr. Yu is now taking the position of Vice chairman of the board, general manager and vice secretary of Party Committee of Bengang Group Co. and vice chairman of the board of Bengang Co., Ltd.. Liang Guangde, Male, age 50, postgraduate degree, senior engineer, Mr. Liang once held the position of vice factory director and director of Bengang No. 2 steel-making Factory; factory director of Cold-rolled sheet metal Factory of Bengang Group; factory director of Hot Continuous Rolling factory of Bengang Steel Plate Co., Ltd.; Mr. Liang is now taking the position of vice general manager and secretary of the Board of Directors of Bengang Steel Plate Co., Ltd.. Liyu, Male, age 49, Master degree, senior accountant, Mr. Li once held the position of vice section chief of Cost office of finance department and section chief of taxation office of Bengang Co., Ltd..; minister of finance office and minister of pricing office of Bengang Co., Ltd..; Mr. Li is now taking the position of vice general accountant of Bengang Group Co. Zhang Guiyu, Male, age of 45, University degree, senior engineer, Mr. Zhang once held the position of director assistant, vice director and acting factory director of Steel-making Factory; Mr. Zhang is now taking the position of director of Steel-making Factory. Profiles of the independent directors: Zhong Tianli, Female, age 49, she is the professor of North-east University Business School and president of Financial Management Institute. She was studied in the finance of the Northeastern finance and economics university from September of 1978 to July of 1982, obtained the bachelor's degree of economics; Studied as a graduate student in the Northeastern accountancy department of finance and economics university from September of 1986 to July of 1989, obtained the economics master's degree; Between Sept. 2000 and June 2003, she’s studying in Northeast University in doctorial course and got doctorial degree thereafter.Took the post as Singaporean Nanyang Technology University (NTU) Asia and commercial visiting researcher of research center from 10 March of 1995 to March of 1996. Xue Xiangxin, male, 51 years old, a steel metallurgical discipline doctoral supervisor of Northeastern University now, scientific and technical place division chief , Northeastern University material and metallurgical resources of metallurgical institute and chief of research institute of environmental project of Northeastern University. He was studied an academic program of metallurgical physical chemistry in the colored metallurgy of the Northeastern technical college (Northeastern University now) from 1974 to 1977. Left the school to receive training and take the post as the assistant in 1977, studied for the master's degree in the Northeastern technical college from 1980 to 1983, and obtained the master's degree in May of 1983; enter the Northeastern surface process technology research institute of technical college and work, take the post as the assistant after graduating. Studied for the doctorate, was promoted to a lecturer in 1988 in the metallurgical specialty of Northeastern technical college steel in April of 1985, and obtained the engineering doctorate in June of 1990; Promoted to the associate professor in June of 1991; Promoted to a professor in 1998. Profiles of the supervisors: Liu Junyou, male, 52 years old, the academic credentials of the university, senior political and ideological work teacher. Mr. Liu once held the position of directors of Party Committee of Benxi Subordinate Institution of municipal Party committee of the Communist Party of China; propaganda ministers and committee members of the Benxi Communist Party of China municipal Party subordinate committee of working committee of organization,; director of Supervisory Bureau of Benxi , member of leading Party group; vice director of management committee of hot spring development district, member of leading Party; director of Benxi office of building materials industry, member of Party Committee; vice Secretary, member of leading Party group of Benxi Gongyuan cement (group); vice secretary and director of Supervisory Bureau of discipline inspection commission of Benxi; Mr. Liu is now taking the position of the standing commissioner of Party Committee, ministry of office and discipline committee director of Bengang Group. He Xusheng, male, 54 years old, college degree, senior economist, Mr. He once held the position of vice section chief of Planning office of Bengang Co., Ltd.; assistant minister of planning department and assets management division director of Bengang Group Co., Ltd.; vice-minister of enterprise management department of Bengang Group Co., Ltd; acting minister, minister of planning department of Bengang Group Co., Ltd.; He is now taking the position of the vice chief economist of Bengang Group Co., Ltd.. Zhang Fuchen, Male, 55 year old, university degree, engineer. Mr. Zhang once held the position of assistant director and vice director of Bloom Factory; chairman of labor union of Hot Continuous Rolling Factory; He is now taking the position of vice director, chairman of labor union and Discipline Committee secretary of Hot Continuous Rolling Factory. Yuping, Female, 52 years old, university degree, she was once held the position of vice director, director, assistant of director and vice section chief of audit office of Bengang Group Co., Ltd.. Li Bingqiang, Male, 39 years old, university degree, he was once held the position of vice director, 11 director of casting workshop and vice director of production department of the Company; he is now taking the position of director of sheet metal mold arrangement office of casting factory. Profiles of the Senior Executives: Zhang Guohua, Male, college graduate, certified accountant. Mr. Zhang was once the director of the accounting dept. of Bengang Group, assistant to the Chief, and Deputy Chief. He is not the Deputy General Manager and Chief of Finance & Accounting Dept. of the Company. Note: there are no statuses shown that the incumbent directors (independent directors are not included) and supervisors are working as full time or part time to other organizations but only work for shareholder’s organization. (III) Name and reason of director, supervisor and senior management people to leave their post in reporting period. Mr. Guan Dianguo no longer take the position of director of the Company in reporting period. (VI) The status of employee of the Company There are 4019 employees in position by the end of Dec.31th 2005. 1. Classified by occupations: production people are 3479, count for 86.56%; Marketing people are 49, count for 1.23%; technology people are 195, count for 4.85%; finance people are 36, count for 0.89% and administration people are 260, count for 6.47%. 2. Classified by education level: graduate degree are 21, count for 0.52%; university degree are 561, count for 13.96%; college degree are 944, count for 23.49%, secondary vocational, technical and high school degree are 1,287, count for 32.03%;others are 1,206 and count for 30.00%. 3. There are 1,948 retired employees get retirement pay form the Company. 12 V. Management structure (I) Company Administration The Company unceasingly makes progress on legal person administration structure, establishing modern organization system and operation in legally by according to the regulations and requirements of Company Law, Securities Law, Listing Company administration Principle and the Guiding Opinion of Establishing Independent Director System in Listing Company, as well as The Notification of Lift Up the Quality of Listed Companies issued by China Securities Regulatory Commission and trans-approved by the National Government. The Company and sharecontrolling shareholder – Benxi Steel (Group) Co., Ltd carried out separation on employee, finance and assets, institution and operation were independent as well. The Company formulated and passed Investor Relationship Management System and Internal Control System in the reporting period and all these contact and communication with investors strengthen company’s internal management in order to promote company’s criterion operation. (II) Independent directors’ fulfilling of duties Independent director attended the entire shareholder meeting and the board meeting and played an important role on important strategy, routine work and maintenance the legality right of the Company and entireness shareholder by according to the law, regulation and Article Association's given responsibility in reporting term. The status of independent director attends of the Board of Directors Name of Number of board Presented Presented by Absent Independent meetings shall personally consignee Remarks (Times) Director present (Times) (Times) Zhong Tianli 6 6 0 0 On business trip and Xue Xiangxin 6 4 2 0 entrusted Zhong Tian Li to vote Note: The independent director has not put forward the objection to relevant items that the Company passed. (III) Separation status in such aspects as personnel, assets, financial affairs, institution, business, etc between the Company and controlling shareholders. 1. The aspect s of personnel: The Company and controlling shareholder are separate in such aspects as labor, personnel and salary management. Such senior executives as company's chairman, general manager, vice general manager, secretary of Board of Directors, etc. get salary from the Company, and have not held the important position beyond a director in shareholder's unit. 2. Assets aspect: The Company and controlling shareholder's relationships between ownership and management of enterprises are clear, have independent purchase, production, marketing system. 13 3. Financial affairs aspect: The company has independent financial accounting, the accountant checks and calculates system and financial management system were improved are complete, applied the independent bank account and pay taxes independently. 4. Organization aspect: The internal of the Company operates independently; organization structuring and working function are totally independent. 5. Business: Company have independence improved production business plan, financial affairs check and calculate , personnel , raw material supplies and products selling business system. (IV) The Company adopted no new motivation and rewarding system for senior executives in the report term. 14 VI. The Shareholders’ Meeting The Company held shareholder meeting once in 2004. The Shareholders’ General Meeting 2004 was held on May 25th 2005. The resolutions were announced by the May 26th 2005 issues of China Securities Journal, Securities Times, and Hong Kong Commercial Daily. 15 VII. Report of the Board of Directors (I) Analyzing and discussing of operation status 1. Year 2005 was an important period for the Company to carry out scientific development strategy, overcome severe market situation, and fully implement the 10th 5-year-plan with a rapid growth. During the year, facing with the severe viberation of market, especially the declining of steel prices and overall price indices from a higher level, the Company kept on the direction of scientific development and mordern industrilization, seized the opportunities brought by the national policies of lifting up the traditional industry bases in North East China. We were concentrating on the improving of quality and product structure, kept optimizing the growth mode under the demand of market. The Company has won the leading place in the industry and achieved good economical performance. In report period, the output of steel finished 6.02 million tons, increased by 21% compared with the same period of last year; finished hot-rolled plate output 4.35 million tons, increase by 3% compared with the same period of last year. Achieved major business income of RMB 20.18 billion mainly in the whole year, increase by 16% compared with that of last year; Major business profit is RMB 1.14 billion, decreased by 6% compared with the same period of last year; Net profit is RMB0.63 billion, decreased by 14% compared with the same period of last year. Major business income and profit decreased mainly because of the declining of sales prices from the entire previous year. 2. Major business scope and its operation status The Company is engaged in the production and processing of of steel smelting, panel rolling and other relevant products. It has not been changed during the report term. The major businesses layout, the profitabilities of the major businesses, market status, asset and profit structure, and cash flow status are as the followings: (1)The distribution of major businesses income and major businesses profit of the Company. Major business Proportion in major Major business Proportion in major Products income business income profit business profit Molten steel 2,925,533,328.88 14.50% 111,317,885.00 9.76% Continuous casting billet 1,679,309,545.69 8.32% -25,024,600.91 -2.19% Hot Plate 15,547,150,012.26 77.03% 1,076,327,704.12 94.34% Disposal of materials 29,997,875.56 0.15% -21,592,189.05 -1.89% Others 467,059.49 0.00% 80,465.31 -0.01% Total 20,182,457,821.88 1,140,948,333.85 Including: related transactions 12,796,502,209.64 92,460,159.31 Molten steel 2,925,533,328.88 14.50% 111,317,885.00 9.76% Hot Plate 1,351,109,433.94 6.69% -247,339.31 -0.02% Others 8,519,859,446.82 42.21% 781,389,613.62 68.49% 16 (2)The major business income and profit status of major product distribution of the company Proportion in major Proportion in major Regions Major business income business income Major business profit business profit North 3,285,410,368.35 16.28% 185,729,781.72 16.28% North-east 9,937,367,438.15 49.24% 561,776,118.72 49.24% East 4,070,081,345.65 20.17% 230,088,553.68 20.17% Mid-south 474,449,813.42 2.35% 26,821,447.07 2.35% North-west 186,689.64 0.00% 10,553.88 0.00% Export 2,414,962,166.67 11.97% 136,521,878.79 11.97% Total 0,182,457,821.88 1,140,948,333.85 (3) The contrast status of Company’s major product distributing in area: Increased/Decreased Regions Major business income compared to last year North 3,285,410,368.35 46.68% North-east 9,937,367,438.15 13.57% East 4,070,081,345.65 -0.54% Mid-south 474,449,813.42 108.12% North-west 186,689.64 -98.04% Export 2,414,962,166.67 18.99% Total 20,182,457,821.88 (4) The formulation status of major business income manages more than 10%’s major product of the Company. Products Major business income Major business cost Gross profit ratio % Molten steel 2,925,533,328.88 2,807,543,308.66 4.03% Continuous rolling billet 1,679,309,545.69 1,700,504,219.16 -1.26% Hot Plate 15,547,150,012.26 14,435,364,606.73 7.15% Including: related transactions 11,445,392,775.70 10,526,582,273.05 8.03% (5) The Status of Major Suppliers and Clients Total amount of the top 5 vendors 16,109,986,528.98 Proportion in purchasing total amount 92.12% Total amount of the top 5 buyers 11,671,678,305.85 Proportion selling total amount 57.83% 17 (6) Formulating of assets and profit RMB’000 Year 2005 Year 2004 Changed over the Items Portion % previous year % Amount Amount Portion % Gross Assets 7,920,607.00 —— 8,164,472.00 —— Account receivable 23.00 0.00 177,062.00 2.17 -99.99 Inventories 990,628.00 12.51 1,627,268.00 19.93 -37.25 Fixed assets 3,022,973.00 38.17 3,553,450.00 43.52 -12.31 Construction in progress 388,674.00 4.91 319,168.00 3.91 25.53 Short-term borrowings 20,000.00 0.25 - 100.00 Long-term borrowings 316,735.00 4.00 574,354.00 7.03 -43.16 Note: Cause of changes 1. Decreasing of total assets was caused by returning of long-term debts. 2. Decreasing of account receivable was caused by retrieving of external accounts. 3. Decreasing of inventory was caused by decreasing of stock and decreasing of raw material prices. 4. Increasing of short-term loans was caused by increasing of loans in the year. 5. Decreasing of long-term borrowings was caused by returning of loans. RMB’000 Items Year 2005 Year 2004 Changed over the previous year % Operational expenses 129,152.00 127,302.00 1.45% Administrative expense 121,426.00 106,910.00 13.58% Financial expenses 5,965.00 31,074.00 -80.80% Income tax 272,882.00 211,648.00 28.93% Note: Cause of changes 1. Increasing of administrative expenses was caused by providing of inventory impairment provisions. 2. Decreasing of financial expenses was caused by increasing of bank deposit interest and returning of long-term borrowings. 3. Increasing of income tax was caused by taxation over the sales discount provided at the end of the current year. (7) Formulating of cash flow RMB’000 Increase / Decrease Items Year 2005 Year 2004 over the previous year Net Cash flow generated by business operation 1,391,115.00 2,027,329.00 -636,214.00 Net cash flow generated by investment -616,051.00 -804,012.00 187,961.00 Net cash flow generated by financing -464,819.00 -591,917.00 127,098.00 Note: Cause of changes 1. Cash flow from business operation decreased mainly because increasing of VAT and other taxations. 18 2. Increasing of net cash flow from investment operations was caused by decreasing of engineering expenditures of the current year. 3. Increasing of cash flow from financing operation was caused by decreasing of borrowings returned. (II) Development Prospect 1. Development Trend of the Industry and the Future Competition Pattern As the iron and steel industry has been in high speed development over the years, iron and steel production capacity has been expanding rapidly. As a result, the market has become more and more competitive. After product price has fallen all the way, the operation has been sustainedly carried out on low price position. On the hand however, prices of oil, electric power and freight which mainly influence the costs of iron and steel shall still rise. Thus the production costs shall continue to rise. However, with adjustment of the national macroeconomic policy and implementation of the domestic demand promotion policy as well as exercising the measures of price protection by production control and adjustment of product structure of iron and steel industry itself, the whole steel material market still has some space for development. 2. Opportunities and Challenges Opportunities: With implementation of the Iron & Steel Industrial Development Policy promulgated by the Central Government and the Central Government’s macro adjustment of and control over the iron & steel enterprises, a number of backward enterprises with low production capacity, high energy consumption and big pollution shall be weeded out. Such practice shall promote the iron & steel industry to develop in a healthy and orderly way, ensure steady growth of the prices of the iron & steel market and the demand on steel materials is increasing steadily. Challenges: The low steel market price, possibility of price rise of the raw materials and insignificant growth of the steel market demand shall affect the Company’s development. 3. Operation Plan and Measures in 2006 The general production and operation target in 2006 is: with the market as the orientation, adjustment of product structure as the key, pursuance of shareholders’ interests and maximization of beneficial result as the objective, stress product varieties and specifications, to improve physical quality, accelerate promotion of key technical improvement projects, upgrade core competitiveness, produce 8 million tons of leading steel products, 4.3 million tons of hot rolled plates and achieve a turnover amounting to RMB 22 billion from the principal business; reach a domestic advanced level in key economic and technical targets, insist on harmonious development, enhance environmental protection control, realize “zero in accident occurrence, personal injury and death and property damage” and construct a GREEN Bengang Steel Plates. Based on the aforesaid targets, emphasis shall be put on the following work: I. Pay close attention to the market trend and expand the market share of the leading products. Facing the present stem situation of keen market competition, it is necessary to make deepened research and analysis on the market, accurately grasp the market operation rules and change trend, extensively collect information on variation of the market demand and supply, the upstream and downstream price change situation, provide scientific basis for marketing decision making and improve the ability to deal with and dominate the market. In respect of production organization, continue to enhance production of key varieties of steel products based on the existing products, increase the proportion of top-grade products in the total products output of the Company. Based on the market demand, timely adjust product structure, attach greater importance on research and development of “hi-tech and high added value” products, continue to develop new products by targeting high-added value and short supply in the market. In sales of product, it is necessary to 19 further optimize user structure, enhance the management, stabilize the existing users and develop new users with quality, varieties and specifications. II. Devote major efforts in developing circulation based economy and try every means to construct a resource saving type enterprise In 2006, the general demand on the Company to develop circulation based economy is to insist on the principle of using raw materials for production in a scientific and economical way and making full use of them; substantially improve the yied, reduce waste; make reasonable use of waste gas and wastes. Make careful study on weeding out the process, technology and equipment of high energy consumption and low efficiency, speed up construction of environmental protection and energy-saving projects, tackle key problems in energy consumption by learning from the advanced enterprises in the industry and try to reduce energy consumption of coal, electric power and oil, etc. Enhance research in comprehensive use of resources, gradually improve the recycling, processing and utilization system of used supplies and recycleable resources, devote every effort to improve the comprehensive utilization of waste gas, water and materials, and work hard for realizing “Zero Emission” of discarded substances. Attach greater attention on control over pollution sources, realize up-to- standard emission in iron and steel production, effectively improve the environment of the factory area and the environmental quality. III. Quicken the steps of management innovation and further compact the foundation of business administration Enhancing quality control. Further strengthen the quality management awareness of all the staff, form a situation of entire personnel participation process and sustainable improvement. Through establishment of “Black Belt” project, further push ahead Six Sigma management, exercise integration of quality management system and environmental management system, do a good job and whole course quality control of the production process, strengthen quality assessment and objection treatment and ensure steady improvement of physical quality of products. Enhancing financial management. Devote major efforts in compressing expenses, reducing expenditures, establish financial settlement software platform, enhance budget fund management and assessment, speed up fund circulation and improve fund utilization rate. Propel standard cost control on overall basis, establish and improve the standard cost system, enhance comprehensive analysis and improve efficiency of cost control. Enhancing procurement management. According to the market changes, make flexible adjustment of the procurement policy, ensure lump raw and fuel materials, spares and parts, etc. to satisfy production and innovation requirements. Meanwhile, it is necessary to extensively and deeply carry out the research, promotion and application work of “application of service life cycle function” and save energy and resources while reducing the procurement costs. Enhancing safety management. Continue to devote major efforts in enhancing safety based on the various detected hidden hazards. It is necessary put safety production responsibility system into effect, continue to conduct the activities of learning the specifications, looking into hidden hazards, blocking the leaks and fighting against the “three non-compliances”, and make effective rectification and improvement over hidden dangers. Special attention should be attached to the new countermeasures for safety production of new projects, work out new rules, adopt new measures, practice the system of questioning responsibilities and the system of looking into responsibilities and ensure realization of the target of “zero in accident occurrence, personal injury and death and property damage” according to the principle of the “Four NOT LETTING-OFFS”. IV. Continue to deepen the internal reform and enhance the internal motive power of the enterprise development. It is necessary to spare not effort to carry forward equity separation reform in a positive and reliable way and try every means to complete the relevant procedures concerning stock reform work at the end of April. It is necessary to seriously implement the Circular of the State Council on Implementation of the Official Opinions on Improving the Quality of Listed Companies promulgated by China Securities Regulatory Commission, improve the corporate governance structure, establish 20 sound international control system of the Company, improve the Company’s operation and management and standardized operation level, improve the Company’s core competitiveness and profit-earning ability and try to provide shareholders with a good investment reform. It is necessary to positively explore and standardize the encouragement and binding mechanism of senior executives and the whole staff, fully mobilize the initiatives of the Company’s senior executives and staff. Establish the mechanism of work performance assessment and selecting the superior and eliminating the inferior, enhance the binding of responsibility target, continuously improve the awareness of making progress and sense of responsibility of the senior executives. It is necessary to spare no effort to push ahead the work of acquiring the principal business of iron and steel from Bengang Group, try to streamline and enhance the business, improve the Company’s benefitial result and competitiveness so as to repay the shareholders’ support. 4. Fund demand and application plan; fund sources In 2006, the fund payments shall be mainly cash flow out for operation activities and the estimated expenditure is to be RMB 21.5 billion. The expenses for engineering projects shall be RMB 180 million, which shall mainly be applied in 4# converter project and rectangular billet works. The funds for the Company’s operation and investment activities are mainly from the sales income of the very year and bank deposits. 5. Major Risks and Countermeasures Risk from the market price fluctuation: Affected by the sharp price falling of the steel material market in 2005, especially the recent situation of supply exceeding demand in the iron and steel market in general, the market competition is severe, which has caused the recent price fluction risk of steel material market. Risk from the market price fluctuation of the upstream raw material market: In opposition to the falling trend of the downstream products of iron & steel industry, there exists risk of price rising of the upstream raw material market, especially the price rise of foreign iron ore, these factors shall certainly result in the risk of price fluctuation of the raw material market. To deal with the aforesaid risks, the Company shall enhance the internal management, improve the product quality, ensure the market share, expand the sales scope; meanwhile, adjust the Company’s product structure, improve the output of “high quality and high added-value” products, improve the product varieties and specifications and increase the Company’s profit growth channels under the situation of the steel market this year. Continue to implement the low cost strategy, further enhance the positive cost control, do a good job in working procedure costs, continue to popularize centralized procurement by bidding, enable the management system to be effectively implemented inside the Company, form cost superiority and improve the market competitiveness of the Company. 21 (III) Investment status 1. In the report year, the Company had not raised any proceeds through share offering and had no proceeds raised before the report period and carried down to the report period for application. 2. In the report year, the application of funds not raised through share offering is as follows: In 2005, the Company totally completed the technical innovation works with investment of RMB 425.61 million. (1) 2# Pusher-type furnace: started in 2005. Accumulative investment completed at the end of 2005 was RMB 41.01 million and the project was completed in 2005. (2) Purchase of spare parts for lithium bromide refrigeration machines: started in 2005. Accumulative investment completed at the end of 2005 was RMB 1.53 million and the work was completed in 2005. (3) Purchase of spare parts for N1 substation: Started in 2005. Accumulative investment completed at the end of 2005 was RMB 0.23 million and the work was completed in 2005. (4) 4# crane improvement works: The total planned investment was RMB 2.6 million and the work started in 2004. The amount incurred in 2005 was RMB 1.98 million; at the end of 2005, the accumulative investment completed was RMB 2.63 million. The work was completed in 2005. (5) 4# Converter Project: The total planned investment was RMB 1,350 million and the work started in 2003. The amount incurred in 2005 was RMB 395.34 million; at the end of 2005, the accumulative investment completed was RMB 144.65 million (where the amount of the construction-in-process converted into fixed assets was RMB 310.70 million). The project is expected to be completed in 2006. (6) Successive innovation projects: The total planned investment was RMB 210.93 million and the work started in 2003. The amount incurred in 2005 was RMB 5.93 million; at the end of 2005, the accumulative investment completed was RMB 136.21 million (where the amount reversing the advance payment for the equipment was RMB 76.42 million). The project is expected to be completed in 2006. (7) Rectangular Billet Project: The total planned investment was RMB 280 million and the work started in 2005. The amount incurred in 2005 was RMB 45.26 million; at the end of 2005, the accumulative investment completed was RMB 45.26 million. The project is expected to be completed in 2007. (8) 3# Heating Furnace Project: The total planned investment was RMB 78 million and the work started in 2002. At the end of 2005, the accumulative investment completed was RMB 5.41 million. This project is still in preparation stage. (9) Grinding Machine Project: The total planned investment was RMB 9.23 million and the work started in 2004. At the end of 2005, the accumulative investment completed was RMB 6.5 million. The project is expected to be completed in 2006. (10) Air Compressor Station Project: The total planned investment was RMB 8 million and the work started in 2004. The amount incurred in 2005 was RMB 4.73 million; at the end of 2005, the accumulative investment completed was RMB 7.83 million. The project is expected to be completed in 2006. (11) Numbered Air Compressor Project: The total planned investment was RMB 9.10 million and the work started in 2005. The amount incurred in 2005 was RMB 5.39 million; at the end of 2005, the accumulative investment completed was RMB 5.39 million. The project is expected to be completed in 2006. 22 (12) 4# LF Refining Project: The total planned investment was RMB 50.06 million and the work started in 2006. The project is expected to be completed in 2006. (IV) Board of Directors’ Routine Work. 1. The status of the Board of Directors meeting and the content of resolution. In the report year, the Board of Directors held 6 meetings which are summarized as follows: ---- The 9th meeting of the Third Board of Directors was held on March 17, 2005 and was disclosed on China Securities Journal, Securities Times and Hong Kong Commercial Daily on March 18, 2005. ---- The 10th meeting of the Third Board of Directors was held on April 12, 2005 and was disclosed on China Securities Journal, Securities Times and Hong Kong Commercial Daily on April 15, 2005. ---- The 11th meeting of the Third Board of Directors was held on May 20, 2005 at the Company’s meeting room. The meeting discussed the preparation work on holding the annual shareholders’ general meeting and approved Mr. Guan Dianguo’s application for resignment of director due to other job assignment. ---- The 12th meeting of the Third Board of Directors was held on August 10, 2005 and was disclosed on China Securities Journal, Securities Times and Hong Kong Commercial Daily on August 10, 2005. ---- The 13th meeting of the Third Board of Directors was held on October21, 2005 and was disclosed on China Securities Journal, Securities Times and Hong Kong Commercial Daily on October 25, 2005. ---- The 14th meeting of the Third Board of Directors was held on December 28, 2005 and was disclosed on China Securities Journal, Securities Times and Hong Kong Commercial Daily on December 31, 2005. 2. The implementation status of the Board of Directors against the shareholder meeting Through review and approval of 2004 Annual Shareholders’ General Meeting held on May 25, 2005, the Company’s 2004 Profit Distribution Plan was as follows: Based on the total share capital of 1,136,000,000 shares ended December 31, 2004, the Company would distribute dividend at the rate of RMB 2.00 for every 10 shares to the whole shareholders (with tax inclusive. With deduction of the tax, the actual dividend would be distributed to the individual public shareholders of A-shares and investment funds at the rate of RMB 1.8 for every 10 shares). The cash dividend to shareholders of domestically listed foreign shares (B-shares) would be paid in Hong Kong Dollars with the exchange rate based on the average of the exchange rate (HKD 1 = RMB1.0638) as published by the People’s Bank of China on the first working day after the resolution of the Shareholders’ General Meeting as specified in the Articles of Association (namely May 26, 2005). No tax was deducted for B-shares. The Board of Directors published the Public Notice on Implementation of 2004 Dividend Distribution on China Securities Journal, Securities Times and Hong Kong Commercial Daily dated June 21, 2005. 23 (V) This profit distribution plan or capital common funds capitalizing of reserve As audited by Beijing TIN WHA CPA, the Company has realized the net profit of RMB632,216,696.89 in year 2005. As provided by the Articles of Association, the statutory common reserves was provided at 10% amounted to RMB63,221,669.69, and statutory public welfare was provided at 5% amounted to RMB31,610,834.84. After the providing of the statutory common reserves and public welfare, the net profit distributable for year 2005 was RMB310,184,192.36, plus the retained profit from year 2004 of RMB1,875,830,483.38, the profit distributable was totaled to RMB2,186,014,775.74. Therefore the dividend plan for year 2005 is as: Basing on the total capital shares of 1,136,000,000 shares ended Dec. 31 2005, cash dividend of RMB2.00 will be distributed to each 10 shares (tax included). There totally RMB227,200,000.00 of common share dividend will be distributed. The retained RMB1,958,814,775.74 will be carried over the next year as un-distributed profit. (XI) Misc. The official information disclosing presses by the Company were: Hong Kong Commercial Daily, China Securities Journal and Security Times and it will not make any change this year. VIII. Report of the Supervisory Committee (I) The Status of Supervisory Committee Meeting During Report Term There are 4 supervisory committee meeting was held during the report term * The 7th meeting of the 3rd term of Supervisory Committee was held on April 12th 2005, the following proposals were adopted as resolutions: 1. Work Report of the Supervisory Committee 2004 2. Financial Settlement 2004 and Financial Budget 2005 3. Annual Report 2004 and the Summary 4. The First Quarterly Report 2004 5. Profit Distribution Pre-plan for Year 2004 6. Proposal on Revising of the Articles of Association 7. Proposal of Enlarge the Investment on No.4 Converter Project 8. The Proposal of Investing on Construction of Large Square Billet Project 9. Proposal of Routine Related Transaction * The 8th meeting of the 3rd term of Supervisory Committee was held on August 8th 2005, the Semi-annual Report was examined and adopted. * The 9th meeting of the 3rd term of Supervisory Committee was held on October 21st 2005, the 3rd 24 Quarterly Report was examined and adopted. * The 10th meeting of the 3rd term of Supervisory Committee was held on December 28th 2005, the Proposal on Acquiring of Assets by Issuing of New Shares examined and adopted. (II) The Supervisory Committee of the Company Issued its Independent Opinion on 2004 Relevant Proceeding. The board of supervisors of the Company according to Company Law, Securities Law and relevant agreement of Article of Association focus on legal routine operation, standardize financial operation, etc. carefully carry out supervise work and this have protected the whole interests of the Company and the masses of shareholders, the Supervisory Committee issued the independent opinion on the relevant situations in report term as follows: 1.The legal operation status of the Company The Supervisory Committee joined and attended the Company's shareholder meeting and every conference of Board of Directors, and played an important role on resolution’s formulated, implemented guarantee function during the report term. The Supervisory Committee of the Company considered that the production of the Company was in good condition of operation. Company directors accorded with Company’s article and regulation while carrying out company's work and did not violate laws and regulations, Article Association or any behavior that harmful to the interests of the Company and shareholder. The Supervisory Committee of the Company considered, the Company’s management of production and operation had responsible as devoted to their duty, had not violated laws and regulations, Article Association or any behavior harmful to the interests of the Company and shareholder while carrying out company's work, the Company made the proper strategy of business and Company’s management is doing well and with high-efficient. 2. Examining the finance status of the Company The finance statement was audited by Beijing TIN WHA CPAs and ShineWing Certified Public Account and they issued standard and without qualified opinion audit report, the finance report of the Company trueness, impersonality and accurately shown the status of finance and business harvest of the Company. 3. Company conducted no selling or purchasing of assets. 4. The Company conducted no fund raising activities. 5. The Company was fairly traded according to the contract or agreement and there was no harmful to interests of company shown. IX. Significant Events （1）No importance lawsuit and arbitrage transactions this year. （2）No purchasing and selling assets, no merge transaction of the Company during the report term. （3）Significant related transactions ocurred during the report term. 25 (I) Related Parties’ Relationship 1) The related transaction parties which is existing control relationship at the end of Dec. 31th 2004 Relationship Name of Major Business Legal Reg. Add. with Company Business type Representative the Company Bengang Group Co. Benxi city Liaoning Steel 、 Steel Parent State own Zhang Yingfu Ltd. Province casting company 2) The registration capital of the related parties with controlling relationship and the change thereof Name of company 2004.12.31 Increased this year Decreased this year 2005.12.31 Bengang Group Co., Ltd. RMB 4,700 million RMB 4,700 million 3) The shareholding of the related parties with controlling relationship and the change thereof 2004.12.31 Increased this year 2005.12.31 Name of company Amount % Amount % Amount % Bengang Group Co., Ltd. RMB613,440,000 54 RMB613,440,000 54 4) Non-controlling related parties Name of the parties Relation with the Company Benxi Steel (Group) Machinery Co., Ltd. Same parent Benxi Steel (Group) Trucking Co., Ltd. Same parent Benxi Steel (Group) Tengda Holdings Ltd. Same parent Benxi Steel (Group) International Trading Co., Ltd. Same parent Benxi Economic Development Zone Bengang Jufeng Development Same parent Co., Ltd. Benxi Steel (Group) Iron Co., Ltd. Same parent Benxi Steel (Group) Special Steel Co., Ltd. Same parent Tianjin Benchu Goods Trading Ltd. Same parent Guangshou Free Trade Zone Bengang Sales Co., Ltd. Same parent Nanjing Bengang Steel Sales Ltd. Same parent Shanghai Bengang Steel Sales Ltd. Same parent Dalian Boluole Steel Tube Ltd. Same parent Benxi Steel (Group) Special Steel Electronic Installation Co., Ltd. Same parent Haerbin Bengang International Trading Ltd. Same parent Bengang Xi’an Goods Trading Ltd. Same parent Tianjin Bengang Steel Trading Ltd. Same parent Wuxi Bengang Steel Sales Ltd. Same parent Yantai Bengang Steel Sales Ltd. Same parent Xiamen Bengang Steel Sales Ltd. Same parent Shenyang North Bengang Sales Ltd. Same parent Chengchun Bengang Steel Sales Ltd. Same parent Benxi Steel (Group) Steel Process and Logistics Co., Ltd. Same parent Benxi Steel (Group) Construction & Repairing Co., Ltd. Same parent Benxi Steel (Group) Fire Resistance Co., Ltd. Same parent Benxi Steel (Group) Metallurgy Residues Co., Ltd. Same parent Liaoning Metallurgy Technician College Same parent Benxi Steel (Group) Industrial Development Co., Ltd. Same parent Benxi Steel (Group) Construction Co., Ltd. Same parent 26 Yinkou Bengang International Logistics Co., Ltd. Same parent Benxi Steel (Group) Real-estate Development Co., Ltd. Same parent Bengang Group International Trading Ltd. Shenyang Branch Same parent Benxi Steel (Group) Education Center Same parent Benxi Steel (Group) Drilling Tools Co., Ltd. Same parent Benxi Steel (Group) Designing Institute Same parent Benxi Steel (Group) Information and Automatic Tech. Ltd. Same parent Benxi Steel (Group) News Center Same parent Benxi Steel (Group) New Industrial Development Co., Ltd. Same parent Benxi Steel (Group) Mining Co., Ltd. Same parent Benxi Steel (Group) Electronics Co., Ltd. Same parent Benxi Steel (Group) Heating Power Co., Ltd. (II) Related Transaction Agreement 1) On December 18, 2003, our company concluded with BenGang Steel Group Company for a comprehensive service agreement of validity for three years, which is valid on January 1, 2004. It includes buying raw materials, auxiliary material, energy power, repair piece spare part, transport services from BenGang Steel Group Company, and our company sells products to the group. According to the request of this agreement, the pricing principle of the relevant project is as follows: A: The pricing of purchasing projects from BengGang Steel Group Company: Pricing of the raw materials: The price of the molten iron is the average of current price of molten iron of the same quality in the domestic pig iron market. The suitable price is not higher than the average price, which Bengang Steel Group Company sold to independent third party's customer's last January; The price of scrap steel is the price in scrap steel market plus the process cost, where the scrap steel market price is the weighted average of the price of scrap steel in bulk, which Bengang Steel Group Company purchased from independent third party last three months. The process cost is the cost which Bengang Steel Group Company made the scrap steel into shape. It is adjusted and authorized once every year for the above-mentioned process cost. The auxiliary materials all adopt the market price The pricing of the energy motive force: Except the electricity in market price brought from Bengang Steel Group Company plus the cost of retransferring as the transaction price, other energy motive force adopts the complete cost plus the national additional tax; Pricing of the spare part of the repair piece: buying the spare part of the repair piece processed by Bengang Steel Group Company follows the pricing standard of complete cost plus national additional tax. Pricing of the automobile traffic expense: The railway traffic expense is the national price, automobile transportation is the market price. Pricing of maintaining the factory building and overhauling and safeguarding of the equipments: The maintenance cost is confirmed according to the working degree of difficulty and the work load of both sides. Pricing of quality monitoring, measuring and weighting: carried out according to the state fixed 27 price. Pricing of the listing service: Bengang Steel Group acted as agent to finish before our company failed to obtain the power to engage in import and export trade, the agent commission is according to 1.5% of the total value of the cargoes imported and exported. If obtained the power to engage in import and export trade, the company has the right to notify the Bengang Group Company to stop the agent relation. Bengang Steel Group is not a sole agent of our company, our company has the right to choose the independent third party to finish acting for the business. Pricing of the design and the project service: carried out according to the state fixed price. Pricing of the heating service of the dwelling house for staff and workers: carried out according to the state fixed price. Pricing of telephone, fax and the TV service: carried out according to the state fixed price. Pricing of the newspaper and other publications: carried out according to the state fixed price. Pricing of educational facilities: carried out according to the educational facility market leasing price or the market price. Pricing of office and business rooms: Bengang Steel Group does not collect and lease the expenses within the date of this agreement. Fee of trade mark: RMB 25,200 per year. Patent: Bengang Steel Group does not collect fees for patent using right. B: Pricing of the products that our company sold to Bengang Steel Group: Hot-rolled steel sheet: carried out according to the weighting average price of the same quality products which our company sold to the independent third party in the previous month. Molten steel: carried out according to manufacturing cost plus the national additional tax. Iron and steel scrap, including the iron material: carried out according to the market price. 2) According to the Liao Tu Pi Zi No.6(1997) issued on Mar. 5th 1997 by Liaoning province Land Management Department, and it’s agreed documentation of land price assessing identification, land assets arrangement proposal and the lease contract of land using right which was signed between the Company and Bengang Group Co. Ltd on April 7th 1997 that the Company had the authority of leasing Bengang Group Co. Ltd land which is located in house building of Bengang Group Co. Ltd with pay and the contract took effect in 50 years. Hereby, the Company pays for land rental charge to Bengang Group Co. Ltd every year was about RMB2, 673,000. The rental charge will be adjusted after 5 years of leasing period, and adjust once to the afterwards every three years. The Company signed the supplementary agreement of the lease contract of the right to use the land with Bengang Group Co. Ltd on April 6 , 2002, both parties agrees that the rental charge of the right to use the land remains unchanged up to April 7 , 2005. 28 (III) Related Party Transactions Pricing strategy: the transaction price between the Company and related transaction parties were according to the relevant agreements or market trade agreement to confirm. 1) Sales Products A. Selling goods to the related transaction parties which existing control relationship: In RMB Year 2005 Year 2004 Proportion in Income Name of company Proportion in Income Amount Amount % % Bengang Group Co., Ltd. 7,162,838,848 35.49 4,808,224,388 27.71 B. Selling goods to the related transaction parties which were not existing control relationship: In RMB Year 2005 Year 2004 Name of company count in count in Amount Amount turnover turnover Benxi Steel(Group)InternationalTradingCo.,Ltd. 2,414,962,167 11.97 2,030,091,873 11.7 Tianjin Benchu Goods Trading Ltd. - - 1,981,637.00 0.01 Tianjin Bengang Steel Trading Ltd. 661,705,203 3.28 666,604,139 3.84 Haerbin Bengang Trading Ltd. 88,367,075 0.44 100,963,455 0.58 Shanghai Bengang Steel Sales Ltd. 202,773,865 1.00 311,667,358 1.8 Nanjing Bengang Steel Sales Ltd. 584,148,811 2.89 318,780,720 1.84 Wuxi Bengang Steel Sales Ltd. - - 234,665,915 1.35 Guangshou Free Trade Zone Bengang Sales Co., Ltd. 53,262,273 0.26 61,427,031 0.35 Bengang Xi’an Goods Trading Ltd. - - 9,525,765 0.05 Yantai Bengang Steel Sales Ltd. 373,321,845 1.85 617,121,116 3.56 Benxi Steel (Group) Special Steel Co., Ltd. 444,229,510 2.20 323,444,201 1.86 Benxi Steel (Group) Tengda Holdings Ltd. - - 24,605,740 0.14 Xiamen Bengang Steel Sales Ltd. 85,303,798 0.42 191,277,332 1.1 Shenyang North Bengang Steel Sales Ltd. 177,779,816 0.88 186,658,633 1.08 Changchun Bengang Steel Sales Ltd. 69,434,623 0.34 85,207,053 0.49 Dalian Boluole Steel Tube Ltd. 111,208,643 0.55 162,976,137 0.94 Benxi Steel(Group)SteelProcessandLogisticsCo., Ltd. 616,733,165 3.06 263,039,782 1.52 Benxi Steel (Group) Construction Co., Ltd. 31,144,381 0.15 190,082,336 1.1 Benxi Steel (Group) Industrial Development Co., Ltd. - - 71,297 0 Benxi Steel (Group) Construction & Repairing Co., Ltd. 4,623,150 0.02 22,159,087 0.13 Total 5,918,998,324 29.33 5,802,350,607 33.44 29 2) Purchasing Raw, Complement Materials and Spare Parts A. Purchasing raw materials, assistant materials and spare parts form related transaction parties which were existing control relationship: In RMB Year 2005 Year 2004 Name of company Proportion Proportion Amount Amount in cost% in cost% Bengang Group Co. Ltd. (raw materials) 15,047,918,814 79.22 15,047,918,814 79.22 Bengang Group Co. Ltd. (assistant 795,819,935 4.19 795,819,935 4.19 materials and spare parts) Total 15,843,738,749 83.41 15,843,738,749 83.41 The transactions regarding raw materials increased over 2005, which was caused by great increasing of production volume. B. Purchasing Goods form Related Transaction Parties which were not existing related transaction relationship: In RMB Year 2005 Year 2004 Name of company Proportion in Proportion in Amount Amount cost% cost% Benxi Steel (Group) Iron Co., Ltd. - - 2,150,015,663 13.33 Benxi Steel (Group) Machinery Co., Ltd. 75,922,760 0.40 66,928,349 0.41 Benxi Steel (Group) Mining Co., Ltd. 152,580,311 0.80 109,931,240 0.68 Benxi Steel (Group) Construction Co., Ltd. 17,055,120 0.09 43,971,960 0.27 Benxi Steel (Group) Trucking Co., Ltd. 1,164,579 0.01 2,412,103 0.01 Benxi Steel (Group) Electronics Co., Ltd. 470,085 0.00 1,284,371 0.01 Liaoning Metallurgy Technician College 4,140,816 0.02 1,384,321 0.01 Benxi Steel (Group) Information and Automatic Tech. Ltd. 657,747 0.00 - - Benxi Steel (Group) Education Center 1,186,690 0.01 - - Benxi Steel (Group) Drilling Tools Co., Ltd. 870,567 0.00 - - Total 254,048,675 1.35 2,375,928,007 14.72 30 3) Other Related Transactions: In RMB Items Year 2005 Year 2004 With the Group Power supply 1,037,338,376 800,652,861 Freight 78,656,875 48,193,945 Repairing 36,295,933 51,127,567 Trademark 25,200 25,200 Land using 2,673,192 2,673,192 Inspection and testing 7,113,084 6,087,164 Construction 280,424 - Benxi Steel (Group) Trucking Co., Ltd. Freight 13,441,017 9,895,030 Repairing 1,074,315 1,160,000 Bengang Group International Trading Ltd. Export commission 37,133,757 30,444,233 Import commission 2,560,035 3,098,258 Import of equipment 39,829,202 275,764,686 Benxi Steel (Group) Special Steel Co., Ltd. Repairing - 927,820 Yinkou Bengang International Logistics Co., Ltd. Port fee 37,510,123 23,877,550 Benggang Group Real-estate Co., Ltd. Property management 229,796 229,796 Benxi New Industry Development Co., Ltd. Labor security fee 1,559,935 1,395,742 Benxi Economic Development Zone Bengang Jufeng Development Co., Ltd. Packaging 29,018,217 21,195,004 Benxi Steel (Group) Construction Co., Ltd. Construction 169,611,713 280,808,079 Repairing 38,710,795 45,993,687 Freight 826,726 - Benxi Steel (Group) Information and Automatic Tech. Ltd. Engineering 17,692,253 20,374,473 Repairing 4,234,120 3,746,460 Benxi Steel (Group) Construction & Repairing Co., Ltd. Engineering 5,102,070 31,467,881 Repairing 25,264,812 8,955,677 Benxi Steel (Group) Designing Institute Designing 1,334,000 3,642,170 Benxi Steel (Group) Industrial Development Co., Ltd. Repairing 5,308,576 4,438,811 Freight 471,741 - Engineering 144,258 - Benxi Steel (Group) Machinery Co., Ltd. Repairing 1,107,493 - Benxi Steel (Group) Electronics Co., Ltd. Repairing 5,475,806 5,344,648 Benxi Steel (Group) Iron Co., Ltd. Freight - 4,975,342 Benxi Steel (Group) Metallurgy Residues Co., Ltd. Freight 22,804,342 18,533,653 Benxi Steel (Group) Thermal Power Development Co., Ltd. Heating 1,248,114 2,299,292 Benxi Steel (Group) Mining Co., Ltd. Freight 2,338,661 1,760,225 31 4) The balance of related transaction parties of account receivable and account payable: In RMB Items Dec. 31 2005 Dec. 31 2004 Notes receivable Yantai Bengang Steel Sales Ltd. - 1,550,000 Benxi Steel(Group) SteelProcessandLogisticsCo.,Ltd. 9,590,000 - Dalian Boluole Steel Tube Ltd. 1,510,741 3,811,448 Nanjing Bengang Steel Sales Ltd. - 200,000 Guangzhou Free Trade Zone Bengang Sales Co., Ltd. 1,500,000 - Total 12,600,741 5,561,448 Notes payable Liaoning Metallurgy Technician College - 433,800 Benxi Steel (Group) Electronics Co., Ltd. - 338,900 Benxi Steel (Group) Construction Ltd. - 102,700 Benxi Steel (Group) Drilling Tools Co., Ltd. - 63,600 Benxi Steel (Group) Trucking Co., Ltd. - 27,100 Benxi Steel (Group) Industrial Development Co., Ltd. - 4,400 Total - 970,500 Account receivable Benxi Steel (Group) Special Steel Co., Ltd. 73,049,191 Benxi Steel (Group) International Trading Co., Ltd. 102,939,282 Total 175,988,473 Account payable Bengang Group 5,392,799 90,259,473 Benxi Steel (Group) Construction & Repairing Co., Ltd. 45,426,507 42,507,063 Benxi Steel (Group) Designing Institute 1,020,170 2,608,370 Benxi Steel (Group) Machinery Co., Ltd. - 25,022,051 Benxi Steel (Group) Construction Co., Ltd. 102,715,890 68,482,194 Benxi Steel (Group) Drilling Tools Co., Ltd. 365,815 487,130 Benxi Steel (Group) Information and Automatic Tech. Ltd. 3,303,131 5,460,591 Total 158,224,312 234,826,872 Account paid in advance Bengang Group 998,905,967 804,095,162 Total 998,905,967 804,095,162 Account received in advance Bengang Group 232,958,635 129,478,951 Benxi Steel (Group) International Trading Co., Ltd. 25,419,055 - Benxi Steel (Group) Tengda Holdings Ltd. - 264,995 Dalian Boluole Steel Tube Ltd. 16,927,091 23,152,334 Tianjin Bengang Steel Trading Ltd. 92,566,821 99,244,800 Benxi Steel (Group) Steel Process and Logistics Co., Ltd. 33,944,584 66,284,791 Yantai Bengang Steel Sales Ltd. 58,481,357 71,765,925 Haerbin Bengang Trading Ltd. 10,304,583 9,359,356 Shenyang North Bengang Steel Sales Ltd. 20,052,628 22,358,460 Changchun Bengang Steel Sales Ltd. 7,697,900 8,262,277 Bengang Xi’an Goods Trading Ltd. - 410,465 Shanghai Bengang Steel Sales Ltd. 27,886,611 14,132,107 Nanjing Bengang Steel Sales Ltd. 52,726,227 44,138,686 Wuxi Bengang Steel Sales Ltd. 271,911 92,217 Guangshou Free Trade Zone Bengang Sales Co., Ltd. 5,734,955 15,860,506 Xiamen Bengang Steel Sales Ltd. 11,058,788 9,147,578 Total 596,031,146 513,953,448 Other account receivable Bengang Group - 6,102,245 Benxi Steel (Group) Construction & Repairing Co., Ltd. - 100,000 Benxi Steel (Group) International Trading Co., Ltd. 9,381,384 7,802,238 Benxi Steel (Group) Construction Co., Ltd. - 19,832,584 Benxi Steel (Group) Machinery Co., Ltd. - 1,033,977 Benxi Steel (Group) Education Center - 84,455 Total 9,381,384 34,955,499 32 Other account payable Bengang Group 11,543,410 60,562,395 Benxi Economic Development Zone Bengang Jufeng Development Co., Ltd. 292,209 4,124,503 Benxi Steel (Group) International Trading Co., Ltd. - 15,758,743 Benxi Steel (Group) Education Center 819,274 - Liaoning Metallurgy Technician College 3,239,527 620,334 Benxi Steel (Group) Trucking Co., Ltd. 6,374,899 6,085,818 Benxi Steel (Group) Electronics Co., Ltd. 3,243,308 3,238,672 Benxi Steel (Group) News Agency 355,688 547,964 Benxi Steel (Group) New Industrial Development Co., Ltd. 186,240 289,366 Benxi Steel (Group) Industrial Devleopment Co., Ltd. 9,194,634 7,575,687 Benxi Steel (Group) Metallurgy Residues Co., Ltd. 2,226,775 1,742,851 Benxi Steel (Group) Mining Co., Ltd. 5,890 5,890 Benxi Steel (Group) Machinery Co., Ltd. 16,502,524 1,038,112 Total 53,984,378 101,590,335 Construction in process Benxi Steel (Group) International Trading Co., Ltd. 115,619,527 266,011,299 Total 115,619,527 266,011,299 (IV) Material Contracts and Implementation 1. The Company has never been involved in such events as keeping as custodian, contracted or leased any other company’s assets and vice versa in the report period or extended from the previous years. 2. No providing of external guarantee occurred in the report term. 3. No providing or accepting of cash asset management to or from other parties occurred during the report term. 4. No other material contract engaged in the report term. (V) There was no commitment issues made by share holders with 5% or above share equities occurred in or last to the report term. (VI) Auditing Expenses The Company pay for annual audit fee to Beijing TIN WHA CPAs and Ho and Ho & Company CPAs RMB 1,500,000. Beijing TIN WHA CPAs and Ho and Ho & Company CPAs have served the Company as auditors for successively 3 years. (VII) In the report period, the Company, the Board of Directors or any director had never been inspected, experienced administrative penalty or been criticized by circulating a notice of criticism by China Securities Regulatory Commission, or condemned in public by Shenzhen Stock Exchange. (VIII) No other significant issues occurred during the report term as determined by the Board of Directors or as provided by Article 67 of the Securities Law, or Article 17 of Information Disclosing Rules for Company Placed Shares Publicly 33 X．Financial Report 1. Accounting Statement (Attached) 2. Accounting Statement annotations (Attached) XI．Documents for Reference （I）Accounting Statement with signed and stamped by the principal of legal representative, director of accounting work principal and accounting institution; （II）Audit report original documentation with accounting office stamp and registered CPA signature and stamp; （III）All of the disclosed documentation original and announcement original of the Company which had published on China Securities Journal, Hong Kong Commercial Daily and Security Times during the report term. The Board of Directors of Bengang Steel Plate Co. Ltd Mr. Li Mohua, the Chairman of Board March 11th 2006 34 Bengang Steel Plates Co., Limited Report and Financial Statements For the year ended 31 December 2005 Ho and Ho & Company Certified Public Accountants Hong Kong 0 Bengang Steel Plates Co., Limited Report and financial statements For the year ended 31 December 2005 Content Pages Report of the auditors 1 Income statement 2 Balance sheet 3 Statement of changes in equity 4 Cash flow statement 5–6 Notes to the financial statements 7 – 40 0 REPORT OF THE AUDITORS To the shareholders of Bengang Steel Plates Co., Limited (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying balance sheet of Bengang Steel Plates Co., Limited (the “Company”) as of 31 December 2005 and the related statements of income, cash flows and statement of changes in equity for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements give a true and fair view of the financial position of the Company 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. Ho and Ho & Company Certified Public Accountants 9 March 2006, Hong Kong 1 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Income statement for the year ended 31 December 2005 (Expressed in Renminbi Thousand Yuan) Note 2005 2004 RMB’000 RMB’000 Revenue 6 20,182,458 17,349,451 Cost of sales (19,083,995) (16,141,686) Gross profit 1,098,463 1,207,765 Other operating income 7 28,583 2,783 Selling expenses (129,152) (127,302) Administrative expenses (121,426) (106,910) Other operating expenses 8 (6,404) (33,189) Finance costs 9 (5,965) (31,074) Profit before tax 10 864,099 912,073 Income tax expenses 11 (272,882) (211,648) Profit for the year 591,217 700,425 Earning per share – basic 12 RMB0.52 RMB 0.62 2 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Balance sheet as at 31 December 2005 (Expressed in Renminbi Thousand Yuan) Note 2005 2004 RMB’000 RMB’000 Assets Non-current assets Property, plant and equipment 15 3,022,973 3,553,450 Construction in progress 16 388,674 319,168 Deferred tax assets 17 18,607 14,713 Total non-current assets 3,430,254 3,887,331 Current assets Inventories 18 990,628 1,627,268 Trade receivable 19 23 177,062 Bills receivable 446,049 77,758 Prepaid expenses and other current assets 20 1,156,140 975,136 Prepaid income tax - 15,704 Cash and cash equivalents 21 1,897,513 1,404,213 Total current assets 4,490,353 4,277,141 Total assets 7,920,607 8,164,472 3 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Balance sheet as at 31 December 2005 (Expressed in Renminbi Thousand Yuan) Note 2005 2004 RMB’000 RMB’000 Equity and Liabilities Capital and reserves Share capital 22 1,136,000 1,136,000 Reserves 23 4,347,628 3,983,611 Total equity 5,483,628 5,119,611 Non-current liabilities Long-term bank loans – repayable after one year 24 291,879 311,862 Current liabilities Trade payable 25 390,763 437,762 Bills payable - 10,000 Other payable and accrued charges 26 174,140 193,517 Receipt in advance 27 1,516,954 1,829,228 Income tax payable 18,387 - Short-term bank loans 28 20,000 - Long-term bank loans – repayable within one year 24 24,856 262,492 Total current liabilities 2,145,100 2,732,999 Total liabilities 2,436,979 3,044,861 Total equity and liabilities 7,920,607 8,164,472 The financial statements on pages 2 to 40 were approved and authorized for issue by the Board of Directors on 9 March 2006 and are signed on its behalf by: Director Director 4 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Statement of changes in equity for the year ended 31 December 2005 (Expressed in Renminbi Thousand Yuan) Total equity RMB’000 Balance at 1 January 2004 4,646,386 Payment of 2003 final dividends (227,200) Profit for the year 700,425 Balance at 31 December 2004 and 1 January 2005 5,119,611 Payment of 2004 final dividends (227,200) Profit for the year 591,217 Balance at 31 December 2005 5,483,628 5 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Cash flow statement for the year ended 31 December 2005 (Expressed in Renminbi Thousand Yuan) 2005 2004 RMB’000 RMB’000 Profit before tax 864,099 912,073 Adjustments for: Depreciation on property, plant and equipment 901,189 578,498 Loss on disposal of property, plant and equipment 5,155 31,884 Finance costs 5,965 31,074 Unrealised exchange gain 7,408 360 1,783,816 1,553,889 Operating cash flows before movements in working capital Decrease (increase) in inventories 636,640 (786,261) Decrease (increase) in trade receivable 177,039 (59,654) (Increase) decrease in bills receivable (368,291) 300,727 (Increase) decrease in prepaid expenses and other current (181,004) 596,783 assets (Decrease) increase in trade payable (46,999) 152,915 Decrease in bills payable (10,000) (10,756) (Decrease) increase in receipt in advance (312,274) 418,092 (Decrease) increase in other payable and accrued charges (19,377) 97,597 Cash generated from operations 1,659,550 2,263,332 Income tax paid (242,685) (197,000) Interest paid (25,656) (38,285) Bank charges paid (94) (718) Net cash from operating activities 1,391,115 2,027,329 6 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Cash flow statement for the year ended 31 December 2005 (Expressed in Renminbi Thousand Yuan) 2005 2004 RMB’000 RMB’000 Net cash from operating activities 1,391,115 2,027,329 Investing activities Interest received 12,377 7,569 (Payment of) proceeds from disposal of property, plant and (703) 1,564 equipment Purchase of property, plant and equipment (444,670) (1,043,527) Decrease (increase) in fixed deposits with maturity more (409,094) 456,421 than three months Decrease (increase) in guarantee deposits 226,039 (226,039) Net cash used in investing activities (616,051) (804,012) Financing activities Dividends paid (227,200) (227,200) New bank loans raised 20,000 - Repayments of bank loans (257,619) (364,717) Net cash used in financing activities (464,819) (591,917) Net increase in cash and cash equivalents 310,245 631,400 Cash and cash equivalents at beginning of the year 1,059,979 428,579 Cash and cash equivalents at end of the year (note 21) Bank balances and cash 1,370,224 1,059,979 7 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Notes to the financial statements for the year ended 31 December 2005 1.GENERAL INFORMATION Bengang Steel Plates Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 27 June 1997 by Benxi Iron and Steel (Group) Limited (“Bengang Group”), through reorganisaion of operations, assets and liabilities of its plants, namely, Steel Smelting plant, Primary Rolling Plant and Continuous Hot Rolling Plant. On 10 June 1997, the Company issued 400,000,000 Domestically Listed Foreign Shares (“B shares”) through a private placement on the Shenzhen Stock Exchange and 616,000,000 unlisted State Shares to Bengang Group. On 3 November 1997, the Company issued 120,000,000 Renminbi denominated Domestic Shares (“A Shares”). The Company’s A Shares was listed on the Shenzhen Stock Exchnge on 15 January 1998. The registered office of the Company is located at No. 16 Renmin Road, Pingshan District, Benxi City, Liaoning Province, the PRC. The directors considered that Bengang Group is the ultimate parent company of the Company. The Company is principally engaged in steel smelting, metallurgy, processing and distribution business of related products in the PRC. As at 31 December 2005, the Company has 4,019 (2004: 3,842) employee. 2. THE POTENTIAL IMPACT ON NEW STANDARDS AND INTERPRETATIONS At the date of authorization of these financial statements, the following Standards and Interpretations were in issue but not yet effective: IAS 1 (Amendment) Capital disclosures IAS 19 (Amendment) Actuarial gains and losses, group plans and disclosures IAS 21 (Amendment) Net investments in foreign operation IAS 39 (Amendment) Cash flow hedge accounting of forecast intragroup transactions IAS 39 (Amendment) The fair value option IAS 39 and IFRS 4 Financial guarantee contracts (Amendment) IFRS 6 Exploration for and evaluation of mineral resources IFRS 7 Financial instruments: Disclosures IFRIC — INT 4 Determining whether an arrangement contains a lease IFRIC — INT 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Company. 3.PRINCIPAL ACCOUNTING POLICIES 8 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 a) Statement of compliance The financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) and its interpretations The Company maintains its accounting records and prepares its statutory financial statements in accordance with the accounting principles and the PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“PRC GAAP”). The accounting policies and basis adopted to the preparation of the statutory financial statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in financial statements but will not be taken up in the accounting records of the Company. b) Basis of preparation The financial statements is presented in Renminbi (“RMB”), the currency in which the majority of the Company’s transactions is denominated. Except for certain property, plant and equipment which are stated at their revalued value, the financial statements have been prepared on the historical cost basis. The accounting policies have been consistently applied by the Company and are consistent with those of the previous year. The principal accounting policies adopted in this report are set out below: c) Foreign currencies The financial statements of the Company are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the financial statements, the results and financial position of each entity are expressed in RMB, which is the functional currency of the Company and the presentation currency for the financial statements. In preparing the financial statements of the Company, transactions in currencies other than the Company’s functional currency (foreign currency) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are re-translated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are re-translated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated. 9 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 3. PRINCIPAL ACCOUNTING POLICIES (continued) c) Foreign currencies (continued) Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the re-translation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity. d) Property, plant and equipment Property, plant and equipment, other than construction in progress, are stated at cost or fair value less subsequent accumulated depreciation and accumulated impairment losses. Certain property, plant and equipment are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation less any subsequent accumulated depreciation and any subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any revaluation increase arising on revaluation of property, plant and equipment is credited to the revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case the increase is credited to the income statement to the extent of the decrease previously charged. A decrease in net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to retained profits. Depreciation is provided to write off the cost or fair value of items of property, plant and equipment, other than construction in progress, over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method. Depreciation for the revalued property, plant and equipment is charged to income statement. Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Company’s accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. 10 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 3. PRINCIPAL ACCOUNTING POLICIES (continued) d) Property, plant and equipment (continued) An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year in which the item is dereognised. e) Impairment of tangible assets At each balance sheet date, the Company reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell 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 the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment loss is recognised immediately in profit or loss unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. . Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amounts that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. f) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. 11 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 3. PRINCIPAL ACCOUNTING POLICIES (continued) g) Financial instruments Financial assets and financial liabilities are recognised on the Company’s balance sheet when the Company has become a party to the contractual provisions of the instrument. Trade and other receivables Trade and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities adopted are set out below: Trade and other payables Trade and other payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest method. Bank borrowings Interest-bearing bank loans and overdrafts are initially measured at fair value and are subsequently measured at amortised cost using the effective interest method. h) Provisions Provisions are recognised when the Company has a present obligation as a result of a past event, and it is probable that the Company will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. 12 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 3.PRINCIPAL ACCOUNTING POLICIES (continued) i) Dividends Dividends on ordinary shares are recognized as a liability in the period in which they are declared. j) Revenue recognition Sale of goods are recognized when goods is delivered and title has passed. Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. k) Operating lease payments Rental payable under operating lease are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognized as a reduction of rental expense over the lease term on a straight-line basis. l) Borrowing costs Borrowing costs are expensed as they are incurred. m) Retirement benefits Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Company’s obligations under the plans are equivalent to those arising in a defined contribution retirement benefit plan. n) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. 13 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 3. PRINCIPAL ACCOUNTING POLICIES (continued) n) Taxation (continued) Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. o) Segment reporting A segment is a distinguishable component of the Company 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 segment. 4. CRITICAL ACCOUNTING JUDGEMENT AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the process of applying the Company’s accounting policies, which are described in Note 3, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements. Property, plant and equipment The Company’s management determines the estimated useful lives and related depreciation charges for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. 14 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 4. CRITICAL ACCOUNTING JUDGEMENT AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) Inventories Note 3 describes that inventories are stated at the lower of cost and net realisable value. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of selling expenses. The Company does not have a general provisioning policy on inventory based on ageing given the nature of inventories that are not subject to frequent wear and tear and frequent technological changes. However, operational procedures have been in place to monitor this risk as majority of working capital is devoted to inventories. Procedurewise, the sales and marketing managers review the inventory ageing listing on a periodical basis to identify aged inventories. This involves comparison of carrying value of the aged inventory items with the respective net realisable value. The purpose is to ascertain whether allowance is required to be made in the financial statements for any obsolete and slow-moving items. In addition, physical count on all inventories are carried out on a periodical basis in order to determine whether an allowance is needed in respect of any obsolete and defective inventories identified. In this regard, the directors of the Company are satisfied that this risk is minimal and adequate allowance for obsolete and slow-moving inventories has been made in the financial statements. Trade and other receivables Note 3 describes that trade and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the receivables are not recoverable. In making the judgement, management considered detailed procedures have been in place to monitor this risk as a significant proportion of the Company’s majority of working capital is devoted to trade and other receivables. In determining whether allowance for bad and doubtful debts is required, The Company takes into consideration the ageing status and the likelihood of collection. Specific provision is only made for trade and other receivables that are unlikely to be collected. In this regard, the directors of the Company are satisfied that this risk is minimal and adequate allowance for doubtful debts has been made in the financial statements in light of the historical records of the Company and the circumstances of the PRC automobile industry as a whole. 5.FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Company does not have written risk management policies and guidelines. However, the board of directors meets periodically to analyse and formulate measures to manage the Company’s exposure to market risk, including principally changes in interest rates and currency exchange rates. Generally, the Company employs a conservative strategy regarding its risk management. As the directors of the Company consider that the Company’s exposure to market risk is kept at a minimum level, the Company has not used any derivatives or other instruments for hedging purposes. The Company does not hold or issue derivative financial instruments for trading purposes. 15 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) The financial assets of the Company comprise primarily trade receivable, bills receivable, prepaid expenses and other current assets and cash and cash equivalents. The financial liabilities of the Company comprise trade payable, bills payable, accrued charge, other, other payable, Receipt in advance and bank loans. Business risk The Company conducts its operations in the PRC and accordingly is subject to special considerations and significant risks. These include risks associated with, inter alias, the political, economic and legal environment, influence of national authorities over price regulations and competitions in the industry. Interest rate risk The Company’s income and operating cash flows are substantially independent of changes in market interest rates as the Company has no significant interest-bearing assets. The Company’s exposure to changes in interest rates is mainly attributable to its borrowings. Borrowings at variable rates expose the Company to cash flow interest-rate risk. Borrowings at fixed rates expose the Company to fair value interest-rate risk. The interest rates and terms of repayment of the Company’s borrowings are disclosed in note 24 and 28. The Company has not used any interest rate swaps to hedge its exposure to interest rate risk. Foreign currency risk The Company’s businesses are principally located in the PRC and all transactions are conducted in RMB, except for the purchases of some machinery and equipment. As at 31 December 2005, all of the Company’s assets and liabilities were denominated in RMB except that small amount of cash and cash equivalents and bank loans were denominated in foreign currency. Fluctuation of exchange rates of RMB against foreign currencies will not significantly affect the Company’s results of operation. Credit risk The Company’s principal financial assets are cash and cash equivalents, trade receivables, bills receivable, and other current assets except for prepayments, represent the Company’s maximum exposure to credit risk in relation to financial assets. The amounts presented in the balance sheet are net of allowances for doubtful debts, if any, estimated by the Company’s management based on prior experience and their assessment of the current economic environment. The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, the Company aims at maintaining flexibility in funding by arranging banking facilities and other external financing. 16 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 5. FINANCIAL INSTRUMENTS(continued) Estimation of fair value The carrying amount of the Company’s financial instruments approximated their value as at 31 December 2005 because of the short term maturities of these instruments except for long-term interest bearing loans. The carrying amount of the Company’s long term interest bearing loans approximated its fair value based on borrowing rates currently for loans with similar terms maturities. Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 6.REVENUE Revenue represents invoiced sales to customers less discounts and returns. Analysis of the Company’s revenue for the year is as follows: 2005 2004 RMB’000 RMB’000 Hot plates 15,547,150 15,286,538 Steel billets 1,679,310 1,358,125 Molten steel 2,925,533 487,824 Scrap material 29,998 77,858 Others 467 139,106 20,182,458 17,349,451 7. OTHER OPERATING INCOME 2005 2004 RMB’000 RMB’000 Reclaim of material,net 24,683 - Machining of material,net 1,969 - Sales of raw material, net (77) 80 Gain on debts restructuring 1,191 578 Gain on disposal of property, plant and equipment 689 696 Receipt of default payments 128 1,429 28,583 2,783 17 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 8.OTHER OPERATING EXPENSES 2005 2004 RMB’000 RMB’000 Penalties 560 609 Loss on disposal of property, plant and equipment 5,844 32,580 6,404 33,189 9.FINANCE COSTS, NET 2005 2004 RMB’000 RMB’000 Interest expenses on bank 25,656 38,285 Interest income on bank (12,377) (7,569) Exchange gain (7,408) (360) Bank charges 94 718 5,965 31,074 10. PROFIT BEFORE TAX Profit before tax has been arrived at after charging (crediting):- 2005 2004 RMB’000 RMB’000 Employee benefits expense - salaries and wages 129,778 124,184 - retirement benefits contribution 34,458 35,445 - other staff welfare 18,161 17,240 - early retirement scheme (note 14) 30,441 24,620 212,838 201,489 Depreciation on property, plant and equipment 901,189 578,498 Loss on disposal of property, plant and equipment, net 5,155 31,884 Rental expenses for land use rights 2,673 2,673 Increase of provision for loss in inventories 11,800 - (Decrease) increase in provision for bad debts (17) 184 18 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 11. INCOME TAX EXPENSES Income tax expenses in income statement represent: 2005 2004 RMB’000 RMB’000 PRC enterprise income tax Current year 276,776 211,648 Deferred taxation (Note 17) (3,894) - 272,882 211,648 The income tax rate applicable to the Company is 33% (2004: 33%) . The total charge for the year can be reconciled to the accounting profit as follows:- 2005 2004 RMB’000 RMB’000 Profit before tax 864,099 912,073 Tax at domestic income tax rate 285,153 300,984 Tax effect of expenses not deductible for tax purpose 40,590 10,664 Tax credit granted (52,861) (100,000) 272,882 211,648 12. EARNINGS PER SHARE The earnings per share for the year is calculated based on the profit for the year of approximately RMB591,217,000 (2004: RMB700,425,000) and the weighted average number of ordinary shares in issue during the year of 1,136,000,000 shares (2004: 1,136,000,000 shares). The amount of diluted earning per share is not presented for the year ended 31 December 2005 and 31 December 2004 respectively as there were no dilutive instruments outstanding during both years. 19 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 13. DIVIDEND Pursuant to a resolution passed at the Directors’ meeting on 9 March 2006, a final dividend of RMB0.20 (2004: RMB0.20) per share totaling RMB227,200,000 (2004: RMB227,200,000) was proposed for shareholders’ approval at the Annual General Meeting. Dividends proposed after the balance sheet date has not been recognized as a liability at the balance sheet date. 14. RETIREMENT BENEFIT PLANS As stipulated by the regulation of the PRC, the Company participates in a defined contribution retirement plans organised by municipal and provincial government for its employee. The Company has no other material obligations for the payment of pension benefits associated with these plans beyond the annual contribution described above. The Company’s contributions to the defined contribution retirement plans are recognized as an expense in the income statement as incurred. The Company’s contributions for the year were RMB34,458,000 (2004: RMB35,445,000) On 1 April 2004, the Company announced an early retirement scheme whereby the employees effectively retire from their work before the statutory retirement age. These employees are still subject to the management of the Company. They will be entitled to a reduced monthly salary and certain staff welfare by the Company. Upon the statutory retirement age, the reduced salary and staff welfare will be replaced by statutory pension which a government agency is responsible for, and the Company has no further obligation for the payments of retirement or other post-retirement benefits of these employees. During the year, the company had paid RMB30,441,000 (2004: RMB24,620,000) for the Scheme. As at 31 December 2005, the Management estimated that the future payments of the reduced salary and staff welfare expected to be incurred amounted to approximately RMB125,751,000 (2004: RMB127,491,000) which was not recognised in the balance sheet. 20 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 15. PROPERTY, PLANT AND EQUIPMENT Machinery Motor vehicle Plant and and and office equipment equipment equipment Total RMB’000 RMB’000 RMB’000 RMB’000 Cost or valuation At 1 January 2004 995,787 4,553,678 20,900 5,570,365 Additions - 169 25 194 Transfer from construction in progress 210,676 607,345 293 818,314 Disposals (7,855) (38,206) (1,383) (47,444) At 31 December 2004 1,198,608 5,122,986 19,835 6,341,429 Additions - - 19,063 19,063 Transfer from construction in progress 112,450 241,500 2,151 356,101 Disposals (479) (43,078) (690) (44,247) At 31 December 2005 1,310,579 5,321,408 40,359 6,672,346 Representing: Cost 405,376 2,226,538 24,814 2,656,728 Valuation 905,203 3,094,870 15,545 4,015,618 1,310,579 5,321,408 40,359 6,672,346 Accumulated depreciation At 1 January 2004 347,267 1,868,314 7,896 2,223,477 Provided for the year 37,194 535,159 6,145 578,498 Eliminated on disposal (1,745) (11,680) (571) (13,996) At 31 December 2004 382,716 2,391,793 13,470 2,787,979 Provided for the year 59,995 838,127 3,067 901,189 Eliminated on disposal (268) (39,013) (514) (39,795) At 31 December 2005 442,443 3,190,907 16,023 3,649,373 Net book value At 31 December 2005 868,136 2,130,501 24,336 3,022,973 At 31 December 2004 815,892 2,731,193 6,365 3,553,450 21 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 15. PROPERTY, PLANT AND EQUIPMENT (continued) a) All of the buildings owned by the Company are located in the PRC under medium lease (lease periods of 20 years or more but less than 50 years). b) For the purpose of the group restructuring of the Parent Company, the Company was established as a joint stock company in 1997. Part of business operations and certain assets and liabilities of the Parent Company were transferred to the Company. These assets and liabilities had been revalued by an independent PRC qualified valuer on 16 March 1997 according to the relevant regulations and on such basis reflected in the Company’s financial statements. On 15 April 2002, the property, plant equipment were revalued by an independent PRC qualified valuer on the market price basis. The surplus arising therefrom was transferred to the revaluation reserves. If leasehold land and buildings had not been revalued, they would have been included in these financial statements at historical cost less accumulated depreciation of RMB2,866,870,000 (2004: RMB3,351,264,000). c) Property, plant and equipment are depreciated on a straight-line basis at the following rates per annum:- Plant and equipment 8－30 years Machinery and equipment 2.4－9 years Motor vehicles and office equipment 3－10.8 years d) In addition, following the revisions to IAS 16 Property, Plant and Equipment in 2003, that are effective for the current accounting period, the Company has reviewed the residual values used for the purposes of depreciation calculations in the light of the amended definition of residual value in the revised Standard. The review did not highlight any requirement for an adjustment to the residual values used in the current or prior periods. In line with the new requirements, these residual values will be reviewed and updated annually in the future. e) As the balance sheet date, the title documents of the plant and buildings, which were transferred from Bengang Group when the Company was incorporated, had not been changed to the Company’s name. The title documents for the plant and buildings newly constructed during the year were in process. 16. CONSTRUCTION IN PROGRESS 2005 2004 RMB’000 RMB’000 At 1 January 319,168 94,149 Additions 375,607 1,043,333 Transfer to property, plant and equipment (356,101) (818,314) At 31 December 338,674 319,168 No interest was capitalised in construction in progress. 17. DEFERRED TAX ASSETS 22 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 Deferred tax has been provided for using liabilities at the prevailing tax rate of 33% (2004: 33%) on the temporary differences. 2005 2004 RMB’000 RMB’000 At 1 January 14,713 14,713 Charge to income statement 3,894 - At 31 December 18,607 14,713 The major components of the deferred tax assets are as follows: 2005 2004 RMB’000 RMB’000 Provision for bad debts 10,368 10,368 Provision for loss in inventories 8,239 4,345 18,607 14,713 18. INVENTORIES 2005 2004 RMB’000 RMB’000 Raw materials 7,110 6,618 Work in progress 544,873 988,290 Finished goods 240,557 456,506 Spare parts 223,055 189,021 1,015,595 1,640,435 Less: Provision for loss (24,967) (13,167) 990,628 1,627,268 At the balance sheet date, inventories stated at net realisable value was RMB26,820,000 (2004: RMB3,664,000). 19. TRADE RECEIVABLE 23 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 2005 2004 RMB’000 RMB’000 Related parties (note 34) - 175,988 Third parties 32,384 33,360 32,384 209,348 Less: Provision for bad debts (32,361) (32,286) 23 177,062 The directors consider that the carrying amount of trade receivable approximates their fair value. 20. PREPAID EXPENSES AND OTHER CURRENT ASSETS 2005 2004 RMB’000 RMB’000 Related parties (note 34) 1,008,287 839,050 Third parties 72,679 60,909 Other receivable 5,703 8,913 Other tax recoverable 70,905 66,080 Prepaid expenses - 1,710 1,157,574 976,662 Less: Provision for bad debts (1,434) (1,526) 1,156,140 975,136 The directors consider that the carrying amount of prepaid expenses and other current assets approximates their fair value. 21. CASH AND CASH EQUIVALENTS For the purpose of the cash flow statement, cash and cash equivalents represent: 2005 2004 RMB’000 RMB’000 Bank balance and cash 1,897,513 1,404,213 Less: Fixed deposits with maturity more than 3 months (527,289) (118,195) Less: Guarantee deposits - (226,039) 1,370,224 1,059,979 24 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 22. SHARE CAPITAL 2005 2004 RMB’000 RMB’000 Registered, Issued and fully paid: 616,000,000 state-owned A shares of RMB1 each 616,000 616,000 120,000,000 public-owned A shares of RMB1 each 120,000 120,000 400,000,000 public-owned B shares of RMB 1 each 400,000 400,000 1,136,000 1,136,000 A shares and B shares rank pari passu in all material respect. 23. RESERVES Assets Share revaluatio Statutory Retained premium n reserves reserves profits Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2004 1,403,670 293,348 381,875 1,431,493 3,510,386 Payment of 2003 final dividends - - - (227,200) (227,200) Eliminated on disposal of property, plant and equipment - (1,267) - 1,267 - Profit for the year - - - 700,425 700,425 Transfer - - 109,809 (109,809) - At 31 December 2004 1,403,670 292,081 491,684 1,796,176 3,983,611 Payment of 2004 final dividends - - - (227,200) (227,200) Eliminated on disposal of property, plant and equipment - (3,598) - 3,598 - Profit for the year - - - 591,217 591,217 Transfer - - 94,833 (94,833) - At 31 December 2005 1,403,670 288,483 586,517 2,068,958 4,347,628 25 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 23. RESERVES (continued) a) Share premium and assets revaluation reserves Share premium represents net assets acquired from the Parent company in excess of par value of state shares issued and proceeds from the issuance of A shares and B shares in excess of their par value, net of expenses directly relating to the issue of the shares. Share premium may be converted into shares 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. Assets revaluation reserve represents the surplus on revaluation of property, plant and equipment. Any decrease in valuation is first offset against an increase on earlier valuation in respect of the same asset and is thereafter charged to the income statement. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to retained profits. b) Statutory surplus reserves In accordance with the Company Law of the PRC, the Company is required to allocate 10% and 5% to 10% of their profits after tax (determined under the PRC GAAP) to the statutory surplus reserve and the statutory public welfare fund (which are collectively referred to as “statutory reserves”), respectively. No allocation to the statutory surplus reserve is required after the balance of such reserve reaches 50% of the registered capital of the respective companies. Subject to certain restrictions set out in the Company Law of the PRC, part of the statutory surplus reserve may be converted to increase share capital, provided that the remaining balance after the capitalisation is not less than 25% of the registered capital. c) Retained profits available for distribution According to the Company’s Articles of Association, the amount of retained profits available for distribution to shareholders of the Company is the lower of the amount determined in accordance with the PRC GAAP and the amount determined in accordance with IFRS. At 31 December 2005, the amount of retained profits available for distribution was RMB2,068,958,000 (2004: RMB 1,796,176,000), being the amount determined in accordance with IFRS. The Company’s distributable profit is to be utilised at the following order:- i) to made good the previous losses; ii) to transfer to statutory surplus reserves at 10% of net profit; iii) to transfer to statutory welfare reserves at 5% of net profit; iv) to transfer to discretionary surplus reserves at the amount and proportion as determined at general meeting; v) to pay dividends. 26 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 24. LONG-TERM BANK LOANS 2005 2004 RMB’000 RMB’000 Guaranteed 157,225 414,844 Unsecured or not guaranteed 159,510 159,510 316,735 574,354 The guarantee is provided by Bengang Group (Note 33) The carrying amount repayable: 2005 2004 RMB’000 RMB’000 Within one year 24,856 262,492 More than one year, not exceeding two years 198,239 50,492 More than two years, not exceeding five years 66,869 228,381 More than five years 26,771 32,989 316,735 574,354 Less: Amount due for settlement within 12 months (shown under current liabilities) (24,856) (262,492) Amount due for settlement after 12 months (shown under non-current liabilities) 291,879 311,862 As at 31 December 2005, the details of the bank loans are as follows: Original currencies (’000） Interest rate RMB’000 RMB 209,510 5.49%-5.76% 209,510 USD 9,240 2.94% 74,568 Japanese Yen 475,244 2.10% 32,657 316,735 27 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 25. TRADE PAYABLE 2005 2004 RMB’000 RMB’000 Related parties (note34) 158,224 234,827 Third parties 232,539 202,935 390,763 437,762 The directors consider that the carrying amount of trade payable approximates their fair value. 26. OTHER PAYABLE AND ACCRUED CHARGES 2005 2004 RMB’000 RMB’000 Related parties (note 34) 53,984 101,590 Tax other than income tax 26,177 801 Accrued salaries and welfare 11,052 8,359 Other payable 82,927 82,767 174,140 193,517 27. RECEIPT IN ADVANCE 2005 2004 RMB’000 RMB’000 Related parties (note 34) 596,032 513,954 Third parties 920,922 1,315,274 1,516,954 1,829,228 28. SHORT-TERM BANK LOANS 2005 2004 RMB’000 RMB’000 Unsecured short-term bank loan repayable within one year 20,000 - The bank loan is guaranteed by Bengang Group. The interest rate is 5.58%. 28 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 29. OPERATING LEASE COMMITMENT The Company as lessee At the balance sheet date, the Company had commitment for future minimum lease payments in respect of land and buildings rented under non-cancellable operating leases which fall due as follows: 2005 2004 RMB’000 RMB’000 Within one year 2,673 2,673 In the second to fifth years inclusive 10,692 10,692 Over five years 98,910 101,583 112,275 114,948 30. CAPITAL COMMITMENT At the balance sheet date, there was capital commitment so far as not provided for in the financial statements: 2005 2004 RMB’000 RMB’000 Capital expenditure in respect of the acquisition of property, plant and equipment - Contracted for but not provided in the financial statements 179,250 225,900 - Authorised but not contracted 312,280 19,100 491,530 245,000 On 12 April 2005, a resolution concerning the increase in investment in No. 4 smelting blast furance and the construction of the squared billet machine was passed at the tenth meeting of the third terms of the Company’s board of directors. The total costs for the above works was RMB406,910,300 and RMB328,493,100 respectively. The duration of the works were two years. The above resolution has been passed at the 2004 general meeting on 25 May 2005. 31. CONTINGENT LIABILITIES At the balance sheet date, the Company had no material contingent liabilities. 29 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 32. SIGNIFICANT EVENTS Pursuant to the “Resolution of acquisition of assets by the creation and allotment of shares” passed by the Company’s directors on 28 December 2005 and to the “Acquisition of assets agreement of Benxi Steel & Iron (Group) limited and Bengang Steel Plates Company Limited 本 溪钢铁(集团)有限责任公司和本钢板材股份有限公司资产购买协议”signed on 28 December 2005 (the “Acquisition Agreement”) between Bengang Group and the Company, the Company is going to create and issue not more than 2,000,000,000 circulating A shares to Bengang Group to acquire assets of its core business, including the integrated the iron and steel production systems of iron smelting, sintering, steel manufacturing, steel rolling, special steel manufacturing, ancillary facilities, sales offices, etc (the “Acquiring Assets”). Purchase consideration is determined on the basis of the revalued amount of the assets as at 30 June 2005 of RMB10,097,000,000. Bengang Group agreed the difference of the consideration and the value of shares to be issued be settled within 3 years after the completion date by 3 equal installments. The amount will be charged at the interest rates as announced by the People’s Bank of China for the loans with the same terms. The interest and the principal is payable at the same time. The acquisition will enable the Company to possess with an integrated steel production facilities which are capable of producing both common steel and special steel. As at the date of this report, the Company has not convened the general meeting for voting for the above acquisition. The details of the Acquiring Assets are as follows: The First Iron Manufacturing Plant ,The Second Iron Manufacturing Plant, Cold Rolling Thin Plates Plant, Sintering Plant, Electricity Generating Plant, Oxygen Plant, Fuel Gas Plant, Power Supply Plant, Water Supply Plant, Transportation Department, Scrape Steel Plant, Measuring and Controlling Plant, Fuel Supply Office, Material Supply Office, Equipment Parts Office, Sales Office, Technical Centre, Quality Control Office, Short Process Plant, Special Steel Plant and the equity shares of the outside sale offices: Xiemen Bengang Iron and Steel Sales Limited 厦门本钢钢铁销售有限公司 Shanghai Bengang Iron and Steel Material Limited 上海本钢钢铁物资有限公司 Shenyang Northern Bengang Iron and Steel Sales Limited 沈阳北方本钢钢铁销售有限公司 Tianjin Bengang Iron and Steel Trading Limited 天津本钢钢铁贸易有限公司 Wuxin Bengang Iron and Steel Sales Limited 无锡本钢钢铁销售有限公司 Nanjing Bengang Material Sales Limited 南京本钢物资销售有限公司 Yantoi Bengang Iron and Steel Sales Limited 烟台本钢钢铁销售有限公司 Harbin Bengang Economic Trading Limited 哈尔滨本钢经济贸易有限公司 Changchun Bengang Iron and Steel Sales Limited 长春本钢钢铁销售有限公司. 30 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 32. SIGNIFICANT EVENTS (continued) As at the date of the report, the shares of the above sale offices were held by the subsidiaries of Bengang Group. Bengang Group undertook to change them under its name when the Acquisition Agreement is effective and to indemnify the Company for any losses from any outstanding litigations of the above sale office. Special Steel Plant, which is a wholly owned subsidiary of Bengang, is under voluntary liquidation. As at the date of this report, the liquidation process has not completed. Bengang Group undertook the process will be completed when the Acquisition Agreement is effective and to provide guarantee for the creditor of Special Steel Plant. The assets of Special Steel Plant will belong to Bengang Group after liquidation. The acquisition is conducted on the following basis: i) Sales offices which are independent entity Their assets liabilities, equities, business, staff are included into the acquisition scope. ii) Special steel Plant As the assets after it is wound up are owned by Bengang Group, its assets, liabilities, are included into the acquisition scope. iii) Offices, plants, production lines, units centre, etc which are not independent entities Except for the ancillary assets, non-operating assets, defective assets, all assets, liabilities and staff are included into the acquisition scope. iv) The mining operations of Bengang Group are not within the acquisition scope. 33. RELATED PARTIES TRANSACTIONS Related parties include state-owned enterprises and their subsidiaries directly or indirectly controlled by the PRC government, other entities and corporations in which the Company is able to control or exercise significant influence in making financial and operating decisions and key management personnel of the Company as well as their close family members. The parent of the Company, Bengang Group, is a state-owned enterprise established in PRC currently holding 54.23% of the Company’s shares. Bengang Group itself is owned by the PRC government. In accordance with IAS 24 (revised 2003), ‘‘Related Party Disclosure’’, state-owned enterprises and their subsidiaries, other than Bengang Group and its subsidiaries, directly or indirectly controlled by the PRC government are also defined as related parties of the Group. 31 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 33. RELATED PARTIES TRANSACTIONS (continued) A portion of the Company’s business activities are conducted with other state-owned enterprises. The Company believes that these transactions are carried out on normal commercial terms that are consistently applied to all customers. For the purpose of related party transactions disclosure, the Company has identified, to the extent practicable, those corporate customers and suppliers which are state-owned enterprises based on their immediate ownership structure. It should be noted, however, that substantially all of the Company’s business activities are conducted in the PRC and the influence of the PRC government in the Chinese economy is pervasive. In this regard, the PRC government indirectly holds interests in many companies. Many state-owned enterprises have multi-layered corporate structure and the ownership structures change over time as a result of transfers and privatisation programs. Some of these interests may, in themselves or when combined with other indirect interests, be controlling interests. Such interests, however, would not be known to the Company and are not reflected in the disclosures below. However, the Company believes that meaningful information relating to related party disclosures has been adequately disclosed. Except for the guarantees provided by Bengang Group’s and its subsidiary for the Company’s bank loans as disclosed in notes 24 and 28, the principal related party transactions with Bengang Group and its subsidiaries in the ordinary course of business, are as follows:- 2005 2004 RMB’000 RMB’000 Sale of goods to - Bengang Group 6,913,271 4,807,293 - 本溪钢铁(集团)国际经济贸易有限公司 2,414,962 2,030,092 - 天津本钢钢铁贸易有限公司 661,705 666,604 - 本溪钢铁(集团)钢材加工配送有限责任公司 616,733 263,040 - 南京本钢物资销售有限公司 584,149 318,781 - 本溪钢铁(集团)特殊钢有限公司 444,230 323,444 - 烟台本钢钢铁销售有限公司 373,322 617,121 - 上海本钢钢铁物资有限公司 202,774 311,667 - 沈阳北方本钢钢铁销售有限公司 177,780 186,659 - 大连波罗勒钢管有限公司 111,209 162,976 - 无锡本钢钢铁销售有限公司 - 234,666 - 厦门本钢钢铁销售有限公司 85,304 191,277 - 哈尔滨本钢经济贸易有限公司 88,367 100,963 - 长春本钢钢铁销售有限公司 69,435 85,207 - 广州保税区本钢销售有限公司 53,262 61,427 - 本溪钢铁(集团)腾达股份有限公司 - 24,606 - 天津本储物资经销有限公司 - 1,982 - 本钢西安物资销售有限公司 - 9,526 12,796,503 10,397,331 32 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 33. RELATED PARTIES TRANSACTIONS (continued) The principal related party transactions with Bengang Group and its subsidiaries in the ordinary course of business (continued) 2005 2004 RMB’000 RMB’000 Other sales to - Bengang Group 218,798 931 - 本溪钢铁(集团)建设有限责任公司 31,144 190,082 - 本溪钢铁(集团)修建有限责任公司 4,623 22,159 - 本溪钢铁(集团)实业发展有限责任公司 - 71 254,565 213,243 Machining material for Bengang Group 30,769 - Purchase of raw materials from - Bengang Group 14,999,205 11,877,306 - 本溪钢铁(集团)铁业有限责任公司 75,923 2,150,016 15,075,128 14,027,322 Purchase of energy and power from Bengang Group 1,037,338 800,653 Purchase of accessories from - Bengang Group 795,820 813,040 - 本溪钢铁(集团)机械制造有限责任公司 152,580 66,928 - 本溪钢铁(集团)矿业有限责任公司 17,055 109,931 - 本溪钢铁(集团)建设有限责任公司 1,165 43,972 - 本溪钢铁(集团)电气有限责任公司 4,141 1,284 - Others 3,185 3,796 973,946 1,038,951 Payment of repair and maintenance expenditure to - Bengang Group 36,296 51,128 - 本溪钢铁(集团)建设有限责任公司 38,711 45,994 - 本溪钢铁(集团)修建有限责任公司 25,265 8,956 - 本溪钢铁(集团)电气有限责任公司 5,476 5,345 - 本溪钢铁(集团)实业发展有限责任公司 5,309 4,439 - 本溪钢铁(集团)信息自动化有限责任公司 4,234 3,746 - Others 2,181 2,088 117,472 121,696 33 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 33. RELATED PARTIES TRANSACTIONS (continued) The principal related party transactions with Bengang Group and its subsidiaries in the ordinary course of business (continued) 2005 2004 RMB’000 RMB’000 Payment of transportation charges to - Bengang Group 73,154 48,194 - 本溪钢铁(集团)冶金渣有限责任公司 22,804 18,534 - 本溪钢铁(集团)汽车运输有限责任公司 13,441 9,895 - 本溪钢铁(集团)铁业有限责任公司 - 4,975 - 本溪钢铁(集团)矿业有限责任公司 2,339 1,760 - Others 1,299 - 113,037 83,358 Payment of construction fee to - 本溪钢铁(集团)建设有限责任公司 169,612 280,808 - 本溪钢铁(集团)修建有限责任公司 5,102 31,468 - 本溪钢铁(集团)信息自动化有限责任公司 17,692 20,374 - 本溪钢铁(集团)设计研究院 1,334 3,642 - 本溪钢铁(集团)实业发展有限责任公司 144 - 193,884 336,292 Payment of package fee to 本溪经济开发区本钢聚丰发展有 限公司 29,018 21,195 Payment of agency to 本溪钢铁(集团)国际经济贸易有限公 司 39,694 33,542 Payment of port expenses to 营口本钢国贸物流有限公司 37,510 23,878 Payment of rental to Bengang Group 2,673 2,673 Payment of testing fee to Bengang Group 7,113 6,087 Payment of air-conditioning fee to 本溪钢铁(集团)热力开发 有限责任公司 1,248 2,299 Payment of labour protection fee to 本溪钢铁(集团)新事业 发展有限责任公司 1,560 1,396 Payment of property management fee to 本溪钢铁(集团)房地 产有限责任公司 230 230 Payment of trade mark use fee to Bengang Group 25 25 34 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 33. RELATED PARTIES TRANSACTIONS (continued) The above transactions were carried out according to the comprehensive services agreement entered between Bengang Group and the Company on 18 December 2003 with the terms of three years and effective from 1 January 2004, inter alias, the purchases of raw materials, ancillary materials, energy and power, accessories, transportation services from and the sales of goods to Bengang Group. According to the agreement, the price policies are as follows: The Price of the purchase from Bengang Group: Basis of the price Molton iron The average of current price of raw iron of same quality in the PRC market. The price is not higher than the average selling price of the third parties in the preceding month. Scrap steel Market price of scrap steel plus processing charge. Market price is the average price of the third parties in the preceding three months. Processing charge is the total cost of the preceding year for processing the scrap steel to finished products. The charge is adjusted every year. Ancillary materials Market price Electricity Market price plus switching cost Other power Total cost plus taxes Accessories Total cost plus taxes Railway transportation National price Auto transportation Market price Repairs and maintenance of Negotiable according to the complexity and workload. plant and equipment Quality control, National price measuring and weighting Agency services Before the export rights is obtained, the export sales of the company are handled by Bengang Group. The agency fee is charged at 1.5% of the export sales. After the export rights is obtained, the agency relationship with Bengang will be terminated. Designing and engineering National price Air-conditioning National price Telephone, fax, television National price services Newspaper and other National price publications Education facilities Market price Office Free of charge Trade marks RMB25,200 per annum Patents Free of charge Business transportation Market price 35 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 33. RELATED PARTIES TRANSACTIONS (continued) The price of the sales to Bengang Group Basis for the price Hot rolling of thin steel The average price of sales of good with same quality to third plates parties in the preceding month Melton steel In the period of repairing or over-production: cost of manufacturing plus taxes Other period: Total cost plus taxes Scrap steel (containing Market price iron) Pursuant to the lease agreement entered between Bengang Group and the Company on 7 April 1997, the Company leased the land where the buildings of Bengang Group are situated for 50 years at the rates approximately of RMB2,673,000 per annum. The rental is subject to renew after the first five years and every three years thereafter. According to the supplementary agreement dated 8 April 2005, the rental is remained unchanged. 34. BALANCES WITH RELATED PARTIES 2005 2004 RMB’000 RMB’000 Accounts receivable (note 19) - 本溪钢铁(集团)国际经济贸易有限公司 - 102,939 - 本溪钢铁(集团)特殊钢有限责任公司 - 73,049 - 175,988 Prepaid expenses and other current assets (note 20) - Bengang Group 998,906 810,281 - 本溪钢铁(集团)建设有限责任公司 - 19,833 - 本溪钢铁(集团)国际贸易有限公司 9,381 7,802 - 本溪钢铁(集团)机械制造有限责任公司 - 1,034 - Others - 100 1,008,287 839,050 Trade payable (note 25) - Bengang Group 5,393 90,260 - 本溪钢铁(集团)建设有限责任公司 102,716 68,482 - 本溪钢铁(集团)修建有限责任公司 45,426 42,507 - 本溪钢铁(集团)机械制造有限责任公司 - 25,022 - 本钢特钢机电安装公司 3,303 5,461 - Others 1,386 3,095 158,224 234,827 36 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 34. BALANCES WITH RELATED PARTIES (continued) 2005 2004 RMB’000 RMB’000 Other payable (note 26) - Bengang Group 11,543 60,562 - 本溪钢铁(集团)机械制造有限责任公司 16,503 1,038 - 本溪钢铁(集团)国际经济贸易有限公司 - 15,759 - 本溪钢铁(集团)实业发展有限责任公司 9,195 7,576 - 本溪钢铁(集团)汽车运输有限责任公司 6,375 6,086 - 本溪钢铁(集团)电气有限责任公司 3,243 3,239 - 辽宁冶金技师学院 3,240 620 - 本溪钢铁(集团)冶金渣有限责任公司 2,227 1,743 - 本溪经济开发区本钢聚丰发展有限公司 292 4,124 - Others 1,366 843 53,984 101,590 Receipt in advance (note 27) - Bengang Group 232,958 129,479 - 天津本钢钢铁贸易有限公司 92,567 99,245 - 烟台本钢钢铁销售有限公司 58,481 71,766 - 南京本钢钢铁物资有限公司 52,726 44,139 - 本溪钢铁(集团)钢材加工配送有限责任公司 33,945 66,285 - 上海本钢钢铁物资有限公司 27,887 14,132 - 本钢(集团)国际经济贸易有限公司 25,419 - - 沈阳北方本钢钢铁销售有限公司 20,053 22,359 - 大连波罗勒钢管有限公司 16,927 23,152 - 厦门本钢钢铁销售有限公司 11,059 9,148 - 哈尔滨本钢经济贸易有限公司 10,305 9,359 - 长春本钢钢铁销售有限公司 7,698 8,262 - 广州保税区本钢销售有限公司 5,735 15,861 - 无锡本钢钢铁销售有限公司 272 92 - 本钢西安物资销售有限公司 - 410 - 本溪钢铁(集团)腾达股份有限公司 - 265 596,032 513,954 37 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 35. BUSINESS AND GEOGRAPHICAL SEGMENTS Business segments The Company’s operation is regarded as a single segment, being an enterprise engaged in the manufacture and sales of steel. Geographical segments Analysis of the Company’s revenue by geographical segments is as follows: PRC Other than the PRC 2005 2004 2005 2004 RMB’000 RMB’000 RMB’000 RMB’000 Revenue 17,767,496 15,319,359 2,414,962 2,030,092 Since the goods sold to various geographical markets were produced from the same production facilities, analysis of assets and liabilities by geographical market is not presented. 36. POST BALANCE SHEET EVENTS In February 2006, Bengang Group announced an arrangement that Bengang Group will pay 3.4 shares to all the shareholders of the listed A shares for every 10 shares. Bengang Group will pay for 40,800,000 shares under this arrangement. This arrangement has been approved by the National Assets Monitoring and Administrative Committee of Liaoning Province. After the arrangement is completed, the shares of Bengang Group, being the sole shareholder of stated-owned shares, will have the rights to circulation. The arrangement has been approved in the general meeting of the shareholders of A shares on 8 March 2006. Apart from the legal obligations, Bengang Group provided the undertaking: i) Bengang Group will not dispose of the Company’s shares by way of trading in the Stock Exchange or placing for the period of at least 24 months from the date of obtaining the circulating rights of the share. The proportion of the Company’s shares to be disposed of will not be more than 5% of the Company’s total capital during the period of the twenty forth to thirty sixth months. ii) Unless approval in the general meeting or from regulatory authorities is obtained, Bengang Group will not dispose of the Company’s newly increased shares, which is issued for the purpose of the acquisition of the steel manufacturing assets owned by Bengang Group (note 32), by way of trading in the Stock Exchange or placing for the period of 36 months from the date of receiving these shares, except that the disposal is made to the strategic investors in the way allowed by the policies. But in such case, the transferee should continue to follow the original undertaking conditions. 38 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 36. POST BALANCE SHEET EVENTS (continued) iii) From the date of the completion of the acquisition to the end of 2010, Bengang Group will hold not less than 65% of the Company’s share capital, except that the disposal is made to in the ways allowed by the policies. But in such case, the transferee should continue to follow the original undertaking conditions. iv) If the Company’s shares are transferred or disposed before the end of 2010, the consideration should not be lower than the net assets per shares according to the most recent audited financial statements. Bengang Group guarantees that if this undertaking is breached, the proceeds from such transaction will be surrendered to the Company. v) Bengang Group guarantees to make compensation to the shareholders of the Company for any losses resulting from any breach of these undertakings. 37. DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED UNDER THE PRC GAAP AND IFRS Other than the differences in the classifications of certain financial captions and the accounting for the items described below, there are no material differences between the Company’s financial statements prepared under the PRC GAAP and IFRS. The major differences are: i) Depreciation on revalued assets Certain assets of the Company are stated at their revalued value(notes 15) in the financial statements prepared under IFRS while they are stated at cost in the financial statements prepared under the PRC GAAP. Accordingly, the depreciation charge of these assets under IFRS and the PRC Accounting Rules and Regulations is different. ii) Provision for deferred tax Under the PRC GAAP, the Company selected to adopted “Tax payable method” in accounting for the income tax expense. Under this method, tax expenses for the current period are the amount paid or payable for current period only. However, under IFRS, income tax expenses include not only tax for current period but also deferent taxation. iii) Gain from debt restructuring Under the PRC GAAP, gain from debt restructuring should be credited to capital reserve. Under IFRS, gain from debt re-structuring should be recognized as income. 39 Bengang Steel plates Co., Limited Financial statements for the year ended 31 December 2005 37. DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED UNDER THE PRC GAAP AND IFRS (continued) Effects of major differences between the PRC GAAP and IFRS on net profit are analyzed as follows: Note 2005 2004 RMB’000 RMB’000 Profit under the PRC GAAP 632,216 732,062 Adjustment: - Depreciation on revalued assets (i) (42,486) (2,532) - Disposal of revalued assets (i) (3,598) (29,683) - Deferred taxation (ii) 3,894 - - Gain on debt restructuring (iii) 1,191 578 (40,999) (31,637) Profit under IFRS 591,217 700,425 Effects of major differences between the PRC GAAP and IFRS on total equity are analyzed as follows: Note 2005 2004 RMB’000 RMB’000 Total equity under the PRC GAAP 5,308,918 4,902,711 Adjustments: - Revaluation of assets (i) 321,764 321,764 - Depreciation on revalued assets (i) (132,380) (89,894) - Disposal of revalued assets (i) (33,281) (29,683) - Deferred taxation (ii) 18,607 14,713 174,710 216,900 Total equity under IFRS 5,483,628 5,119,611 40